AMERICAN HERITAGE FUND INC, N-30D, 1998-07-29

AMERICAN HERITAGE FUND INC
N-30D, 1998-07-29

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<PAGE> 1

THE AMERICAN HERITAGE FUND, INC.
[AMERICAN HERITAGE FUND LOGO]
1370 Avenue of the Americas
New York, N.Y. 10019
Tel: (212) 397-3900
Fax: (212) 397-4036

Heiko Thieme
Chairman

July 1998

To Our Valued Shareholders:

In 1997, we took a bold stance by concentrating our portfolio to the
utmost. This strategy helped make us the best performing fund in that year
on a total return basis out of more than 10,000 funds.

Although such an approach is not without risk, we are pursuing the same
strategy for the calendar year 1998. Presently, three stocks make up 95%
of the portfolio. One of the stocks has already appreciated over 300% this
year, while the other two are below their January levels. As I assess the
potential for these stocks to be well above average, I am willing to
maintain this unusual weighting.

The first half of 1998 has already exceeded most projections as far as the
general direction for the stock market is concerned. If the Dow Jones
Industrial Index exceeds a 20% return this year, it would be the fourth
consecutive year of such returns, unprecedented in stock market history.

Big companies have been the main beneficiaries during this phase of the
bull market. Small companies represented in the Russell 2000 Index are
terribly lagging. While the Dow Index is up 13%, the Russell 2000 Index is
basically flat. The big money flow into equity funds has been focused on
blue chips. Given the high P/E ratios for most of these companies, I
maintain that the time for small, unrecognized companies will come. The
American Heritage Fund is willing to be patient, and I hope my investors
will be as well. We continue to search for undervalued blue chips and
small, unknown companies with a high appreciation potential over time.
Anybody who cannot take significant swings in the net asset value should
not consider us as a suitable investment. Those who are intrigued by this
strategy are welcome to our family of investors.

Please, always remember: I am not only the money manager, but also a
shareholder of the Fund. Therefore, I have as much of an interest to be
the market leader as you have.

With kind regards,

/s/ HEIKO THIEME
Heiko Thieme
Chairman
<PAGE> 2

- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS
Investments in securities, at
value (cost $17,707,872)........ $ 18,329,476
Receivable for investment
securities sold................. 1,836,842
Receivable for dividends and
interest........................ 6,505
Deposits with brokers for
securities sold short........... 28,155
Other assets...................... 23,525
------------
TOTAL ASSETS.................... 20,224,503
------------

LIABILITIES
Payable for investment securities
purchased....................... 2,564,594
Demand loan payable to bank....... 638,684
Payable for capital stock
reacquired...................... 9,742
Accrued advisory fees............. 17,265
Accrued expenses and other
payables........................ 103,480
------------
TOTAL LIABILITIES............... 3,333,765
------------
Commitments & Contingencies

NET ASSETS
Net assets (equivalent to $.93 per
share based on 18,177,289 shares
of capital stock outstanding)... $ 16,890,738
============
Composition of net assets:
Shares of capital stock........... 181,763
Paid in capital................... 61,924,729
Accumulated distributions in
excess of net investment
income.......................... (2,812,036)
Accumulated net realized loss on
investments..................... (43,025,322)
Net unrealized appreciation of
investments..................... 621,604
------------
NET ASSETS, May 31, 1998..... $ 16,890,738
============
</TABLE>

- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES
MAY 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number of
Shares Value
- -------------------------------------------------------
<S> <C>
COMMON STOCKS & WARRANTS - 108.38%
AEROSPACE & TRANSPORTATION - 0.56%
Boeing Co..................... 2,000 $ 95,250
-----------
BANKS & FINANCE - 3.30%
Auer Von Welsbach Invest.
AG*(+)...................... 6,500 457,518
Kouri Capital Group Inc.*+.... 200,000 100,000
-----------
557,518
-----------
BIOTECHNOLOGY - 79.23%
Direct Therapeutics, Inc.*+... 160,000 48,000
Senetek PLC Sponsored ADR*(+). 2,903,000 13,335,656
-----------
13,383,656
-----------
CHEMICALS - 1.99%
Advanced Materials Group
Inc.*+...................... 128,000 336,000
-----------
COMMERCIAL SERVICES - 0.64%
Cedent Corporation*........... 5,000 108,437
-----------
COMMUNICATION & EQUIPMENT - 0.00%
American Satellite Network
Inc. Wts*+.................. 6,775 0
Millicom International
Cellular
SA Rights *(+)+............. 27,100 0
-----------
0
-----------
COMPUTER EQUIPMENT & SOFTWARE - 1.32%
Hewlett Packard Co............ 300 18,637
JTS Corporation*.............. 85,000 3,400
Management Technologies
Inc.*....................... 95,238 2,976
Management Technologies Inc.
C Wts*...................... 419,047 0
Seagate Technology Inc.*...... 1,500 34,688
Sideware Systems*(+).......... 113,200 34,233
Texas Instruments............. 2,500 128,438
-----------
222,372
-----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

2
<PAGE> 3
- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES
MAY 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number of
Shares Value
- -------------------------------------------------------
<S> <C> <C>
CONSUMER PRODUCTS - 1.82%
Philip Morris Companies
Inc......................... 5,000 $ 186,875
Pier 1 Imports Inc............ 5,000 120,313
-----------
307,188
-----------
ENTERTAINMENT & LEISURE - 0.30%
Gold Star International Inc.
Units*(+)+.................. 5,000 50,000
-----------
ENVIRONMENTAL SERVICES - 1.02%
I D M Environmental
Corporation*................ 50,000 171,875
-----------
INDUSTRIAL PRODUCTS - 0.36%
Mark Solutions Inc.*.......... 50,000 60,938
-----------
MEDICAL TECHNOLOGY - 13.41%
A D M Tronics Unlimited
Inc.*+...................... 4,230,000 1,586,250
Life Medical Sciences Inc.*... 54,500 69,828
Life Medical Sciences Inc. Cl
A Wts*...................... 22,500 2,813
Medtrack Inc.*+............... 300,000 200,001
Miravant Medical
Technologies*............... 15,000 406,875
-----------
2,265,767
-----------
MISCELLANEOUS - 1.07%
Marketing Service*............ 50,000 181,250
-----------
</TABLE>

<TABLE>
<CAPTION>
Number of
Shares Value
- -------------------------------------------------------
<S> <C>
OIL SERVICES & EQUIPMENT - 0.73%
Smith International Inc....... 2,500 $ 122,656
-----------
PHARMACEUTICAL - 2.63%
Elan Corp.*................... 2,500 152,969
Lilly (Eli) & Co.............. 3,200 196,600
Polydex Pharmaceuticals
Ltd.*(+).................... 31,500 94,500
-----------
444,069
-----------
TOTAL COMMON STOCKS & WARRANTS
(Cost $17,557,872).......... $18,306,976
-----------
PREFERRED STOCKS - 0.00%
Medtrack Inc. Pf B+ (Cost
$0)......................... 30,000 0
-----------
BONDS AND NOTES - 0.13%
International Fast Food G-Bond
9%, due 12/15/2007 (Cost
$150,000)................... 150,000 22,500
-----------
TOTAL SECURITIES (Cost $17,707,872)......
$18,329,476
===========
</TABLE>

<TABLE>
<C> <S>
* Non-income producing property
(+) Foreign security
+ Illiquid security
</TABLE>

The accompanying notes are an integral part of these financial statements.

3
<PAGE> 4

- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.......................... $ 18,528
Dividends......................... 336,142
-----------
TOTAL INVESTMENT INCOME........... 354,670
-----------
EXPENSES:
Investment advisory fees.......... 250,268
Transfer agent fees............... 77,059
Legal fees........................ 142,940
Audit fees........................ 30,062
Custodian fees.................... 45,374
Administrative fees............... 182,137
Fund accounting fees.............. 44,974
Insurance......................... 30,939
Postage and printing expense...... 99,514
Registration fees and expenses.... 25,000
Directors' fees................... 30,713
Interest expense.................. 90,496
Consulting and professional
fees............................ 3,153
Rent.............................. 92,585
Telephone......................... 11,119
Miscellaneous..................... 15,731
-----------
TOTAL EXPENSES.................... 1,172,064
-----------
Investment loss -- net............ (817,394)
-----------
Net realized loss on securities
transactions.................... (11,258,564)
Net change in unrealized
appreciation of investments..... 13,742,853
-----------
Net gain on investments........... 2,484,289
-----------
Net increase in net assets
resulting from operations....... $ 1,666,895
===========
</TABLE>

- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE FOR THE YEAR
YEAR ENDED ENDED
MAY 31, 1998 MAY 31, 1997
----------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Investment loss -- net... $ (817,394) $ (819,245)
Net realized gain (loss)
on securities
transactions........... (11,258,564) 2,967
Net change in unrealized
appreciation of
investments............ 13,742,853 1,113,728
----------- -----------
Net increase in net
assets resulting from
operations............. 1,666,895 297,450
Distributions to
shareholders from --
Investment
income -- net........ 0 0
Net realized gains on
investments.......... 0 0
Return of capital...... 0 0
Capital share
transactions........... (2,902,748) (3,600,612)
----------- -----------
Net decrease in net
assets............... (1,235,853) (3,303,162)
NET ASSETS:
Beginning of year........ 18,126,591 21,429,753
----------- -----------
End of year.............. $16,890,738 $18,126,591
=========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

4
<PAGE> 5

- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1998
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
The American Heritage Fund, Inc. ("the Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, open-end management
investment company. The following is a summary of the significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles. Significant accounting policies of the Fund are as follows:

SECURITY VALUATIONS
The Fund values its securities, where market quotations are readily available,
at market value based on the last recorded sales price as reported by the
principal securities exchange on which the security is traded, or if the
security is not traded on an exchange, market value is based on the latest bid
price. Foreign securities are converted to U.S. dollars using exchange rates at
the close of the trading day. Securities for which market quotations are not
readily available are valued as the Board of Directors or a committee composed
of members of the Board of Directors, in good faith determines.

FEDERAL INCOME TAXES
The Fund did not meet one of the income diversification tests of the Internal
Revenue Code and as such does not qualify as a regulated investment company for
the current year. The non qualification did not affect the net asset value of
the Fund. The specific income diversification test was subsequently repealed by
the Taxpayer Relief Act of 1997.

It is the Fund's policy to comply with the requirements of the Internal Revenue
Code that are applicable to
- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
- --------------------------------------------------------------------------------
regulated investment companies and to distribute all its taxable income to its
shareholders.

The Fund has determined to value at zero any tax benefit from its operating
losses from the current year as it intends to meet the above referenced
requirements in the next fiscal year. Therefore, no federal income tax provision
is required.

OPTION WRITING
When the Fund sells an option, an amount equal to the premium received by the
Fund is recorded as a liability and is subsequently adjusted to the current
market value of the option written. Premiums received from writing options which
expire unexercised are treated by the Fund on the expiration date as realized
gains from the sales of securities. The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, are also treated as a realized gain, or if the premium is less than
the amount paid for the closing purchase transaction, as a realized loss. If a
call option is exercised, the premium is added to the proceeds from the sale of
the underlying security in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund.

ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.

5
<PAGE> 6
- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
- --------------------------------------------------------------------------------
OTHER
The Fund follows industry practice and records security transactions on the
trade date. The specific identification method is used for determining gains or
losses for financial statements and income tax purposes. Dividend income is
recorded on the ex-dividend date and interest income is recorded on an accrued
basis.

NOTE 2. INVESTMENT ADVISORY AGREEMENT
AND OTHER RELATED TRANSACTIONS

The Fund has an investment advisory agreement with American Heritage Management
Corporation (AHMC), whereby AHMC receives a fee of 1.25% of the Fund's first
$100,000,000 average net asset value and 1% of such value on any additional net
assets, computed daily and payable monthly. For the year ended May 31, 1998 AHMC
received $250,268 in investment advisory fees. Heiko H. Thieme is the Fund's
Chairman of the Board of Directors, Chief Executive Officer and Secretary. Heiko
H. Thieme is also the Chairman of the Board of Directors, Chief Executive
Officer and Secretary of AHMC, of which he owns 90% of the outstanding shares.

For the year ended May 31, 1998, the Fund paid brokerage commissions of $990,836
to Thieme Securities, Inc. of which Mr. Thieme is the owner.

The Fund has agreed to reimburse AHMC for office space utilized by the Fund. For
the year ended May 31, 1998, the Fund reimbursed AHMC $92,585 for the use of its
office space.

AHMC is also reimbursed for administrative personnel utilized by the Fund. Total
reimbursement was $182,137 for the year ended May 31, 1998.

NOTE 3. INVESTMENTS

For the year ended May 31, 1998, purchases and sales of investment securities
other than short-term investments aggregated $244,291,113 and $245,994,083,
respectively. The gross unrealized appreciation for all
- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
- --------------------------------------------------------------------------------
securities totaled $7,278,939 and the gross unrealized depreciation for all
securities totaled $6,657,335, or a net unrealized appreciation of $621,604. The
aggregate cost of securities for federal income tax purposes at May 31, 1998 was
$17,707,872.

Net realized loss on investments for the year ended May 31, 1998 was
$11,258,564. The components are as follows:

<TABLE>
<S> <C>
Long transactions $(11,251,873)
Short sales transactions 38,536
Option transactions (45,227)
------------
$(11,258,564)
============
</TABLE>

Option activity for the year ended May 31, 1998 follows:

<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
--------- --------
<S> <C> <C>
Options outstanding at May
31, 1997 0 $ 0
Options purchased 100 45,227
Options expired (100) (45,227)
---- --------
Options outstanding at May
31, 1998 0 $ 0
==== ========
</TABLE>

NOTE 4. RESTRICTED AND OTHER ILLIQUID SECURITIES

Investments in restricted securities and investments, where market quotations
are not available, are valued at fair value as determined in good faith by the
Board of Directors, or a committee composed of members of the Board of Directors
of the Fund.

The Fund may acquire portfolio securities called restricted securities, which
can be sold only pursuant to an effective registration statement under the
Securities Act of 1933 or an exemption from such registration. In addition,
other securities held by the Fund may be illiquid which means they cannot be
sold or disposed of in the ordinary course of business at approximately the
quoted market value of such securities, or in the

6
<PAGE> 7

Restricted securities eligible for resale under Rule 144A under the Securities
Act of 1933 that have been determined to be liquid by the Fund's Board of
Directors based upon trading markets for the securities and any other restricted
securities that become registered under the Securities Act of 1933 or that may
be otherwise freely sold without registration thereunder are not subject to the
foregoing limitation, unless they are otherwise illiquid.

Certain securities held by the Fund, which were restricted at the time of their
acquisition, have been deemed to no longer be restricted for financial statement
presentation purposes in reliance upon the provision of Rule 144 under the
Securities Act of 1933.

The Fund normally will be able to purchase restricted securities at a
substantial discount from the market value of similar unrestricted securities,
but there are certain risks which the Fund will necessarily assume in acquiring
restricted securities. The principal risk is that the Fund may have difficulty
in disposing of such securities without registration under the Securities Act of
1933, and the Fund will have to bear the risk of market conditions prior to such
registration. In the absence of an agreement obtained at the time of purchase of
such securities, there can be no assurance that the issuer will register the
restricted securities. Furthermore, if the Fund disposes of restricted
securities without registration, it may be necessary to sell such shares at a
discount similar to or greater than that at which the Fund purchased the shares.

NOTE 5. CARRYOVERS

At May 31, 1998, the Fund had net capital loss carryforwards of approximately
$42,948,000 expiring in
- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
- --------------------------------------------------------------------------------
2003 through 2006 and net operating loss carryforwards of approximately
$2,797,000, which begin to expire in 1999 through 2014.

NOTE 6. REDEMPTIONS

The Fund reserves the right to make payments for shares redeemed in cash or in
kind.

NOTE 7. CAPITAL SHARE TRANSACTIONS

As of May 31, 1998 the total par value and paid in capital totaled $62,106,492.

Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR ENDED
ENDED MAY 31, 1998 MAY 31, 1997
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 12,381,297 $ 12,475,679 8,704,545 $ 6,830,024
Shares issued in
reinvestment of
dividends 0 0 0 0
Shares redeemed (16,079,052) (15,378,426) (14,977,593) (10,430,636)
----------- ------------ ----------- ------------
Net decrease (3,697,755) $ (2,902,747) (6,273,048) $ (3,600,612)
=========== ============ =========== ============
</TABLE>

NOTE 8. BANK LOANS

The Fund has a demand secured $10,000,000 bank line of credit; borrowings under
this arrangement bear interest at the bank's prime rate. The outstanding balance
as of May 31, 1998 was $638,684. Total interest paid on the credit line during
the year ended May 31, 1998 totaled $90,496.

NOTE 9. CONTINGENCIES

On October 5, 1994, a shareholder of the Fund on behalf of himself and a
purported class of others brought an action against the Fund, AHMC, Heiko H.
Thieme and Richard K. Parker in the United States District Court for the
Southern District of New York. Although the Fund cannot now determine the exact
amount of the losses incurred by members of the purported class, the Fund
believes that such losses do not exceed $25 million and could be less. The
amount

7
<PAGE> 8

The Complaint alleged that certain registration statements and prospectuses of
the Fund did not disclose certain risks involving the Fund's investments in
restricted securities and companies having small capitalizations and which lack
significant operating histories or established products and that the Fund
invests significant amounts of money in such companies based "merely" on an
interview between the company's executives and Mr. Thieme and a review of the
companies' financial statements or products. The Complaint also alleged that
certain assets of the Fund were overvalued. On September 11, 1995, the Court, in
ruling on the Fund's Motion to Dismiss, dismissed the Complaint. The Court's
Order permitted the Plaintiff to move the Court for leave to file an amended
complaint limited to claims relating to the Fund's investments in restricted and
other illiquid securities.

On July 11, 1996, the Court issued an Order permitting the Plaintiff to file an
amended complaint. The amended complaint alleges that certain registration
statements and prospectuses of the Fund failed to disclose certain risks
regarding the Fund's investments in illiquid securities and that the Fund
invested in illiquid securities in concentrations which exceeded the Fund's own
investment restrictions and that the Fund improperly valued its illiquid
securities. The amended complaint also alleges that the other defendants
breached their fiduciary duties in connection with the Fund's investments in and
valuation of illiquid securities and by the receipt of AHMC of substantial
compensation for investment advice and that the Fund breached its own
limitations with respect to illiquid securities and that the Fund changed
investment policies without obtaining a shareholder vote.

The Plaintiff made a motion to permit the action to proceed as a class action
and in which the Plaintiff
- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
- --------------------------------------------------------------------------------
would serve as the sole class representative of all persons who acquired shares
of the Fund from July 1, 1993 through August 31, 1994. On August 1, 1997, the
Court denied the Plaintiff's motion.

The Fund, after conferring with its special counsel, has concluded that the
substantive allegations of the amended complaint are without merit. Although
there can be no assurance of the outcome of the action, based upon the Fund's
belief, the Fund has not established a reserve for potential losses other than
the expenses of its defense. The Fund intends to vigorously defend the action.

The Plaintiff is seeking rescission or compensatory damages and pre-judgment
interest thereon and the costs and expense of the litigation and such other and
further relief as the Court may deem just and proper. The Fund's Officers and
Directors are entitled to be indemnified by the Fund to the full extent
permitted by law.

The Fund has borne expenses related to the above litigation which for the year
ended May 31, 1998 totaled $136,777. As of May 31, 1998 the Fund has recovered a
total of $171,310 from its insurance carrier relating to current and prior year
expenses.

On August 4, 1995 the Fund commenced an action against Kouri Capital Group, Inc.
("KCG") and Pentti Kouri in the Supreme Court of the State of New York, County
of New York. The action was based upon a Stock Purchase Agreement between the
Fund and KCG pursuant to which KCG agreed to repurchase certain shares issued
thereby and sold to the Fund for $4,400,000. Such obligation of KCG was
personally guaranteed by Mr. Kouri. Neither KCG nor Mr. Kouri has honored its or
his obligation to the Fund. The Fund sought a recovery in the amount of
$4,400,000 plus interest. The defendants denied the substantive allegations of
the Complaint and asserted counterclaims which would declare their obligations
to the Fund to have been terminated and to obtain damages in excess of
$4,400,000. The Fund, after

8
<PAGE> 9

- --------------------------------------------------------------------------------
THE AMERICAN HERITAGE FUND, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
- --------------------------------------------------------------------------------
conferring with its special counsel, concluded that the substantive allegations
of the counterclaims were without merit. Although there could be no assurance of
the outcome of the action, based upon the Fund's belief, the Fund did not
establish a reserve for potential losses other than the expense of its defense
of the counterclaims. Upon agreement of the parties, the action has been
dismissed without prejudice. In the event that the Fund is unable to reach a
settlement of its claims acceptable to the Fund, the Fund intends to bring
another action again KCG and Mr. Kouri. In such event, it can be expected that
they will again assert counterclaims against the Fund.

The Fund has borne all expenses related to the above litigation which for the
year ended May 31, 1998 totaled $64,750.

On July 20, 1998, the Fund's investment in the securities of Senetek PLC
(Senetek) represented approximately 74% of the Fund's net assets. As set forth
in the Fund's Prospectus, the restriction limiting investments of more than 50%
of the value of total assets in the securities of any one issuer is applied
solely at the time of any proposed transaction. Senetek is a small foreign
company and the Fund's investment therein is speculative.

On July 20, 1998 the Fund's investment in the securities of ADM Tronics
Unlimited, Inc. represented approximately 19% of the Fund's net assets with a
value of approximately $3,300,000. The Fund believes that substantially all of
this holding was illiquid at May 31, 1998.

9
<PAGE> 10

THE AMERICAN HERITAGE FUND, INC.
FINANCIAL HIGHLIGHTS AND RELATED
RATIOS/SUPPLEMENTAL DATA
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..... $ .83 $ .76 $ .63 $ 1.19 $ 1.42
Income from investment operations:
Net investment income (loss)......... (.04) (.03) (.02) .06 .19
Net gains or (losses) on securities
(both realized and unrealized)..... .14 .10 .15 (.48) (.35)
----------- ----------- ----------- ----------- ------------
Total from investment operations....... .10 .07 .13 (.42) (.16)
Less distributions
Dividends (from net investment
income)............................ -- -- -- .07 --
Distributions (from capital gains)... -- -- -- -- .07
Return of capital distribution....... -- -- -- .07 --
----------- ----------- ----------- ----------- ------------
Net asset value, end of year........... $ .93 $ .83 $ .76 $ .63 $ 1.19
=========== =========== =========== =========== ============
Total return........................... 12.05% 9.21% 20.63% (38.37)% (12.49)%
Net assets, end of period.............. $16,890,738 $18,126,591 $21,429,753 $30,779,569 $101,036,392
Ratio of expenses to average net
assets............................... 5.85% 6.42% 6.25% 3.69% 2.41%
Ratio of net income (loss) to average
net assets........................... (4.08)% (4.97)% (3.53)% 6.55% 3.40%
Portfolio turnover rate................ 1,180% 470% 606% 620% 434%
Average commission per share........... $ .0858 $ .0879 $ .0866 N/A N/A
</TABLE>

N/A -- Disclosure not applicable to prior periods.

The accompanying notes are an integral part of these financial statements.

10
<PAGE> 11

LANDSBURG PLATT RASCHIATORE & DALTON
Certified Public Accountants

117 South 17th Street 13th Floor Philadelphia, PA 19103
215-561-6633 FAX 215-561-2070

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
The American Heritage Fund, Inc.

We have audited the accompanying statement of assets and liabilities of The
American Heritage Fund, Inc., including the schedule of investments in
securities, as of May 31, 1998, the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights and related
ratios/supplemental data for each of the five years in the period then ended.
These financial statements, and financial highlights and related
ratios/supplemental data are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements, and the
financial highlights and related ratios/supplemental data based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights and related ratios/supplemental data are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial highlights
and related ratios supplemental data. Our procedures included confirmation of
securities owned as of May 31, 1998, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and the financial highlights and
related ratios/supplemental data referred to above present fairly, in all
material respects, the financial position of The American Heritage Fund, Inc. as
of May 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights and related ratios/supplemental data for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.

/s/ LANDSBURG PLATT RASCHIATORE & DALTON
June 24, 1998

11
<PAGE> 12

THE AMERICAN HERITAGE FUND, INC. BULK RATE
1370 Avenue of the Americas U.S. POSTAGE
New York, NY 10019 PAID
SECAUCUS, NJ
ADDRESS CORRECTION REQUESTED PERMIT NO. 237

<TABLE>
<S> <C>
THE
AMERICAN
[AMERICAN HERITAGE FUND LOGO] HERITAGE
FUND, INC.
- -------------------------------------------------------------
ANNUAL
REPORT
May 31, 1998
</TABLE>

This report and the financial statements contained herein are submitted for the
general information of shareholders and are not authorized for distribution to
prospective investors unless preceded or accompanied by an effective prospectus.
Nothing herein contained is to be considered an offer of sale or solicitation of
an offer to buy shares of The American Heritage Fund, Inc. Such offering is made
only by prospectus, which includes details as to offering price and other
material information.