NATIONWIDE INVESTING FOUNDATION, 497, 1999-09-01

NATIONWIDE INVESTING FOUNDATION
497, 1999-09-01

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<PAGE> 1
PRESTIGE ADVISOR SERIES
PRESTIGE LARGE CAP VALUE FUND
PRESTIGE LARGE CAP GROWTH FUND
PRESTIGE BALANCED FUND
PRESTIGE SMALL CAP FUND
PRESTIGE INTERNATIONAL FUND

SUPPLEMENT DATED SEPTEMBER 1, 1999
TO
PROSPECTUS DATED NOVEMBER 2, 1998

The following sections of the current prospectus for each of the Prestige
Advisor Series (the "Funds") have been amended as described below.

Investment Management of the Funds
- ----------------------------------

Effective September 1, 1999, the investment advisory services previously
performed for the Funds by Nationwide Advisory Services, Inc. ("NAS") were
transferred to Villanova Mutual Fund Capital Trust ("VMF"), an affiliate of NAS
and an indirect subsidiary of Nationwide Financial Services, Inc. VMF assumes
all rights and responsibilities performed by NAS, including the supervision and
monitoring of each Funds' subadviser, and each Fund's subadviser continue to
manage the Fund after the transfer to VMF. After the transfer, there was no
change in the fees charged for investment advisory services for each of the
Funds.

VMF was organized in 1999, and beginning September 1, 1999, it provides
investment advisory services to both Nationwide Separate Account Trust and
Nationwide Mutual Funds. Its principal offices are located at Three Nationwide
Plaza, Columbus, Ohio 43215.

Fund Administration
- -------------------

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
implementation of these changes, there was no change in the fees charged for
fund administration services for each of the Funds.

All references in the Prospectus to Nationwide Advisory Services, Inc. in its
capacity as the Funds' investment adviser and fund administrator should be
changed to Villanova Mutual Fund Capital Trust and Villanova SA Capital Trust,
respectively. Nationwide Advisory Services, Inc. remains the Funds' distributor.
<PAGE> 2
How To Purchase Shares
- ----------------------

On page 32 of the Prospectus under the caption "CHOOSE A CLASS OF SHARES", is
amended to allow the purchase of Class Y shares by life insurance separate
accounts to fund the benefits of variable annuity contracts issued to
governmental entities as an investment option under their deferred compensation
plans as defined under Section 457 of the Internal Revenue Code ("Code") or
qualified plans adopted pursuant to Section 401(a) of the Code, as well as other
open-end investment companies (each, a "Fund of Funds") advised by VMF.

Administrative Services Plan
- ----------------------------

Effective September 1, 1999, each of the Funds is implementing an Administrative
Services Plan and related Servicing Agreements for the Class A shares of each
Fund, as is currently in place for the Class Y shares of each Fund.

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

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
PROSPECTUS FOR FUTURE REFERENCE
<PAGE> 3
CLASS Y SHARES

NATIONWIDE S&P 500 INDEX FUND

SUPPLEMENT DATED SEPTEMBER 1, 1999
TO
PROSPECTUS DATED NOVEMBER 2, 1998

The following sections of the current prospectus for the Class Y Shares of the
Nationwide S&P 500 Index Fund have been amended as described below.

Investment Management of the Fund
- ---------------------------------

Effective September 1, 1999, the investment advisory services previously
performed for the Fund by Nationwide Advisory Services, Inc. ("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 the Fund's subadviser, and the Fund's subadviser continues to
manage the Fund after the transfer to VMF. After the transfer, there was no
change in the fees charged for investment advisory services for the Fund.

Fund Administration
- -------------------

Effective September 1, 1999, the fund administration services previously
performed for the Fund 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
implementation of these changes, there was no change in the fees charged for
fund administration services for the Fund.

Other Changes
- -------------

The cover page of the Prospectus is amended to allow the purchase of Class Y
shares by life insurance separate accounts to fund the benefits of variable
annuity contracts issued to governmental entities as an investment option under
their deferred compensation plans as defined under Section 457 of the Internal
Revenue Code ("Code") or qualified plans adopted pursuant to Section 401(a) of
the Code, as well as other open-end investment companies advised by VMF.
<PAGE> 4
All references in the Prospectus to Nationwide Advisory Services, Inc. in its
capacity as the Fund's investment adviser and fund administrator should be
changed to Villanova Mutual Fund Capital Trust and Villanova SA Capital Trust,
respectively. Nationwide Advisory Services, Inc. remains the Fund's distributor.

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
PROSPECTUS FOR FUTURE REFERENCE
<PAGE> 5
CLASS R SHARES

NATIONWIDE MONEY MARKET FUND

SUPPLEMENT DATED SEPTEMBER 1, 1999
TO
PROSPECTUS DATED JANUARY 5, 1999

The following sections of the current prospectus for the Class R Shares of the
Nationwide Money Market Fund have been amended as described below.

Investment Management of the Fund
- ---------------------------------

Effective September 1, 1999, the investment advisory services previously
performed for the Fund by Nationwide Advisory Services, Inc. ("NAS") were
transferred to Villanova Mutual Fund Capital Trust ("VMF"), an affiliate of NAS
and an indirect subsidiary of Nationwide Financial Services, Inc. The portfolio
manager for the Fund continues to manage the Fund after the transfer to VMF.
After the transfer, there was no change in the fees charged for investment
advisory services for the Fund.

Fund Administration
- -------------------

All references in the Prospectus to Nationwide Advisory Services, Inc. in its
capacity as the Fund's investment adviser and fund administrator should be
changed to Villanova Mutual Fund Capital Trust and Villanova SA Capital Trust,
respectively. Nationwide Advisory Services, Inc. remains the Fund's distributor.

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
PROSPECTUS FOR FUTURE REFERENCE
<PAGE> 6
CLASS R SHARES

NATIONWIDE S&P 500 INDEX FUND

SUPPLEMENT DATED SEPTEMBER 1, 1999
TO
PROSPECTUS DATED NOVEMBER 2, 1998

The following sections of the current prospectus for the Class R Shares of the
Nationwide S&P 500 Index Fund have been amended as described below.

Investment Management of the Fund
- ---------------------------------

Fund Administration
- -------------------

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
PROSPECTUS FOR FUTURE REFERENCE
<PAGE> 7
LOCAL FUND SHARES

NATIONWIDE S&P 500 INDEX FUND

SUPPLEMENT DATED SEPTEMBER 1, 1999
TO
PROSPECTUS DATED DECEMBER 21, 1998

The following sections of the current prospectus for the Local Fund Shares of
the Nationwide S&P 500 Index Fund have been amended as described below.

Investment Management of the Fund
- ---------------------------------

Fund Administration
- -------------------

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
PROSPECTUS FOR FUTURE REFERENCE
<PAGE> 8
NATIONWIDE FAMILY OF FUNDS

SUPPLEMENT DATED SEPTEMBER 1, 1999
TO
PROSPECTUS DATED MARCH 1, 1999 (REVISED JULY 1, 1999)

Effective September 1, 1999, the investment advisory services previously
performed for each of the Funds by Nationwide Advisory Services, Inc. ("NAS")
were transferred to Villanova Mutual Fund Capital Trust ("VMF"), an affiliate of
NAS and an indirect subsidiary of Nationwide Financial Services, Inc. The
portfolio managers for each of the Funds continues to manage the Funds after the
transfer to VMF. After the transfer, there was no change in the fees charged to
each of the Funds for investment advisory services.

VMF was organized 1999, and beginning September 1, 1999, it provides investment
advisory services to both Nationwide Separate Account Trust and Nationwide
Mutual Funds. Its principal offices are located at Three Nationwide Plaza,
Columbus, Ohio 43215.

All references in the Prospectus to Nationwide Advisory Services, Inc. in its
capacity as the Funds' investment adviser should be changed to Villanova Mutual
Fund Capital Trust. References to Nationwide Advisory Services, Inc. as the
Funds' distributor, under the heading "Buying, Selling and Exchanging Fund
Shares" in the Prospectus, are unchanged.

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
PROSPECTUS FOR FUTURE REFERENCE
<PAGE> 9

PART B:

STATEMENT OF ADDITIONAL INFORMATION MARCH 1, 1999 (REVISED SEPTEMBER 1, 1999)

NATIONWIDE MUTUAL FUNDS

NATIONWIDE MID CAP GROWTH FUND
NATIONWIDE GROWTH FUND
NATIONWIDE FUND
(together referred to as the "Stock Funds")
NATIONWIDE BOND FUND
NATIONWIDE TAX-FREE INCOME FUND
NATIONWIDE LONG-TERM U.S. GOVERNMENT BOND FUND
NATIONWIDE INTERMEDIATE U.S. GOVERNMENT BOND FUND
(together referred to as the "Bond Funds")
NATIONWIDE MONEY MARKET FUND - PRIME SHARES
(all together the "Funds")

This Statement of Additional Information is not a prospectus. It
contains information in addition to and more detailed than that set forth in the
Prospectus for the Funds and should be read in conjunction with the Prospectus
dated March 1, 1999, as revised July 1, 1999 and supplemented September 1, 1999
for the Funds. The Prospectus may be obtained by writing to Nationwide Advisory
Services, Inc. ("NAS"), P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio
43216 or by calling toll-free 800-848-0920.

Terms not defined in this Statement of Additional Information have the
meanings assigned to them in the Prospectus.

The Report of Independent Auditors and Financial Statements of the
Funds for the period ended October 31, 1998 are incorporated by reference to the
Annual Report. Copies of the Annual Report are available without charge upon
request by writing the Trust or by calling 1-800-848-0920.

TABLE OF CONTENTS

General Information and History 1
Investment Objectives and Policies 2
Investment Restrictions 23
Trustees and Officers of the Trust 24
Investment Advisory and Other Services 26
Brokerage Allocation 31
Additional Information on Purchases and Sales 32
Valuation of Shares 37
Investor Strategies 38
Investor Privileges 39
Investor Services 41
Fund Performance Advertising 42
Additional Information 44
Additional General Tax Information 45
Major Shareholders 50
Financial Statements 50
Appendix 51

GENERAL INFORMATION AND HISTORY

Nationwide Mutual Funds (the "Trust"), formerly Nationwide Investing Foundation
III, is an open-end management investment company, created under the laws of
Ohio by a Declaration of Trust dated as of October 30, 1997, as subsequently
amended. Each of the Funds is a diversified fund as defined in the Investment
Company Act of 1940.

<PAGE> 10

INVESTMENT OBJECTIVE AND POLICIES

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES

The following information supplements the discussion of the Funds' investment
objectives and policies discussed in the Prospectuses. The investment objectives
of each Fund are fundamental and may not be changed without shareholder
approval. The investment policies and types of permitted investments described
here may be changed without approval by the shareholders unless otherwise
indicated. There is no guarantee that any of the Funds' investment objectives
will be realized.

TEMPORARY DEFENSIVE POSITION

In addition to investments described below and in the Funds Prospectus, each
Fund, except for the Tax-Free Income Fund, may as a temporary defensive position
invest 100% of its assets in cash or money market instruments as discussed more
fully below. The Tax-Free Income Fund may as a temporary defensive position
invest up to 20% of its assets in cash and taxable money market instruments.

INFORMATION CONCERNING THE DURATION OF THE U.S. GOVERNMENT BOND FUNDS AND THE
BOND FUND: The Long-Term U.S. Government Bond Fund will maintain a duration
which, on a weighted average basis and under normal market conditions, will
generally be greater than six years. The Intermediate U.S. Government Bond Fund
will maintain a duration which, on a weighted average basis and under normal
market conditions, will generally be between three and a half and six years. The
Bond Fund will maintain a duration, which, on a weighted average basis and under
normal market conditions, will generally be between four and seven years.
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 to 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 to 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

<PAGE> 11

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, Villanova Mutual Mutual Fund Capital Trust ("VMF") (the
"Adviser") 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 either U.S. Government Bond Fund
will at all times achieve its targeted portfolio duration.

The change in market value of U.S. Government fixed-income securities
is largely a function of changes in the prevailing level of interest rates. When
interest rates are falling, a portfolio with a shorter duration generally will
not generate as high a level of total return as a portfolio with a longer
duration. When interest rates are stable, shorter duration portfolios generally
will not generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case.) When interest rates are rising, a portfolio with a
shorter duration will generally outperform longer duration portfolios. With
respect to the composition of a fixed-income portfolio, the longer the duration
of the portfolio, generally, the greater the anticipated potential for total
return, with, however, greater attendant interest rate risk and price volatility
than for a portfolio with a shorter duration.

While each U.S. Government Bond Fund intends to maintain the average duration
described above under normal market conditions, there is no limit as to the
maturity of any one security which each U.S. Government Bond Fund may purchase.

DEBT OBLIGATIONS. Each of the Funds may invest in 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
("market risk"). Lower-rated securities are more likely to react to developments
affecting market and credit risk 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 bonds 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 bonds 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-grade and investment grade debt
obligations are characterized as such based on their ratings by nationally
recognized statistical rating organizations ("NRSROs"). 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 risk of
the securities. These ratings are used by a Fund as initial criteria for the
selection of portfolio securities. Among the factors that will be considered by
VMF are the long-term ability of the issuer to pay principal and interest and
general economic trends. 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 the sale of such securities, but VMF will consider such
events in determining 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 NRSROs or their rating systems, or due to a corporate reorganization, a
Fund will attempt to use comparable ratings as standards for its investments in
accordance with its investment objective and policies.

<PAGE> 12

STRIPPED TREASURY SECURITIES. These are Treasury bonds that pay no interest
during the life of the bond. Interest builds up and is paid in a lump sum when
the bond matures or becomes payable. These bonds are usually sold at a deep
discount because the buyer is only purchasing the right to receive a future
payment and has no right to receive interest payments. Stripped Treasury
securities may be subject to greater price changes as a result of changing
interest rates than bonds that make regular interest payments, and rising
interest rates may leave the Funds with a low-paying investment that may be
difficult to sell.

MONEY MARKET INSTRUMENTS. Each Fund may invest in certain types of money market
instruments which may include the following types of instruments:

-- obligations with remaining maturities of 397 days or less issued or
guaranteed as to interest and principal by the U.S. Government, its
agencies, or instrumentalities, or any federally chartered corporation,
and for the Money Market Fund's, obligations of the Canadian government
and their provinces, their agencies and instrumentalities';

-- repurchase agreements;

-- certificates of deposit, time deposits and bankers' acceptances
issued by domestic banks (including their branches located outside the
United States (Eurodollars) and subsidiaries located in Canada),
domestic branches of foreign banks (Yankees dollars), savings and loan
associations and similar institutions;

-- commercial paper, which are short-term unsecured promissory notes
issued by corporations in order to finance their current operations.
Generally the commercial paper will be rated within the top two rating
categories by an NRSRO, or if not rated, is issued and guaranteed as to
payment of principal and interest by companies which at the date of
investment have outstanding debt issue with a high quality rating;

-- asset-backed commercial paper whose own rating or the rating of any
guarantor is in one of the two highest categories of any NRSRO;

-- adjustable and variable rate instruments including callable notes;

-- short-term (maturing in 397 days or less) bank and corporate
obligations rated within the top two categories by an NRSRO;

-- 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.

-- unrated debt obligations with remaining maturities of one year or
less that are determined by Nationwide Advisory Services to be of
comparable quality to the securities listed above.

MORTGAGE AND ASSET-BACKED SECURITIES - The Bond Funds (except Tax-Free Income
Fund) may each purchase mortgage-backed securities. In addition, the Nationwide
Bond Fund and the Nationwide Money Market Fund may invest in 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 or, in the case of the
Nationwide Bond Fund only, 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 may be

<PAGE> 13

supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed as to payment of principal but not market value, 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 support
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
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 mortgage-backed securities 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-backed 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 market for privately issued
mortgage and asset-backed securities is smaller and less liquid than the market
for government sponsored mortgage-backed securities.

Asset-backed securities have structural characteristics similar to
mortgage-back securities. However, the underlying assets are not 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 the asset-backed securities may be supported by non-governmental
credit enhancements similar to those utilized in connection with mortgage-backed
securities.

<PAGE> 14

The yield characteristics of mortgage- and asset-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- and asset-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 pose 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. The 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 the Fund would likely decrease.
Also, the 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
the 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. During periods of increasing interest
rates, there is a risk that the effective maturity of mortgage-backed securities
with prepayment features will be extended, then effectively converting short or
intermediate term securities (which tend to be less volatile in price) into
longer securities (which tend to be more volatile. Adjustable rate mortgages
also have less potential for appreciation in value as interest rates decline
than do fixed rate investments.

There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States. Fannie Maes are guaranteed as to 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. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of 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.

COLLATERALIZED MORTGAGE OBLIGATIONS--The Bond Funds (other than the Tax-Free
Income Fund) may also acquire CMOs. CMOs are debt obligations collateralized by
mortgage

<PAGE> 15

loans or mortgage pass-through securities. Typically, CMOs are collateralized by
GNMA, FNMA or FHLMC certificates, but also may be collateralized by whole loans
or private mortgage pass-through securities (such collateral collectively
referred to as "Mortgage Assets"). Payments of principal or interest on the
Mortgage Assets, and any reinvestment income thereon, provide the income to pay
debt service on the CMOs. CMOs may be issued by agencies or instrumentalities of
the U.S. Government or by private lenders.

STRIPPED MORTGAGE-BACKED SECURITIES -- Each Bond Fund (other than the Tax-Free
Income Fund) may acquire stripped mortgage-backed securities. Stripped
mortgage-backed securities are securities representing interests in a pool of
mortgages the cash flow from which has been separated into interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped mortgage-backed securities may be issued by U.S.
Government agencies or by private lenders. As interest rates rise and fall, the
value of IOs tends to move in the same direction as interest rates. The value of
POs, like other debt instruments, will tend to move in the opposite direction
compared to interest rates. POs perform best when prepayments on the underlying
mortgages rise since this increases the rate at which the investment is returned
and the yield to maturity on the PO. When payments on mortgages underlying a PO
are slow, the life of the PO is lengthened and the yield to maturity is reduced.

Each Bond Fund (other than the Tax-Free Income 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. No more than 10% of a Bond Fund's total assets will be invested in IOs
and in POs. 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 Bond Fund may have difficulty in selling such
securities.

REPURCHASE AGREEMENTS. All of the Funds may enter into repurchase agreements
with certain banks or non-bank dealers. In connection with the purchase of a
repurchase agreement 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 a Fund. Repurchase agreements may be entered into with respect to
securities of the type in which a Fund may invest or government securities
regardless of their remaining maturities. A Fund will require that additional
securities be deposited with its custodian 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 the securities, 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. VMF, acting under the supervision of the Board of Trustees
of the Trust, reviews the creditworthiness of those banks and non-bank dealers
with which the Fund enters into repurchase agreements to evaluate these risks.

<PAGE> 16

WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each of the Funds may
purchase securities on a "when-issued" or "delayed delivery" basis (i.e.,
payment or delivery occurs beyond the normal settlement date at a stated price
and/or yield). When-issued transactions normally settle within 45 days (for
mortgage-backed securities, the delivery date may extend to as long as 120
days). The payment obligation and the interest rate, if applicable, that will be
received on when-issued securities are fixed at the time the Fund enters into
the commitment to buy such securities. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
yields obtained on or prices of such securities may be higher or lower than the
yields or prices available in the market on the dates when the investments are
actually delivered to the buyers.

Purchasing when-issued securities allows a Fund to lock in a fixed price or
yield on a security it intends to purchase. However, when the Fund purchases a
when-issued security, it immediately assumes the risk of ownership, including
the risk of price fluctuation until the settlement date.

When a Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, the Fund's 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. In addition, because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described above, such Fund's liquidity and the ability of VMF to
manage it might be affected in the event its commitments to purchase
"when-issued" securities ever exceeded 25% of the value of its total assets.
Under normal market conditions, however, a Fund's commitment to purchase
"when-issued" or "delayed-delivery" securities will not exceed 25% of the value
of its total assets. 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.

The Funds will engage in "when-issued" or "delayed delivery" transactions only
for the purpose of acquiring portfolio securities consistent with the Funds'
investment objectives and policies and not for investment leverage. If the
Tax-Free Income Fund sells a "when-issued" or "delayed-delivery" security before
delivery, any gain would not be tax-exempt.

LENDING PORTFOLIO SECURITIES. Each Fund (except the Tax-Free Income 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. Investments
of such collateral allows a Fund to continue to be entitled to payments in
amounts equal to the interest, dividends or other distributions payable on the
loaned security and receives interest on the amount of the loan. For the
purposes of this policy, the Fund considers 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 from the
borrower at least 100% collateral of the type discussed in the preceding
paragraph; (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

<PAGE> 17

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, the Trust's Board of Trustees must be able
to terminate the loan and regain the right to vote the securities if a material
event adversely affecting the investment occurs. These conditions may be subject
to future modification. Loan agreements involve certain risks in the event of
default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to recover the loaned securities or dispose
of the collateral for the loan.

SMALL COMPANY STOCKS. Investing in securities of small-sized companies may
involve greater risks than investing in larger, more established issuers 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 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 companies may have limited product lines, markets or
financial resources and may lack management depth. In addition, small-sized
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 companies than for larger,
more established ones.

SPECIAL SITUATION COMPANIES. The Mid Cap Growth Fund may invest in the
securities of "special situation companies," which 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. The Mid Cap Growth Fund believes, however,
that if VMF analyzes "special situation companies" carefully and invests in the
securities of these companies at the appropriate time, such Fund may achieve
capital growth. There can be no assurance however, that a special situation that
exists at the time the Mid Cap Growth Fund makes its investment will be
consummated under the terms and within the time period contemplated, if it is
consummated at all.

FOREIGN SECURITIES. The Mid Cap Growth Fund, Growth Fund, Nationwide Fund, Bond
Fund and Money Market Fund may invest, directly or indirectly through the use of
depository receipts, in foreign securities. The Money Market Fund may invest in
such foreign securities if denominated in U.S. dollars. Investors in such Funds
should recognize that investing in foreign securities involves certain special
considerations which are not typically associated with investing in domestic
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. As non-U.S. companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic issuers, there may be less publicly available
information about certain foreign securities than about domestic securities.
Fixed commissions on foreign securities exchanges are generally higher than
negotiated commissions on United States exchanges, although each such 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

<PAGE> 18

subject to foreign government taxes, higher custodian fees and dividend
collection fees which could reduce the yield on such securities.

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. However, these foreign
withholding taxes are not expected to have a significant impact on those Funds
for which the investment objective is to seek long-term capital appreciation and
any income should be considered incidental.

On January 1, 1999, eleven member states in the European Economic and
Monetary Union began conversion from their local currencies to a common currency
called the "euro". Securities issued by corporations and governments in the
participating countries will now be denominated in euros and outstanding
securities will be converted to the euro. Conversion to the euro presents some
potential risks to the Funds that invest in foreign securities due to
uncertainties relating to the conversion, competitive implications resulting
from pricing of the issuers products and services in euro, and development of
new accounting, clearing and settlement systems related to the euro. Such
uncertainties could have an adverse impact on the value of the foreign
securities held by a Fund.

CANADIAN AND PROVINCIAL OBLIGATIONS. The Money Market Fund and the
Nationwide Bond Fund may also invest in Canadian and Provincial obligations.
Generally, these obligations are unsecured, discounted bills and notes issued in
U.S. dollars. These obligations have a final maturity of 270 days or less from
date of issue and are exempt from registration under section 3(a)(3) of the
Securities Act of 1933, as amended. Canada Bills constitute direct,
unconditional obligations of Her Majesty in right of Canada and are a direct
charge on, and payable out of the Consolidated Revenue Fund of Canada. Export
Development Company is a crown corporation and agent of Her Majesty in right of
Canada. Provincial obligations are backed by the full faith and credit of the
provincial governments.

DEPOSITORY RECEIPTS. As indicated in the Funds' Prospectus, the Stock
Funds may invest in foreign securities indirectly by purchasing depository
receipts, including American Depository Receipts ("ADRs"). Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. For purposes of
a Fund's investment policies, ADRs are deemed to have the same classification as
the underlying securities they represent. Thus, an ADR representing ownership of
common stock will be treated as common stock.

The Stock Funds 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

<PAGE> 19

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 issuers.
However, Eurodollar and Yankee bank obligations held in the Money Market Fund
will undergo the same credit analysis as domestic issues in which the Money
Market Fund invests, and will have at least the same financial strength as the
domestic issuers approved for the Money Market Fund.

MUNICIPAL SECURITIES. As stated in the Prospectus, the assets of the Tax-Free
Income Fund will be primarily invested in municipal securities. Municipal
securities include debt obligations issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately-operated facilities
are included within the term municipal securities if the interest paid thereon
is exempt from federal taxes including the federal alternative minimum tax.

Among other types of municipal securities, the Tax-Free Income Fund may
purchase short-term General Obligation Notes, Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes, Project Notes, Tax-Exempt
Commercial Paper, Construction Loan Notes and other forms of short-term
tax-exempt loans. Such instruments are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. In addition, the Tax-Free Income Fund may invest in other types
of tax-exempt instruments, such as municipal bonds, private activity bonds,
pollution control bonds and money market securities.

Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to its Project Notes, they are
also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the
federal government will lend the issuer an amount equal to the principal of and
interest on the Project Notes.

The two principal classifications of municipal securities consist of
"general obligation" and "revenue" issues. The Tax-Free Income Fund may also
acquire "moral obligation" issues, which are normally issued by special purpose
authorities. There are, of course, variations in the quality of municipal
securities, both within a particular classification and between classifications,
and the yields on municipal securities depend upon a variety of factors,
including the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Ratings

<PAGE> 20

represent the opinions of an NRSRO as to the quality of municipal securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality, and municipal securities with the same maturity, interest
rate and rating may have different yields, while municipal securities of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to purchase, an issue of municipal securities may cease to be rated
or its rating may be reduced below the minimum rating required for purchase. VMF
will consider such an event in determining whether the Tax-Free Income Fund
should continue to hold the obligation. The Tax-Free Income Fund may also invest
in commercial paper as long as it is rated within the two highest rating
categories by an NRSRO.

An issuer's obligations under its municipal securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the federal bankruptcy code, and laws, if
any, which may be enacted by Congress or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon the enforcement of such obligations or upon the ability of municipalities
to levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its municipal securities may be
materially adversely affected by litigation or other conditions.

The Tax-Free Income Fund may invest in AMT bonds. Although the Fund has
adopted fundamental investment policy which requires it to invest at least 80%
of its net assets in securities, the interest income from which is exempt from
Federal income taxes and is not treated as a preference item for purposes of the
Federal alternative minimum tax. An AMT bond is an otherwise tax-exempt
municipal bond whose interest is treated as a preference item for purposes of
computing the alternative minimum tax imposed on individuals and corporations.
Specifically, private activity bonds, other than 501(c)(3) bonds issued on or
after August 8, 1986 that are not current refundings of pre-1986 industrial
development bonds are AMT bonds. A municipal bond is considered to be a private
activity bond if more than either 5% or $5 million of the proceeds is used to
finance a loan to any person other than a governmental unit or 10% or more of
the proceeds of the issue is used in a trade or business of any person other
than a governmental entity and more than 10% of the issue is secured by property
or payments used in a private business. Private activity bonds held by the
Tax-Free Income Fund are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer.

Municipal bonds that are private activity bonds will not be tax-exempt
unless they fall within the category of "qualified bonds" defined in the Code.
Qualified bonds include issues for certain facilities such as airport bonds,
water and sewer service bonds, qualified single and multifamily housing bonds,
certain "small" industrial development bonds and bonds for local furnishing of
gas and electricity. Qualified bonds are also bonds for water, solid waste
facility bonds, docks and wharves issues and "enterprise zone" bonds.

In addition to normal risks associated with bonds, there is a slight
risk of less active secondary market for AMT bonds. In general, a larger
secondary market will exist for AMT bonds when the supply of municipal bonds is
tight.

PUTS. The Tax-Free Income Fund may also acquire "puts" with respect to
municipal securities held in its portfolio. A put is a right to sell a specified
security (or securities) within a specified period of time at a specified
exercise price. The Tax-Free Income Fund may sell, transfer, or assign a put
only in conjunction with the sale, transfer, or assignment of the underlying
security or securities.

The amount payable to the Tax-Free Income Fund upon its exercise of a
"put" is normally (i) the Tax-Free Income Fund's acquisition cost of the
municipal securities (excluding any accrued interest which the Tax-Free Income
Fund paid on the acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period the Tax-Free
Income Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.

<PAGE> 21

Puts may be acquired by the Tax-Free Income Fund to facilitate the
liquidity of its portfolio assets. Puts may also be used to facilitate the
reinvestment of the Tax-Free Income Fund's assets at a rate of return more
favorable than that of the underlying security. Puts may, under certain
circumstances, also be used to shorten the maturity of underlying variable rate
or floating rate securities for purposes of calculating the remaining maturity
of those securities.

The Tax-Free Income Fund expects that it will generally acquire puts
only where the puts are available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Tax-Free Income Fund may
pay for puts either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the puts (thus reducing the yield to
maturity otherwise available for the same securities).

The Tax-Free Income Fund intends to enter into puts only with dealers,
banks, and broker-dealers which, in VMF's opinion, present minimal credit risks.

CONVERTIBLE SECURITIES. The Mid Cap Growth Fund, Growth Fund and Nationwide Fund
may invest in convertible securities to the extent described in their
Prospectus. Convertible securities are bonds, debentures, notes, preferred
stocks, or other securities that may be converted into or exchanged for a
specified amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. 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.

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, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. 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.

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.

PREFERRED STOCK. The Funds may invest in preferred stocks. 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

<PAGE> 22

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 or protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer.

WARRANTS. The Mid Cap Growth Fund, Growth Fund, and Nationwide Fund may acquire
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 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.

RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. Each 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. At this time
none of the Funds intends to invest more than 5% of its net assets in illiquid
securities. 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. 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 a Fund
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. A Fund 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 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 under the Securities Act which allows for
a broader institutional trading market for securities otherwise subject to
restriction

<PAGE> 23

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. The market for certain restricted
securities such as institutional commercial paper has expanded further as a
result of this regulation and use of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.

Any such restricted securities will be considered to be illiquid for
purposes of such a Fund's limitations on investments in illiquid securities
unless, pursuant to procedures adopted by the Board of Trustees of the Trust,
VMF 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, a Fund's level of illiquidity may increase.

A Stock Fund may buy or sell over-the-counter ("OTC") options and, in
connection therewith, segregate assets or cover its obligations with respect to
OTC options written by the Fund. The assets used as cover for OTC options
written by a Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.

VMF will monitor the liquidity of restricted securities in a Fund. In
reaching liquidity decisions, VMF may consider the following factors: (A) the
unregistered nature of the security; (B) the frequency of trades and quotes for
the security; (C) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (D) dealer undertakings to make a
market in the security and (E) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).

PRIVATE PLACEMENT COMMERCIAL PAPER. Commercial paper eligible for
resale under Section 4(2) of the Securities Act is offered only to accredited
investors. Rule 506 of Regulation D in the Securities Act of 1933 lists
investment companies as an accredited investor.

Section 4(2) paper not eligible for resale under Rule 144A under the Securities
Act shall be deemed liquid if (1) the Section 4(2) paper is not traded flat or
in default as to principal and interest; (2) the Section 4(2) paper is rated in
one of the two highest rating categories by at least two NRSROs, or if only one
NRSRO rates the security, it is rated in one of the two highest categories by
that NRSRO; and (3) the Adviser believes that, based on the trading markets for
such security, such security can be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the security.

BORROWING. Each Fund may borrow money from banks, limited by the Fund's
fundamental investment restriction to 33-1/3% of its total assets (including the
amount borrowed). In addition, a Fund may borrow up to an additional 5% of its
total assets from banks for temporary or emergency purposes. Each 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.

<PAGE> 24

DERIVATIVE INSTRUMENTS. As discussed in the Prospectus, VMF may use a variety of
derivative instruments, including options, futures contracts (sometimes referred
to as "futures"), options on futures contracts, stock index options and forward
currency contracts to hedge a Fund's portfolio or for risk management.
Derivations are financial instruments whose value and performance are based on
the value and performance of another security, financial instrument or index. At
this time none of the Funds intends to invest more than 5% of its net assets in
derivative instruments.

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").

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 VMF's
ability to predict movements of the overall securities and currency markets,
which requires different skills than predicting changes in the prices of
individual securities. There can be no assurance that any particular strategy
adopted will succeed.

(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged, as well as how similar the index is
to the portion of the Fund's assets being hedged in terms of securities
composition.

(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because VMF 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 "Additional General Tax Information".

OPTIONS. Each of the Stock Funds may purchase or write put and call
options on securities and indices, and may purchase options on foreign
currencies, and enter

<PAGE> 25

into closing transactions with respect to such options to terminate an existing
position. A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract. Option contracts may be written with terms which would permit
the holder of the option to purchase or sell the underlying security only upon
the expiration date of the option. The initial purchase or sale of an option
contract is an "opening transaction". In order to close out an option position,
a Fund may enter into a "closing transaction", the sale or purchase, as the case
may be, of an option contract on the same security with the same exercise price
and expiration date as the option contract originally opened. 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 the Fund may include European-style
options, which can only be exercised at expiration. This is in contrast to
American-style options which can be exercised at any time prior to the
expiration date of the option.

A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.

A Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. OTC
options are contracts between the Fund and the counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the counter party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counter party to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.

Each Stock Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. Each of the
Stock Funds 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

<PAGE> 26

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.

Transactions using OTC options expose a Fund to certain risks. To the
extent required by SEC guidelines, a Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, other options, or futures or (2) cash and liquid obligations with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. A Fund will also set aside cash and/or
appropriate liquid assets in a segregated custodial account if required to do so
by the SEC and CFTC regulations. Assets used as cover or held in a segregated
account cannot be sold while the position in the corresponding option or futures
contract is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Fund's assets to segregated accounts as a
cover could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.

Each Stock 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. Index options (or options on securities indices) are similar
in many respects to options on securities except that an index option gives the
holder the right to receive, upon exercise, cash instead of securities, if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call , or less than, in the case of a put, the exercise
price of the option. Price movements in securities in which a Fund owns or
intends to purchase probably will not correlate perfectly with movements in the
level of an index and, therefore, a Fund bears the risk of a loss on an index
option that is not completely offset by movements in the price of such
securities. Because index options are settled in cash, a call writer cannot
determine the amount of its settlement obligations in advance and, unlike call
writing on specific securities, cannot provide in advance for, or cover, its
potential settlement obligations acquiring and holding the underlying
securities. A Fund will be required to segregate assets and/or provide an
initial margin to cover index options that would require it to pay cash upon
exercise.

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.

FUTURES CONTRACTS. The Stock Funds 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

<PAGE> 27

when VMF believes it is more advantageous to a Fund than is purchasing the
futures contract.

To the extent required by regulatory authorities, a Fund will only
enter into futures contracts that are traded on U.S. or foreign exchanges or
boards of trade approved by the CFTC and are standardized as to maturity date
and underlying financial instrument. These transactions may be entered into for
"bona fide hedging" purposes as defined in CFTC regulations and other
permissible purposes including increasing return and hedging against changes in
the value of portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions. The ability of a Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.

A Fund will not enter into futures contracts and related options for
other than "bona fide hedging" purposes for which the aggregate initial margin
and premiums required to establish positions exceed 5% of the Fund's net asset
value after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into. There is no overall limit on the percentage
of a Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures contracts could be
used to reduce a Fund's exposure to market, currency, or interest rate
fluctuations, such Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.

A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified multiplier times the difference 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

<PAGE> 28

market." Variation margin does not involve borrowing, but rather represents a
daily settlement of a Fund's obligations to or from a futures broker. When a
Fund purchases an option on a future, the premium paid plus transaction costs is
all that is at risk. In contrast, when a Fund purchases or sells a futures
contract or writes a call or put option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous. Purchasers and sellers of futures positions and options on
futures can enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Positions in futures and options on futures may be closed only on an exchange or
board of trade on which they were entered into (or through a linked exchange).
Although the Funds intend to enter into futures transactions only on exchanges
or boards of trade where there appears to be an active market, there can be no
assurance that such a market will exist for a particular contract at a
particular time.

Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.

If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses, because it would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.

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.

FORWARD CURRENCY CONTRACTS. The Mid Cap Growth Fund, Growth Fund and Nationwide
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

<PAGE> 29

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

SECURITIES OF OTHER NON-AFFILIATED INVESTMENT COMPANIES. 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. The Funds may also invest in shares of other
non-affiliated U.S. investment companies registered under the 1940 Act.
Investing through such vehicles may involve frequent or layered fees or expenses
and may also be subject to limitation under the 1940 Act. Under the 1940 Act, a
Fund may invest up to 10% of its assets in shares of investment companies and up
to 5% of its assets in any one investment company as long as the investment does
not represent more than 3% of the voting stock of the acquired investment
company.

BANK OBLIGATIONS. Bank obligations that may be purchased by a Fund include
certificates of deposit, banker's acceptances and fixed time deposits. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.

Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation. The Money Market Fund may invest in obligations of U.S.
banks with assets over $500 million.

FLOATING AND VARIABLE RATE OBLIGATIONS--The Bond Funds and the Money Market Fund
may invest in floating and variable rate obligations. Floating or variable rate
obligations bear interest at rates that are not fixed, but change either with
changes in specified market rates or indices, such as the prime rate, or at
specified intervals. Interest rates on floating rate obligations reset at such
times as there are changes in the underlying index or interest rate while
interest rates on variable rate obligations reset at preset fixed times (such as
quarterly or monthly). Certain of the floating or variable rate obligations that
may be purchased by these Funds may be callable by the issuer at certain dates
during the term of the obligations. The dates on which they may be called are
set at the time of issuance. The obligations have credit risks like other debt
instruments, but because the issuer may call the obligations, these Funds are
also subject to the risk that the rates at which a Fund will be able to reinvest
such assets after a call may be less than the rate paid on the floating or
variable rate obligation. Certain of the floating or variable rate obligations
that may be purchased by these Funds may also carry a demand feature that would
permit the holder to tender them back to the issuer at par value prior to
maturity. Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permits the amount of the indebtedness thereunder to vary and
provides for periodic adjustments in the interest rate. The Bond Funds and the
Money Market Fund will limit their purchases of floating and variable rate
obligations to those of the same quality as obligations they are otherwise
allowed to purchase. VMF will monitor on an ongoing basis the ability of an
issuer of a demand instrument to pay principal and interest on demand.

In the event the interest rate of a variable or floating rate
obligation is established by reference to an index or an interest rate that may
from time to time lag behind other market interest rates, there is the risk that
the market value of

<PAGE> 30

such obligation, on readjustment of its interest rate, will not approximate its
par value or amortized cost, as the case may be.

Although there may be no active secondary market with respect to a
particular variable or floating rate obligation purchased by a Fund, the Fund
may attempt to resell the obligation at any time to a third party. The absence
of an active secondary market, however, could make it difficult for a Fund to
dispose of a variable or floating rate obligation in the event the issuer of the
obligation defaulted on its payment obligations, and the Fund could, as a result
or for other reasons, suffer a loss to the extent of the default. Variable or
floating rate obligations may be secured by bank letters of credit.

Variable and floating rate obligations for which no readily available
market exists and which are not subject to a demand feature that will permit the
Fund to receive payment of the principal within seven days after demand by that
Fund, will be considered illiquid and therefore, together with other illiquid
securities held by such Fund, investments will not exceed such Fund's
limitations on investments in illiquid securities.

The 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.

ZERO COUPON SECURITIES. The Bond Funds may invest in zero coupon securities in
accordance with investment policies described in their Prospectus.

Zero coupon securities are debt securities that pay no cash income but
are sold at substantial discounts from their value at maturity. When a zero
coupon security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Zero
coupon securities may have conversion features.
Certain zero coupon securities may be convertible into stock of the issuer.

Zero coupon 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 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 the Fund's limitation on investments in illiquid
securities.

Current federal income tax law requires the holder of a zero coupon
security acquired at a discount 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, the 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.

MEDIUM-GRADE OBLIGATIONS--The Nationwide Bond and Tax-Free Income Funds may
invest in medium-grade securities. Medium-grade securities are obligations rated
in the fourth highest rating category by any NRSRO. Medium-grade securities,
although considered investment-grade, have speculative characteristics and may
be subject to greater fluctuations in value than higher-rated securities. In
addition, the issuers of

<PAGE> 31

medium-grade securities may be more vulnerable to adverse economic conditions or
changing circumstances than issuers of higher-rated securities.

All ratings are determined at the time of investment. Any subsequent
rating downgrade of a debt obligation will be monitored by VMF to consider what
action, if any, a Fund should take consistent with its investment objective.
There is no requirement that any such securities must be sold if downgraded.

PORTFOLIO TURNOVER

The Funds will attempt to purchase securities with the intent of
holding them for investment but may purchase and sell portfolio securities
whenever VMF believes it to be in the best interests of a Fund. The Funds will
not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with their investment objective and policies.

INVESTMENT RESTRICTIONS

The following are fundamental investment restrictions of each Fund 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 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. The
Money Market Fund will be deemed to be in compliance with this restriction
so long as it is in compliance with Rule 2a-7 under the 1940 Act, as such
Rule may be amended from time to time.

- - 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 act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed an underwriter within the meaning of
the Securities Act in connection with the purchase and sale of portfolio
securities.

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

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

- - May not lend any security or make any other loan, except that each Fund
may purchase or hold debt securities and lend portfolio securities in
accordance with its investment objective and policies, make time deposits
with financial institutions and enter into repurchase agreements.

- - May not purchase the securities of any issuer if, as a result, 25% or more
than (taken at current value) of the Fund's total assets would be invested
in the

<PAGE> 32

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 and obligations issued by
state, county or municipal governments. The following industries are
considered separate industries for purposes of this investment restriction:
electric, natural gas distribution, natural gas pipeline, combined electric
and natural gas, and telephone utilities, captive borrowing conduit,
equipment finance, premium finance, leasing finance, consumer finance and
other finance.

The following are the non-fundamental operating policies of the Funds which may
be changed by the Board of Trustees of the Trust without shareholder approval:

- - EACH FUND MAY NOT:

- - Sell securities short, 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.

- - 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%
(10% with respect to the Money Market Fund) of its net assets would be
invested in securities that are illiquid.

- - Purchase securities of other investment companies except (a) in connection
with a merger, consolidation, acquisition, reorganization or offer of
exchange, or (b) to the extent permitted by the 1940 Act or any rules or
regulations thereunder or pursuant to any exemptions therefrom.

- - Pledge, mortgage or hypothecate any assets owned by the Fund in excess of
33 1/3% of the Fund's total assets at the time of such pledging, mortgaging
or hypothecating.

- - Concentrate its investments (invest 25% or more of its total assets) in
the securities of one or more issuers conducting their principal business
in a particular industry or group of industries. This does not include
obligations issued or guaranteed by the U.S. government or its agencies and
instrumentalities and repurchase agreements involving such securities.

TRUSTEES AND OFFICERS OF THE TRUST

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 occupation of the Trustees and Officers during the last five
years, their ages, their addresses and their affiliations are:

JOHN C. BRYANT, Trustee*, Age 63
411 Oak St., Suite 306, Cincinnati, Ohio 45219
Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a partnership
of business, government, schools and social service agencies to address the
educational needs of students. He was formerly Professor of Education,
Wilmington College.

C. BRENT DEVORE, Trustee, Age 58
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.

<PAGE> 33

SUE A. DOODY, Trustee, Age 64
169 East Beck Street, Columbus, Ohio
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is an active
member of the Greater Columbus Area Chamber of Commerce Board of Trustees.

ROBERT M. DUNCAN, Trustee*, Age 71
1397 Haddon Road, Columbus, Ohio
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.

THOMAS J. KERR, IV, Trustee*, Age 65
4890 Smoketalk Lane, Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.

DOUGLAS F. KRIDLER, Trustee, Age 43
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.

DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise and is Chairman and Chief Executive Officer of Nationwide
Advisory Services, Inc.

NANCY C. THOMAS, Trustee+, Age 64
10835 Georgetown Road, NE, Louisville, Ohio
Ms. Thomas is a farm owner and operator. She is also a Director of the
Nationwide Insurance Companies and associated companies.

DAVID C. WETMORE, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.

JAMES F. LAIRD, JR., Treasurer, Age 42
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.

CHRISTOPHER A. CRAY, Assistant Treasurer, age 40
Three Nationwide Plaza, Columbus, Ohio
Mr. Cray is Treasurer of Villanova Mutual Fund Capital Trust, the adviser and
Nationwide Advisory Services, Inc., the Distributor. Prior to that he was
Director - Corporate Accounting of Nationwide Insurance Enterprise.

ELIZABETH A. DAVIN, Secretary, age 34
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.

+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.

*Members of the Executive Committee. Mr. McFerson is Chairman. The Executive
Committee has the authority to act for the Board of Trustees except as provided
by law and except as specified in the Trust's Bylaws.

Bryant, Doody, DeVore, Duncan, Kerr, Kridler and Wetmore are also Trustees, and
Laird, Cray and Davin are also Officers of Nationwide Separate Account Trust and
Nationwide Asset Allocation Trust, registered investment companies in the
Nationwide fund complex.

All Trustees and Officers of the Trust own less than 1% of its outstanding
shares.

<PAGE> 34

The Trustees receive fees and reimbursement for expenses of attending
board meetings from the Trust. VMF reimburses the Trust for fees and expenses
paid to Trustees who are interested persons of the Trust. The Compensation Table
below sets forth the total compensation to be paid to the Trustees of the Trust,
before reimbursement, for the fiscal period ended October 31, 1998. In addition,
the table sets forth the total compensation to be paid to the Trustees from all
funds in the Nationwide Fund Complex, including the predecessor investment
companies to the Trust, for the fiscal year ended October 31, 1998. Trust
officers receive no compensation from the Trust in their capacity as officers.

<TABLE>
<CAPTION>
COMPENSATION TABLE

PENSION
RETIREMENT
AGGREGATE BENEFITS ANNUAL TOTAL
COMPENSATION ACCURED AS BENEFITS COMPENSATION
NAME OF PERSON, FROM PART OF TRUST UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $ 10,000 --0-- --0-- $21,000
C. Brent DeVore, Trustee 10,000 --0-- --0-- 12,250
Sue A. Doody, Trustee 10,000 --0-- --0-- 21,000
Robert M Duncan, Trustee 10,000 --0-- --0-- 21,000
Thomas J. Kerr, IV, Trustee 10,000 --0-- --0-- 21,000
Douglas F. Kridler, Trustee 10,000 --0-- --0-- 21,000
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee 10,000 --0-- --0-- 10,000
David C. Wetmore, Trustee 10,000 --0-- --0-- 12,250
</TABLE>

**The Fund Complex includes three trusts comprised of thirty five investment
company funds or series.

Each of the Trustees and officers and their families are eligible to
purchase Class D shares of each of the Funds, which generally charge a front-end
sales charge, at net asset value without a sales charge. This is permitted
because there are few marketing expenses associated with these sales.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER. Under the terms of the Investment Advisory Agreement dated
May 9, 1998 as amended September 1, 1999, Villanova Mutual Fund Capital Trust
("VMF") manages the investment of the assets of the Funds in accordance with the
policies and procedures established by the Trustees.

The Adviser pays the Funds pro rata share of compensation and/or of the
Trustees and officers affiliated with the Adviser. VMF also pays all expenses
incurred by it in providing service under the Investment Advisory Agreements,
other than the cost of investments (including brokerage commissions and other
transaction costs).

The Investment Advisory Agreements also provide that VMF shall not be
liable for any act or omission in providing advisory services, or for any loss
arising out of any investment, unless VMF has acted with willful misfeasance,
bad faith, or gross negligence in the performance of its duties, or by reason of
VMF' reckless disregard of its obligations and duties under the Agreements.
After an initial two-year period, the Investment Advisory Agreements must be
approved each year by the Trust's board of trustees or by shareholders in order
to continue. Each Investment Advisory Agreement terminates automatically if it
is assigned. They may be terminated without penalty by vote of a majority of the
outstanding voting securities, or by either party, on not less than 60 days
written notice.

The Trust pays the compensation of the Trustees who are not interested
persons of the Adviser and all expenses (other than those assumed by the
Adviser), including governmental fees, interest charges, taxes, membership dues
in the Investment Company Institute allocable to the Trust; fees under the
Trust's Fund Administration Agreement; fees and expenses of independent
certified public accountants, legal counsel, and any transfer agent, registrar,
and dividend disbursing agent of the

<PAGE> 35

Trust; expenses of preparing, printing, and mailing shareholders' reports,
notices, proxy statements, and reports to governmental offices and commissions;
expenses connected with the execution, recording, and settlement of portfolio
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Trust; expenses of calculating the net asset value of
shares of the Trust; expenses of shareholders' meetings; and expenses relating
to the issuance, registration, and qualification of shares of the Trust. VMF
reimburses the Trust for fees and expenses paid to Trustees who are interested
persons of the Trust.

VMF, a Delaware business trust, is a wholly owned subsidiary Villonova
Capital, Inc., 97% of the common stock of which is held by Nationwide Financial
Services, Inc. (NFS). NFS, a holding company, has two classes of common stock
outstanding with different voting rights enabling Nationwide Corporation (the
holder of all of the outstanding Class B common stock) to control NFS.
Nationwide Corporation, is also a holding company in the Nationwide Insurance
Enterprise. All of the Common Stock of Nationwide Corporation is held by
Nationwide Mutual Insurance Company (95.3%) and Nationwide Mutual Fire Insurance
Company (4.7%), each of which is a mutual company owned by its policyholders.

Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
served as the investment adviser to the Funds. Effective September 1, 1999, the
investment advisory services previously performed for the Funds by NAS were
transferred to VMF, an affiliate of NAS and an indirect subsidiary of Nationwide
Financial Services, Inc. After the transfer, there was no change in the fees
charged for investment advisory services to each of the Funds.

For services provided under the Investment Advisory Agreement, VMF
receives an annual fee paid monthly based on average daily net assets of each
Fund according to the following schedule:

Fund Assets Fee
---- ------ ---
<S> <C> <C>
Nationwide Mid-Cap
Growth, Nationwide $0 up to $250 million .60%
Growth and Nationwide Fund $250 million up to $1 billion .575%
$1 billion up to $2 billion .55%
$2 billion up to $5 billion .525%
$5 Billion and more .50%

Nationwide Bond,
Nationwide Tax-Free Income, $0 up to $250 million .50%
Nationwide Intermediate $250 million up to $1 billion .475%
U.S. Government $1 billion up to $2 billion .45%
Bond, and Nationwide $2 billion up to $5 billion .425%
Long-Term U.S. $5 Billion and more .40%
Government Bond Funds

Nationwide Money Market Fund $0 up to $1 billion .40%
$1 billion up to $2 billion .38%
$2 billion up to $5 billion .36%
$5 Billion and more .34%
</TABLE>

VMF has agreed with the Trust to waive advisory fees, and if necessary,
reimburse expenses in order to limit total annual Fund operating expenses to
1.25% for Class A shares, 2.00% for Class B shares and 1.00% for Class D shares
in the Mid Cap Growth Fund; and 1.04% for Class A shares, 1.64% for Class B
shares and .79% for Class D shares in the Long-Term U.S. Government Bond Fund
and Intermediate U.S. Government Bond Fund until further written notice.

During the fiscal years ended October 31, 1998, 1997 and 1996, NAS received the
following fees for investment advisory services:

Years Ended October 31,
Funds Funds* 1998 1997 1996
----- ------ ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ 61,706 $ 63,883 $ 54,053
Growth Growth of NIF 4,894,110 3,750,599 3,212,196
Nationwide Fund Nationwide Fund of NIF 9,977,231 5,938,011 4,425,921
Bond Bond of NIF 647,809 629,068 663,545

Years Ended October 31,
Funds Funds* 1998 1997 1996
----- ------ ---- ---- ----

Tax-Free Income Tax-Free Income of
NIF II and Municipal
Bond of FHIT 1,505,626 1,810,070 1,855,962
LT U.S. Govt Government of FHIT 254,928 343,259 414,415
Intermediate U.S. Govt U.S. Govt. of
NIF II 266,473 256,016 255,149
Money Market** Money Market of NIF and
Cash Reserve of FHIT 3,857,898 3,519,727 2,969,392
</TABLE>

* As of May 9, 1998, the Funds acquired all of the assets of one or more series
of Nationwide Investing Foundation ("NIF"), Nationwide Investing Foundation II
("NIF II") and Financial Horizons Investment Trust ("FHIT") (collectively, the
"Acquired Funds"), as described above, in exchange for the assumption of the
stated liabilities of the Acquired Funds and a number of full and fractional
Class D shares of the applicable Fund (the Money Market Fund issued shares
without class designation) having an aggregate net asset value equal to the net
assets of the Acquired Funds as applicable (the "Reorganization").

** Net of waivers of $221,174, $389,150 and $328,076 for the fiscal year ended
October 31, 1998, 1997, and 1996, respectively.

DISTRIBUTOR. NAS serves as underwriter for each of the Funds in the continuous
distribution of its Shares pursuant to an Underwriting Agreement dated as of May
9, 1998 (the "Underwriting Agreement"). Unless otherwise terminated, the
Underwriting Agreement will continue in effect until May 9, 2000, and year to
year thereafter for successive annual periods, if, as to each Fund, such
continuance is approved at least annually by (i) the Trust's Board of Trustees
or by the vote of a majority of the outstanding shares of that Fund, and (ii)
the vote of a majority of the Trustees of the Trust who are not parties to the
Underwriting Agreement or interested persons (as defined in the 1940 Act) of any
party to the Underwriting Agreement, cast in person at a meeting called for the
purpose of voting on such approval. The Underwriting Agreement may be terminated
in the event of any assignment, as defined in the 1940 Act.

In its capacity as Distributor, NAS solicits orders for the sale of
Shares, advertises and pays the costs of advertising, office space and the
personnel involved in such activities. NAS receives no compensation under the
Underwriting Agreement with the Trust, but may retain all or a portion of the
sales charge imposed upon sales of Shares of each of the Funds.

<PAGE> 37

During the fiscal years ended October 31, 1998, 1997 and 1996, NAS received the
following commissions from the sale of shares of the Funds:

Acquired Years Ended October 31,
Funds Funds* 1998 1997 1996
----- ------ ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ 20,296 $ -- $ --
Growth Growth of NIF 1,058,927 873,750 1,029,727
Nationwide Fund Nationwide Fund of NIF 3,502,971 2,037,896 1,089,371
Bond Bond of NIF 112,368 123,036 202,206
Tax-Free Tax-Free of NIF II
and Municipal
Bond of FHIT 87,774 -- --
LT U.S. Govt Govt. Bond of FHIT 7,157 -- --
Intermediate
U.S. Govt U.S. Govt. of NIF II 25,366 -- --
</TABLE>

NAS also receives the proceeds of contingent deferred sales charges
imposed on certain redemptions of shares. During the fiscal years ended October
31, 1998, 1997 and 1996, NAS received the following amounts:

Acquired Years Ended October 31,
Funds Funds* 1998 1997 1996
----- ------ ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ -- $ 10,832 $ 12,788
Growth Growth of NIF -- -- --
Nationwide Fund Nationwide Fund of NIF 254 -- --
Tax-Free Tax-Free of NIF II and 111 202,973 287,599
Municipal Bond of FHIT
Bond Bond of NIF 6,107 -- --
LT U.S. Govt Govt. Bond of FHIT -- 23,417 36,566
Intermediate U.S. Govt U.S. Govt. of NIF II -- 31,232 58,918
</TABLE>

* See explanation of reorganization above.

From such fees, NAS retained $1,048,391, $1,603,988, and $1,443,474. NAS
reallows to dealers 4.75% of sales charges on Class A of the stock funds, 4.00%
on Class B of the stock funds, 4.00% on Class D of the stock funds, and 4.00% on
Class A of the bond funds.

DISTRIBUTION PLAN. The Funds have adopted a Distribution Plan (the "Plan") under
Rule 12b-1 of the 1940 Act which permits the Funds to compensate NAS as the
Funds' Distributor, for expenses associated with distribution of shares of the
class. Although actual distribution expenses may be more or less, under the Plan
the Funds shall pay an annual fee in amounts not exceeding a maximum amount of
.25% of the average daily net assets of Class A shares, 1.00% of the average
daily net assets of Class B shares of the Stock Funds, and .85% of the average
daily net assets of Class B shares of the Bond Funds to NAS. Distribution
expenses paid by NAS may include the costs of marketing, printing and mailing
prospectuses and sales literature to prospective investors, advertising, and
compensation to sales personnel and broker-dealers as well as payments to
broker-dealers for shareholder services.

<PAGE> 38

During the fiscal year ended October 31, 1998, NAS received the following
distribution fees:

Acquired Class Class Class
Funds Funds* A B C
----- -------- ----- ----- -----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ 204 $ 659 $ --
Growth Fund Growth of NIF 1,838 3,518 --
Nationwide Fund Nationwide Fund of NIF 11,051 29,020 --
Tax-Free Tax-Free of NIF II
and Municipal 359 2,653 266,074
Bond of FHIT
Bond Bond of NIF 717 627 --
LT U.S. Govt Govt. Bond of FHIT 113 491 --
Intermediate U.S. Govt U.S. Govt. of NIF II 236 384 46,052
</TABLE>

* See explanation of reorganization above.

** Distribution fees from the Funds prior to the May 11, 1998 reorganization,
net of waivers of $38,480 for Mid Cap Growth, $199,556 for Tax-Free, $178,777
for LT U.S. Govt. and $34,539 for Intermediate U.S. Govt.

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 initially was approved by the
Board of Trustees on March 5, 1998 and is amended from time to time upon
approval of the Board of Trustees. The Plan may be terminated as to the Funds by
vote of a majority of the Independent Trustees, or by vote of majority of the
outstanding Shares of that Fund. Any change in the Plan that would materially
increase the distribution cost to the Funds 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 may be amended by the vote of the
Trustees including a majority of 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 Fund. 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 must determine that
there is a reasonable likelihood that the Plan will benefit the Fund and its
Shareholders.

The Board of Trustees of the Trust believes 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 the Fund's Shares including, but not limited
to, those discussed above.

ADMINISTRATIVE SERVICE PLAN. Under the terms of an Administrative Services Plan,
a Fund is permitted to enter into Servicing Agreements with servicing
organizations who agree to provide certain administrative support services in
connection with the Class A and D shares of the Funds and Prime Shares of the
Money Market Fund. Such administrative support services include but are not
limited to the following:

<PAGE> 39

establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for banks wires, performing shareholder
sub-accounting, answering inquires 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 in connection with Class A and D shares of each Fund and Prime Shares
of the Money Market Fund 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 Class A or D shares of each Fund
and Prime Shares of the Money Market Fund held by customers of Nationwide
Financial Services, Inc. or such other entity.

FUND ADMINISTRATION. Under a separate Fund Administration Agreement dated May 9,
1998 as amended September 1, 1999, Villanova SA Capital Trust ("VSA"), a
wholly-owned subsidiary of Villanova Capital, Inc. provides for various
administrative and accounting services, including daily valuation of each Fund's
shares, preparation of financial statements, tax returns and regulatory reports,
and preparation and presentation of quarterly reports to the Board of Trustees.
For these services, each Fund pays VSA an annual fee in the amount of 0.07% on
assets up to $250 million of average daily net assets, 0.05% on the next $750
million and 0.04% on assets of $1 billion and more.

Prior to September 1, 1999, Nationwide Advisory Services, Inc. provided fund
administration services to the Funds. Effective September 1, 1999, the fund
administration services previously performed for the Funds by NAS were
transferred to VSA, an affiliate of NAS and an indirect subsidiary of Nationwide
Financial Services, Inc. In addition, BISYS Fund Services Ohio, Inc. began
performing 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. Fund Administration fees were not separately
charged prior to May 9, 1998.

During the period ended October 31, 1998, NAS received fund administration fees
from the Funds as follows:

Funds Amount
----- ------
<S> <C>
Mid Cap Growth $ 3,308
Growth 248,049
Nationwide Fund 470,352
Tax-Free 88,596
Bond 44,441
LT U.S. Govt. 13,998
Intermediate U.S. Govt. 16,351
Money Market 257,123
</TABLE>

TRANSFER AGENT. Nationwide Investors Services, Inc. ("NISI"), Three Nationwide
Plaza, Columbus, Ohio 43215, is the Transfer and Dividend Disbursing Agent for
all Nationwide Funds. NISI, an affiliate of VMF, will receive fees for transfer
agent services in the following amounts: $16 per Stock Fund account per annum;
$18 per Bond Fund account per annum; and $27 per Money Market Fund Prime Shares
account per annum. Management believes the charges for the services performed
are comparable to fees charged by other companies performing similar services.

<PAGE> 40

During the fiscal years ended October 31, 1998, 1997 and 1996, NISI received the
following transfer agent fees from the Funds:

Acquired Years Ended October 31,
Funds Funds* 1998 1997 1996
----- ------ ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ 12,379 $ 11,300 $ 11,898
Growth Growth of NIF 785,969 729,500 683,043
Nationwide Fund Nationwide Fund of NIF 1,018,754 788,500 698,913
Bond Bond of NIF 142,149 149,300 161,300
Tax-Free Tax-Free of NIF II
and Municipal 144,397 146,800 173,251
Bond of FHIT
LT U.S. Govt Govt. Bond of FHIT 34,092 41,500 57,100
Intermediate
U.S. Govt U.S. Govt. of NIF II 38,102 37,599 40,299
Money Market Money Market of NIF
and Cash Reserve 701,561 664,007 654,597
of FHIT
</TABLE>

* See explanation of reorganization above.

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 Custody Agreement. Fifth Third performs no managerial or
policy making functions for the Funds.

LEGAL COUNSEL. Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus, OH
43215, serves as the Trust's legal counsel.

AUDITORS. KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the
independent auditors for the Trust.

BROKERAGE ALLOCATION

ALLOCATION OF PORTFOLIO BROKERAGE-- There is no commitment by VMF to
place orders with any particular broker/dealer or group of broker/dealers.
Orders for the purchases and sales of portfolio securities of the Funds are
placed where, in the judgment of VMF, the best prices and executions can be
obtained. None of the firms with whom orders are placed are engaged in the sale
of shares of the Funds. In allocating orders among brokers for execution on an
agency basis, in addition to price considerations, the usefulness of the
brokers' overall services is also considered. Services provided by brokerage
firms include efficient handling of orders, useful analyses of corporations,
industries and the economy, statistical reports and other related services for
which no charge is made by the broker above the negotiated brokerage
commissions. While VMF does not pay commissions above the standard commission
rates in order to obtain research from brokers, it's possible that trades could
be made at higher commission rates than those charged by firms that do not
provide these services. The Funds and VMF believe that these services and
information, which in many cases would be otherwise unavailable to VMF, are of
significant value to VMF, but it is not possible to place an exact dollar value
thereon. VMF does not believe that the receipt of such services and information
tends to reduce materially VMF's expense.

In the case of securities traded in the over-the-counter market, the Funds will
normally deal with the market makers for such securities unless better prices
can be obtained through brokers.

<PAGE> 41

During the fiscal years ended October 31, 1998, 1997 and 1996, the following
brokerage commissions were paid by the Funds, all to firms rendering statistical
services as described above:

Acquired Years Ended October 31,
Funds Funds* 1998 1997 1996
----- ------ ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ 10,084 $ 8,480 $ 1,928
Growth Growth of NIF 712,200 742,579 376,916
Nationwide Fund Nationwide Fund of NIF 934,759 664,395 436,679
</TABLE>

* See explanation of reorganization above.

As of October 31, 1998, the Nationwide Fund and Nationwide Money Market Fund
held investments in securities of their regular broker-dealers as follows:

Shares or
Fund Security Principal Amount Value
---- -------- ---------------- -----
<S> <C> <C> <C>
Nationwide Fund Merrill Lynch 237,500 $14,071,875
Money Market Fund Bear Stearns $34,000,000 $33,846,053
Goldman Sachs $22,000,000 $21,962,763
Merrill Lynch $33,501,000 $33,372,446
Salomon Brothers $35,000,000 $34,908,652
J.P. Morgan $30,241,000 $30,126,387
</TABLE>

ADDITIONAL INFORMATION ON PURCHASES AND SALES

CLASS A AND CLASS D SALES CHARGES

The charts below show the Class A and Class D sales charges, which decrease as
the amount of your investment increases.

CLASS A SHARES OF THE STOCK FUNDS

Sales charge as % Sales charge as %
Amount of purchase of offering price of amount invested
- ------------------ ----------------- ------------------
<S> <C> <C>
less than $50,000 5.75% 6.10%
$50,000 to $99,999 4.50 4.71
$100,000 to $249,999 3.50 3.63
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25

CLASS A SHARES OF THE BOND FUNDS

Sales charge as % Sales charge as %
Amount of purchase of offering price of amount invested
- ------------------ ----------------- ------------------

less than $50,000 4.50% 4.71%
$50,000 to $99,999 4.00 4.17
$100,000 to $249,999 3.00 3.09
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25
</TABLE>

CLASS D SHARES OF THE STOCK AND BOND FUNDS

Sales charge as % Sales charge as %
Amount of purchase of offering price of amount invested
- ------------------ ----------------- ------------------
<S> <C> <C>
less than $50,000 4.50% 4.71%
$50,000 to $99,999 4.00 4.17
$100,000 to $249,999 3.00 3.09
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 1.00 1.01
$1 million to $24,999,999 0.50 0.50
$25 million or more None None
</TABLE>

NET ASSET VALUE PURCHASE PRIVILEGE (CLASS A AND D SHARES ONLY).--THE SALES
CHARGE APPLICABLE TO CLASS A AND D SHARES MAY BE WAIVED FOR THE FOLLOWING
PURCHASES DUE TO THE REDUCED MARKETING EFFORT REQUIRED BY NAS:

(1) shares sold to other registered investment companies affiliated with
VMF,

(2) shares sold:

(a) to any pension, profit sharing, or other employee benefit plan
for the employees of VMF, any of its affiliated companies, or
investment advisory clients and their affiliates;

(b) to any endowment or non-profit organization;

(c) to any pension, profit sharing, or deferred compensation plan
which is qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code of 1986 as amended, dealing directly
with NAS with no sales representative involved upon written
assurance of the purchaser that the shares are acquired for
investment purposes and will not be resold except to the
Trust;

(d) to any life insurance company separate account registered as a
unit investment trust;

(3) for Class D shares sold:

(a) to Trustees and retired Trustees of NIF III (including its
predecessor Trusts);

(b) to directors, officers, full-time employees, sales
representatives and their employees, and retired directors,
officers, employees, and sale representatives, their spouses,
children or immediate relatives (immediate relatives include
mother, father, brothers, sisters, grandparents,
grandchildren, ("Immediate Relatives")), and Immediate
Relatives of deceased employees of any member of the
Nationwide Insurance Enterprise, or any investment advisory
clients of VMF and their affiliates;

(c) to directors, officers, and full-time employees, their
spouses, children or Immediate Relatives and Immediate
Relatives of deceased employees of any sponsor group which may
be affiliated with the Nationwide Insurance Enterprise from
time to time, which include but are not limited to Farmland
Insurance Industries, Inc., Maryland Farm Bureau, Inc., Ohio
Farm Bureau Federation, Inc., Pennsylvania Farmers'
Association, Ruralite Services, Inc., and Southern States
Cooperative;

(d) to any qualified pension or profit sharing plan established by
a Nationwide sales representative for himself/herself and
his/her employees;

<PAGE> 43

(4) Class A shares sold;

(a) to any person purchasing through an account with an
unaffiliated brokerage firm having an agreement with NAS to
waive sales charges for those persons;

(b) to any directors, officers, full-time employees, sales
representatives and their employees or any investment advisory
clients of a broker-dealer having a dealer/selling agreement
with NAS;

(c) to any person who pays for such shares with the proceeds of
mutual fund shares redeemed from an NAS brokerage account; to
qualify, the person must have paid an initial sales charge or
CDSC on the redeemed shares and the purchase of Class A shares
must be made within 60 days of the redemption. This waiver
must be requested when the purchase order is placed, and NAS
may require evidence of qualification for this waiver.

(d) to any Class Member of Snyder vs. Nationwide Mutual Insurance
Company and Nationwide Life Insurance Company on the initial
purchase of shares for an amount no less than $5,000 and no
more than $100,000. To be eligible for this waiver, the
purchase of Class A shares must come from a source other than
the surrender of, withdrawal from, or loan against any
existing policy, mutual fund or annuity issued by Nationwide
Mutual Insurance Company or its affiliates.

(e) to any person who pays for such shares with the proceeds of
mutual funds shares redeemed from an account in the NEA
Valuebuilder Mutual Fund Program. This waiver is only
available for the initial purchase if shares were made with
such proceeds. NAS may require evidence of qualification for
such waiver.

(f) to certain employer-sponsored retirement plan including
pension, profit sharing or deferred compensation plans which
are qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code.

CLASS B SHARES OF THE STOCK AND BOND FUNDS AND CDSC. A CDSC, payable to NAS,
will be imposed on any redemption of Class B shares which causes the current
value of your account to fall below the total amount of all purchases made
during the preceding six years. THE CDSC IS NEVER IMPOSED ON DIVIDENDS, WHETHER
PAID IN CASH OR REINVESTED, OR ON APPRECIATION OVER THE INITIAL PURCHASE PRICE.
The CDSC applies only to the lesser of the original investment or current market
value.

Where the CDSC is imposed, the amount of the CDSC will depend on the number of
years since you made the purchase payment from which an amount is being
redeemed, according to the following table:

YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
- ------------------ -------------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and following 0.00%
</TABLE>

For purposes of calculating the CDSC, it is assumed that the oldest Class B
shares remaining in your account will be sold first. All payments during a month
will be aggregated and deemed to have been made on the last day of the preceding
month.

For the Bonds Funds your money will earn daily dividends through the
date of liquidation. If you redeem all of your shares in one of the Bond Funds,
you will

<PAGE> 44

receive a check representing the value of your account, less any applicable CDSC
calculated as of the date of your withdrawal, plus all daily dividends credited
to your account through the date of withdrawal.

THE CDSC WILL BE WAIVED IN THE CASE OF A TOTAL OR PARTIAL REDEMPTION
FOLLOWING THE DEATH OR DISABILITY (WITHIN THE MEANING OF CODE SECTION 72(m)(7)
OF THE INTERNAL REVENUE CODE) OF A SHAREHOLDER (ACCOUNTS OWNED BY AN INDIVIDUAL
OR AN INDIVIDUAL JOINTLY WITH SPOUSE) IF REDEMPTION OCCURS WITHIN ONE YEAR OF
DEATH OR INITIAL DETERMINATION OF DISABILITY.

CDSC APPLICABLE FOR CLASS A SHARES. Employer sponsored retirement plans which
purchase Class A shares at net asset value (other than those investing in Funds
through a variable insurance product) are subject to a CDSC, payable to NAS, of
1.00% if a finder's fee (as described below) was paid on the purchase of the
shares and the shares are redeemed within the first year after purchase, 0.50%
if redeemed within the second year and 0.25% if redeemed within the third year.
The sales charge is applied to the original purchase price, or the current
market value of the shares being sold, whichever is less. A CDSC will be charged
on redemptions of $1 million or more within a 12 month period.

NAS will pay a finder's fee at the plan sponsor level at the time of purchase to
the dealer of record at the time of purchase at the following rates:

1.00% for sales of the Funds of $1 million up to $3 million
0.50% for sales of the Funds of $ 3 million up to $50 million
0.25% for sales of the Funds of $50 million or more

The finder's fee is paid on the aggregate assets of all Funds held at the plan
sponsor level.

CONVERSION FEATURES FOR CLASS B SHARES. Class B shares which have been
outstanding for seven years will automatically convert to Class A shares on the
first business day of the next month following the seventh anniversary of the
date on which such Class B shares were purchased. Such conversion will be on the
basis of the relative net asset values of the two classes, without the
imposition of a sales charge or other charge except that the lower 12b-1 fee
applicable to Class A shares shall thereafter be applied to such converted
shares. Because the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of the conversion, a
shareholder may receive fewer Class A shares than the number of Class B shares
converted, although the dollar value of the amount converted will be the same.
Reinvestments of dividends and distributions in Class B shares will not be
considered a new purchase for purposes of the conversion feature and will
convert to Class A shares in the same proportion as the number of the
shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and
distributions.

If you effect one or more exchanges among Class B shares of the Funds
during the seven-year period, the holding period for shares so exchanged will be
counted toward such period. If you exchange Class B shares into the Prime Shares
of the Money Market Fund for a period of time, the conversion aging period will
be stopped during the time period when shares are exchanged into the Money
Market Fund.

FACTORS TO CONSIDER WHEN CHOOSING A CLASS OF SHARES. Before purchasing Class A
shares or Class B shares of a Fund, investors should consider whether, during
the anticipated life of their investment in a Fund, the accumulated 12b-1 fee
and potential CDSC on Class B shares prior to conversion (as described above)
would be less than the initial sales charge and accumulated 12b-1 fee on Class A
shares purchased at the same time, and to what extent such differential would be
offset by the higher yield of Class A shares as a result of the lower expenses.
In this regard, to the extent that the sales charge for the Class A shares is
waived or reduced investments in Class A shares become more desirable. NAS may
refuse a purchase order for Class B shares of over $100,000.

Although Class A shares are subject to a 12b-1 fee, they are not
subject to the higher 12b-1 fee applicable to Class B shares. For this reason,
Class A shares can be

<PAGE> 45

expected to pay correspondingly higher dividends per shares. However, because
initial sales charges are deducted at the time of purchase, purchasers of Class
A shares who do not qualify for waivers of or reductions in the initial sales
charge would have less of their purchase price initially invested in the Fund
than purchasers of Class B shares.

As described above, purchasers of Class B shares will have more of
their initial purchase price invested. Any positive investment return on this
additional invested amount may partially or wholly offset the expected higher
annual expenses borne by Class B shares. Because a Fund's future returns cannot
be predicted, there can be no assurance that this will be the case. Investors in
Class B shares would, however, own shares that are subject to higher annual
expenses and, for a six-year period, such shares would be subject to a CDSC
ranging from 5.00% to 1.00% upon redemption. Investors expecting to redeem
during this six-year period should compare the cost of the CDSC plus the
aggregate annual Class B shares' 12b-1 fees to the cost of the initial sales
charge and 12b-1 fee on the Class A shares. Over time the expense of the annual
12b-1 fee on the Class B shares may be equal to or exceed the initial sales
charge and annual 12b-1 fee applicable to Class A shares.

For example, if a Fund's net asset value remains constant and assuming
no waiver of any 12b-1 fees, the aggregate 12b-1 fee with respect to Class B
shares of a Fund would equal or exceed the initial sales charge and aggregate
12b-1 fee of Class A shares approximately eight years after the purchase. In
order to reduce such fees for Class B Shareholders, Class B shares will be
automatically converted to Class A shares, as described above, at the end of a
seven-year period. This example assumes that the initial purchase of Class A
shares would be subject to the maximum initial sales charge of 5.75% for the
Stock Funds and 4.50% for the Bond Funds. This example does not take into
account the time value of money which reduces the impact of the Class B shares'
12b-1 fee on the investment, the benefit of having the additional initial
purchase price invested during the period before it is effectively paid out as a
12b-1 fee, fluctuations in net asset value, any waiver of 12b-1 fees or the
effect of different performance assumptions. For investors who are eligible to
purchase Class D shares, the purchase of Class D shares will usually be
preferable to purchasing Class A or Class B shares.

SIGNATURE GUARANTEE. A signature guarantee is required if the redemption is over
$100,000, or if your account registration has changed within the last 30 days,
or if the redemption check is made payable to anyone other than the registered
shareholder, or if the proceeds are sent to a bank account not previously
designated, or are mailed to an address other than the address of record. NAS
reserves the right to require a signature guarantee in other circumstances,
without notice. Based on the circumstances of each transaction, NAS reserves the
right to require that your signature be guaranteed by an authorized agent of an
"eligible guarantor institution," which includes, but is not limited to, certain
banks, credit unions, savings associations, and member firms of national
securities exchanges. A signature guarantee is designed to protect the
shareholder by helping to prevent an unauthorized person from redeeming shares
and obtaining the proceeds. A notary public is not an acceptable guarantor. In
certain special cases (such as corporate or fiduciary registrations), additional
legal documents may be required to ensure proper authorizations. If NAS decides
to require signature guarantees in all circumstances, shareholders will be
notified in writing prior to implementation of the policy.

VALUATION OF SHARES

The net asset value per share for each Fund is determined as of the close of
regular trading on the New York Stock Exchange (usually 4 P.M. Eastern Time),
each day that the Exchange is open and on such other days as the Board of
Trustees determines and on days in which there is sufficient trading in
portfolio securities of a Fund to materially affect the net asset value of that
Fund (the "Valuation Time").

The Funds will not compute net asset value on customary business
holidays, including Christmas, New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day and
Thanksgiving.

<PAGE> 46

The net asset value per share of a class is computed by adding the
value of all securities and other assets in a Fund's portfolio allocable to such
class, deducting any liabilities allocable to such class and any other
liabilities charged directly to that class and dividing by the number of shares
outstanding in such class.

In determining net asset value, portfolio securities listed on national
exchanges are valued at the last quoted sale price on the principal exchange, or
if there is no sale on that day at the quoted bid price, or if the securities
are traded in the over-the-counter market, at the last quoted sale price, or if
no sale price, at the quoted bid prices; U.S. Government securities are valued
at the quoted bid price; all prices obtained from an independent pricing
organization. Money market obligations with remaining maturities of 10 days or
less purchased by a non-money market fund are valued at amortized cost in
accordance with provisions contained in Rule 2a-7 of the 1940 Act, as described
below. Securities for which market quotations are not available, or for which an
independent pricing agent does not provide a value or provides a value that does
not represent fair value in the judgment of VMF or its designee are valued at
fair value in accordance with procedures adopted by the Board of Trustees.

The value of portfolio securities in the Money Market Fund is
determined on the basis of the amortized cost method of valuation in accordance
with Rule 2a-7 of the 1940 Act. This involves valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.

The Trustees have adopted procedures whereby the extent of deviation,
if any, of the current net asset value per share calculated using available
market quotations from the Money Market Fund's amortized cost price per share,
will be determined at such intervals as the Trustees deem appropriate and are
reasonable in light of current market conditions. In the event such deviation
from the Money Market Fund's amortized cost price per share exceeds 1/2 of 1
percent, the Trustees will consider appropriate action which might include
withholding dividends or a revaluation of all or an appropriate portion of the
Money Market Fund's assets based upon current market factors.

The Trustees, in supervising the Money Market Fund's operations and
delegating special responsibilities involving portfolio management to VMF, have
undertaken as a particular responsibility within their overall duty of care owed
to the Money Market Fund's shareholders to assure to the extent reasonably
practicable, taking into account current market conditions affecting the Fund's
investment objectives, that the Money Market Fund's net asset value per share
will not deviate from $1.

Pursuant to its objective of maintaining a stable net asset value per
share, the Money Market Fund will only purchase investments with a remaining
maturity of 397 days or less and will maintain a dollar weighted average
portfolio maturity of 90 days or less.

INVESTOR STRATEGIES

1 MONEY MARKET PLUS GROWTH--This strategy provides the security of
principal that the Money Market Fund offers plus the opportunity for
greater long-term capital appreciation through reinvestment of
dividends in one of the Stock Funds.

An initial investment of $5,000 or more is made in the Prime Shares of
the Money Market Fund, and monthly dividends are then automatically invested
into one or more of the Stock Funds chosen by you at such Stock Fund's current
offering price. Money Market Plus Growth gives investors stability of principal
through the Money Market Fund's stable share price, and its portfolio of high
quality, short-term money market investments. And the Money Market Fund offers
fast liquidity through unlimited free checking ($500 minimum), telephone
redemption, or NAS NOW. NOTE: Money Market

<PAGE> 47

Fund dividends reinvested into one of the Stock Funds are subject to
applicable sales charges.

2 MONEY MARKET PLUS INCOME--This strategy provides the security of principal
that the Money Market Fund offers plus the opportunity for greater income by
reinvesting dividends into one or more of the Bond Funds.

An initial investment of $5,000 or more is made in the Prime Shares of
the Money Market Fund and monthly dividends are then reinvested into one of the
Bond Funds chosen by you at such Fund's current offering price.

When short-term interest rates increase, Money Market Fund dividends
usually also rise. At the same time, share prices of the Bond Funds generally
decrease. So, with Money Market Plus Income, when you earn higher Money Market
Fund dividends, you can generally purchase more shares of one of the Bond Funds
at lower prices. Conversely, when interest rates and Money Market Fund dividends
decrease, the share prices of the Bond Funds usually increase--you will
automatically buy fewer shares of one of the Bond Funds at higher prices. The
Prime Shares of the Money Market Fund provides investors with stability of
principal, fast liquidity through unlimited free checking ($500 minimum),
telephone redemption, or NAS NOW. NOTE: Money Market Fund dividends reinvested
into one of the Bond Funds are subject to applicable sales charges.

3 AUTOMATIC ASSET ACCUMULATION--This is a systematic investment strategy which
combines automatic monthly transfers from your personal checking account to your
mutual fund account with the concept of Dollar Cost Averaging. With this
strategy, you invest a fixed amount monthly over an extended period of time,
during both market highs and lows. Dollar Cost Averaging can allow you to
achieve a favorable average share cost over time since your fixed monthly
investment buys more shares when share prices fall during low markets, and fewer
shares at higher prices during market highs. Although no formula can assure a
profit or protect against loss in a declining market, systematic investing has
proven a valuable investment strategy in the past.

You can get started with Automatic Asset Accumulation for as little as
$25 a month in a Fund. Another way to take advantage of the benefits that Dollar
Cost Averaging can offer is through the Money Market Plus Growth or Money Market
Plus Income investor strategies.

4 AUTOMATIC ASSET TRANSFER--This systematic investment plan allows you to
transfer $25 or more to a Stock or Bond Fund from another Fund systematically,
monthly or quarterly, after Fund minimums have been met. The money is
transferred on the 25th day of the month as selected or on the preceding
business day. Dividends of any amount can be moved automatically from one Fund
to another at the time they are paid. This strategy can provide investors with
the benefits of Dollar Cost Averaging through an opportunity to achieve a
favorable average share cost over time. With this plan, your fixed monthly or
quarterly transfer from the Fund to any other Fund you select buys more shares
when share prices fall during low markets and fewer shares at higher prices
during market highs. Although no formula can assure a profit or protect against
loss in a declining market, systematic investing has proven a valuable
investment strategy in the past. For transfers from the Prime Shares of the
Money Market Fund to another Fund, sales charges may apply if not already paid.

5 AUTOMATIC WITHDRAWAL PLAN ($50 OR MORE)--You may have checks for any fixed
amount of $50 or more automatically sent bi-monthly, monthly, quarterly, three
times/year, semi-annually or annually, to you (or anyone you designate) from
your account.

NOTE: If you are withdrawing more shares than your account receives in
dividends, you will be decreasing your total shares owned, which will reduce
your future dividend potential. In addition, an Automatic Withdrawal Plan for
Class B shares will be subject to the applicable CDSC.

INVESTOR PRIVILEGES

<PAGE> 48

The Funds offer the following privileges to shareholders. Additional information
may be obtained by calling NAS toll-free at 1-800-848-0920.

1 NO SALES CHARGE ON REINVESTMENTS--All dividends and capital gains will be
automatically reinvested free of charge in the form of additional shares within
the same Fund and class or another specifically requested Fund (but the same
class) unless you have chosen to receive them in cash on your application.
Unless requested in writing by the shareholder, the Trust will not mail checks
for dividends and capital gains of less than $5 but instead they will
automatically be reinvested in the form of additional shares, and you will
receive a confirmation.

2 EXCHANGE PRIVILEGE--The exchange privilege is a convenient way to exchange
shares from one Fund to another Fund in order to respond to changes in your
goals or in market conditions. HOWEVER, AN EXCHANGE IS A SALE AND PURCHASE OF
SHARES AND, FOR FEDERAL AND STATE INCOME TAX PURPOSES, MAY RESULT IN A CAPITAL
GAIN OR LOSS.The registration of the account to which you are making an exchange
must be exactly the same as that of the Fund account from which the exchange is
made, and the amount you exchange must meet the applicable minimum investment of
the Fund being purchased.

EXCHANGES AMONG FUNDS

Exchanges may be made among any of the Funds within the same class or among any
class in any of the Funds and Prime Shares of the Money Market Fund. For certain
exchanges of Class A shares among the Funds, you may pay the difference between
the sales charges, if a higher sales charge is applicable. Exchanges within
Class B or Class D shares may be made without incurring a sales charge.

An exchange from the Prime Shares of the Money Market Fund into another
Fund will be subject to the applicable sales charge unless already paid. For an
exchange into the Prime Shares of the Money Market Fund, the CDSC aging period
for Class B shares will be stopped during the time period such Money Market Fund
shares are held. If the Money Market Fund shares are subsequently sold, a CDSC
will be charged at the level that would have been charged had the shares been
sold at the time when they were exchanged into the Money Market Fund. If the
Money Market Fund shares are exchanged back into Class B shares, the CDSC aging
period will continue from the point in time when the shares were originally
exchanged into the Money Market Fund.

There is no administrative fee or exchange fee. The Trust reserves the
right to reject any exchange request it believes will result in excessive
transaction costs, or otherwise adversely affect other shareholders. For a
description of CDSC see "Class B Shares of the Stock and Bond Funds and CDSC."
The Trust reserves the right to change the exchange privilege upon at least 60
days' written notice to shareholders.

EXCHANGES MAY BE MADE THREE CONVENIENT WAYS:

BY TELEPHONE

NAS NOW--You can automatically process exchanges by calling
1-800-637-0012, 24 hours a day, seven days a week. However, if you
declined the option in the application, you will not have this
automatic exchange privilege. NAS NOW also gives you quick, easy access
to mutual fund information. Select from a menu of choices to conduct
transactions and hear fund price information, mailing and wiring
instructions as well as other mutual fund information. You must call
our toll-free number by the Valuation Time to receive that day's
closing share price. The Valuation Time is the close of regular trading
of the New York Stock Exchange, which is usually 4:00 p.m.
Eastern Time.

CUSTOMER SERVICE LINE--By calling 1-800-848-0920, you may exchange
shares by telephone. Requests may be made only by the account owner(s).
You must call our toll-free number by the Valuation Time to receive
that day's closing share price. The Valuation Time is the close of
regular trading of the New York Stock Exchange, which is usually 4:00
p.m. Eastern Time.

<PAGE> 49

NAS may record all instructions to exchange shares. NAS reserves the
right at any time without prior notice to suspend, limit or terminate
the telephone exchange privilege or its use in any manner by any person
or class.

The Funds will employ the same procedure described under "Buying,
Selling and Exchanging Fund Shares" in the Prospectus to confirm that
the instructions are genuine.

The Funds will not be liable for any loss, injury, damage, or expense
as a result of acting upon instructions communicated by telephone
reasonably believed to be genuine, and the Funds will be held harmless
from any loss, claims or liability arising from its compliance with
such instructions. These options are subject to the terms and
conditions set forth in the Prospectus and all telephone transaction
calls may be tape recorded. The Funds reserve the right to revoke this
privilege at any time without notice to shareholders and request the
redemption in writing, signed by all shareholders.

BY MAIL OR FAX-- Write or fax to Nationwide Advisory Services, Inc., Three
Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or FAX (614)
249-8705. Please be sure that your letter or facsimile is signed exactly as your
account is registered and that your account number and the Fund from which you
wish to make the exchange are included. For example, if your account is
registered "John Doe and Mary Doe", "Joint Tenants With Right of Survivorship,'
then both John and Mary must sign the exchange request. The exchange will be
processed effective the date the signed letter or fax is received. Fax requests
received after 4 P.M. Eastern Time will be processed as of the next business
day. NAS reserves the right to require the original document if you use the fax
method.

3 NO SALES CHARGE ON A REPURCHASE--If you redeem all or part of your Class A or
D shares on which you paid a front-end sales charge, you have a one-time
privilege to reinvest all or part of the redemption proceeds in any shares of
the same class, without a sales charge, within 30 days after the effective date
of the redemption. If you redeem Class B shares, and then reinvest the proceeds
in Class B shares within 30 days, NAS will reinvest an amount equal to any CDSC
you paid on redemption.

If you realize a gain on your redemption, the transaction is taxable,
and reinvestment will not alter any capital gains tax payable. If you realize a
loss and you use the reinstatement privilege, some or all of the loss will not
be allowed as a tax deduction depending upon the amount reinvested.

4 FREE CHECKING WRITING PRIVILEGE (PRIME SHARES OF THE MONEY MARKET FUND
ONLY)--You may request a supply of free checks for your personal use and there
is no monthly service fee. You may use them to make withdrawals of $500 or more
from your account at any time. Your account will continue to earn daily income
dividends until your check clears your account. There is no limit on the number
of checks you may write. Cancelled checks will not be returned to you. However,
your monthly statement will provide the check number, date and amount of each
check written. You will also be able to obtain copies of cancelled checks, the
first five free and $2.00 per copy thereafter, by contacting one of our service
representatives at 1-800-848-0920.

INVESTOR SERVICES

1 NAS NOW AUTOMATED VOICE RESPONSE SYSTEM--Our toll-free number 1-800-637-0012
will connect you 24 hours a day, seven days a week to NAS NOW. Through a
selection of menu options, you can conduct transactions, hear fund price
information, mailing and wiring instructions and other mutual fund information.

2 TOLL-FREE INFORMATION AND ASSISTANCE--Customer service representatives are
available to answer questions regarding the Funds and your account(s) between
the hours of 8 A.M. and 5 P.M. Eastern Time. Call toll-free: 1-800-848-0920
or contact NAS at our FAX telephone number (614) 249-8705.

3 RETIREMENT PLANS (NOT AVAILABLE WITH THE TAX-FREE INCOME FUND)--Shares of the
Funds may be purchased for Self-Employed Retirement Plans, Individual Retirement

<PAGE> 50
Accounts (IRAs), Roth IRAs, Educational IRAs, Simplified Employee Pension Plans,
Corporate Pension Plans, Profit Sharing Plans and Money Purchase Plans. For a
free information kit, call 1-800-848-0920.

4 SHAREHOLDER CONFIRMATIONS--You will receive a confirmation statement each time
a requested transaction is processed. However, no confirmations are mailed on
certain pre-authorized, systematic transactions. Instead, these will appear on
your next consolidated statement.

5 CONSOLIDATED STATEMENTS--Shareholders of the Stock Funds receive quarterly
statements as of the end of March, June, September and December. Shareholders of
the Bond and Money Market Funds receive monthly statements. Please review your
statement carefully and notify us immediately if there is a discrepancy or error
in your account.

For shareholders with multiple accounts, your consolidated statement
will reflect all your current holdings in the Funds. Your accounts are
consolidated by social security number and zip code. Accounts in your household
under other social security numbers may be added to your statement at your
request. Depending on which Funds you own, your consolidated statement will be
sent either monthly or quarterly. Only transactions during the reporting period
will be reflected on the statements. An annual summary statement reflecting all
calendar-year transactions in all your Funds will be sent after year-end.

6 AVERAGE COST STATEMENT--This statement may aid you in preparing your tax
return and in reporting capital gains and losses to the IRS. If you redeemed any
shares during the calendar year, a statement reflecting your taxable gain or
loss for the calendar year (based on the average cost you paid for the redeemed
shares) will be mailed to you following each year-end. Average cost can only be
calculated on accounts opened on or after January 1, 1984. Fiduciary accounts
and accounts with shares acquired by gift, inheritance, transfer, or by any
means other than a purchase cannot be calculated.

Average cost is one of the IRS approved methods available to compute
gains or losses. You may wish to consult a tax advisor on the other methods
available. The average cost information will not be provided to the IRS. If you
have any questions, contact one of our service representatives at
1-800-848-0920.

7 SHAREHOLDER REPORTS--All shareholders will receive reports semi-annually
detailing the financial operations of the funds.

8 PROSPECTUSES--Updated prospectuses will be mailed to you annually.

9 UNDELIVERABLE MAIL--If mail from NAS to a shareholder is returned as
undeliverable on three or more consecutive occasions, NAS will not send any
future mail to the shareholder unless it receives notification of a correct
mailing address for the shareholder. Any dividends that would be payable by
check to such shareholders will be reinvested in the shareholder's account until
NAS receives notification of the shareholder's correct mailing address.

FUND PERFORMANCE ADVERTISING

CALCULATING MONEY MARKET FUND YIELD

Any current Money Market Fund yield quotations, subject to Rule 482 under the
Securities Act, shall consist of a seven calendar day historical yield for each
class, carried at least to the nearest hundredth of a percent. The yield shall
be calculated by determining the change, excluding realized and unrealized gains
and losses, in the value of a hypothetical pre-existing account in each class
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 declared on both the original share and any such additional
shares. The Fund's

42
<PAGE> 51

effective yield represents an annualization of the current seven day return with
all dividends reinvested. The yields for each class will differ due to different
fees and expenses charged on the class. As of October 30, 1998, the seven day
current and effective yields for the Prime Shares of the Money Market Fund were
4.77% and 4.88%, respectively.

The Money Market Fund's yields will fluctuate daily. Actual yields will
depend on factors such as the type of instruments in the Money Market Fund's
portfolio, portfolio quality and average maturity, changes in interest rates,
and the Money Market Fund's expenses.

Although the Fund determines its yield for each class on the basis of a
seven calendar day period, it may use a different time span on occasion.

There is no assurance that the yields quoted on any given occasion will
remain in effect for any period of time and there is no guarantee that the net
asset values 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. 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 (compound) 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 (compound) total return
represents 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 minus the maximum sales charge, for a specified period
of time, by the amount of the initial payment, assuming reinvestment of all
dividends and distributions. In calculating the standard total returns for Class
A and D shares, the current maximum applicable sales charge is deducted from the
initial investment. For Class B shares, the payment of the applicable CDSC is
applied to the investment result for the period shown. The one, five, and
ten-year periods are calculated based on periods that end on the last day of the
calendar quarter preceding the date on which an advertisement is submitted for
publication.

Standardized yield and total return quotations will be computed
separately for Class A, B, and D shares. Because of differences in fees and/or
expenses borne by Class A, B, and D shares, the net yields and total returns on
Class A, B and D shares can be expected, at any given time, to differ from class
to class for the same period.

The uniformly calculated average annual (compound) total returns for Class D
shares for the periods ended October 31, 1998 were as follows:

<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR OR LIFE
------ ------ ---------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A(1) B(1) D A(1) B(1) D A(1) B(1) D
---- ---- - ---- ---- - ---- ---- -

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth -.60% .85% .38% 13.79% 14.75% 14.01% 11.86%* 12.45%* 11.97%*
Growth 9.27% 10.75% 10.72 15.72% 16.83% 16.03 13.44% 14.08% 13.59
Nationwide Fund 18.58% 20.10% 20.07 21.26% 22.38% 21.56 17.17% 17.80% 17.31
Bond 4.00% 3.57% 4.20 5.15% 5.75% 5.19 8.02% 8.49% 8.04
Tax-Free 2.07% 1.67% 2.27 3.19% 4.51% 3.95 6.79% 7.26% 6.81
LT U.S. Govt. 6.04% 5.62% 6.15 6.14% 6.73% 6.16 8.80% 9.27% 8.82*
Intermediate U.S. Govt. 3.92% 3.41% 4.13 5.85% 6.44% 5.89 6.68% 7.36% 6.71**
</TABLE>

(1) These returns include performance based on the Funds predecessors,
which was achieved prior to the creation of the class (5/11/98), and
which is the same as the performance shown for Class D shares through
May 11, 1998. The returns have been restated for sales charges but not
for fees applicable to Class A and B.

43
<PAGE> 52

Had Class A or B been in existence for the time periods presented, the
performance would have been lower as a result of their additional expenses.

* The life of the Funds is since 12/19/88.
** The life of the Fund is since 2/10/92.

The Nationwide Bond Fund, Nationwide Tax-Free Income Fund, Nationwide
Intermediate U.S. Government Bond Fund and Nationwide Long-Term U.S. Government
Bond Fund 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, assuming reinvestment of all dividends and
distributions. This yield formula uses the average number of shares entitled to
receive dividends, provides for semi-annual compounding of interest, and
includes a modified market value method for determining amortization. The yield
will fluctuate, and there is no assurance that the yield quoted on any given
occasion will remain in effect for any period of time. The effect of sales
charges are not reflected in the calculation of the yields, therefore, a
shareholders actual yield may be less.

The following are the yields for the 30-day period ended October 30, 1998:

CLASS A CLASS B CLASS D
------- ------- -------

Bond 3.87% 3.46% 4.11%
Tax-Free 3.45 3.02 3.68
LT U.S. Govt. 4.49 4.16 4.65
Intermediate U.S. Govt. 4.61 4.32 4.81

The Tax-Free Income Fund may also advertise a tax equivalent yield computed by
dividing that portion of the uniformly calculated yield which is tax-exempt by
one minus a stated income tax rate and adding the product to that portion, if
any, of the yield that is not tax-exempt. Assuming a tax rate of 36%, the tax
equivalent yields for the Tax-Free Income Fund for the 30-day period ended
October 31, 1998 were 5.23% for Class A shares, 4.72% for Class B shares, and
5.75% for Class D shares.

NONSTANDARD RETURNS

The Funds may also choose to show nonstandard returns including total
return, and simple average total return. Nonstandard returns may or may not
reflect reinvestment of all dividends and capital gains; in addition, sales
charge assumptions will vary. Sales charge percentages decrease as amounts
invested increase as outlined in the prospectus; therefore, returns increase as
sales charges decrease.

Total return represents the cumulative percentage change in the value
of an investment over time, calculated by subtracting the initial investment
from the redeemable value and dividing the result by the amount of the initial
investment. The simple average total return is calculated by dividing total
return by the number of years in the period, and unlike average annual
(compound) total return, does not reflect compounding.

RANKINGS AND RATINGS IN FINANCIAL PUBLICATIONS

The Funds may report their performance relative to other mutual funds or
investments. The performance comparisons are made to: other mutual funds with
similar objectives; other mutual funds with different objectives; or, to other
sectors of the economy. Other investments which the Funds may be compared to
include, but are not limited to: precious metals; real estate; stocks and bonds;
closed-end funds; market indexes; fixed-rate, insured bank CDs, bank money
market deposit accounts and passbook savings; and the Consumer Price Index.

44
<PAGE> 53

Financial World, Consumer Reports, Business Week, Time, Newsweek, U.S. News and
World Report; and other publications such as the Wall Street Journal, Barron's,
Columbus Dispatch, Investor's Business Daily, and Standard & Poor's Outlook.

The rankings may or may not include the effects of sales charges.

ADDITIONAL INFORMATION

DESCRIPTION OF SHARES--The Trust presently offers the following series of shares
of beneficial interest, without par value and with the various classes listed;
eight of these series are the Funds:

Series Share Classes
- ------ -------------

Nationwide Mid Cap Growth Fund Class A, Class B, Class D
Nationwide Growth Fund Class A, Class B, Class D
Nationwide Fund Class A, Class B, Class D
Nationwide Bond Fund Class A, Class B, Class D
Nationwide Tax-Free Income Fund Class A, Class B, Class D
Nationwide Long-Term U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Intermediate U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Money Market Fund Class R, Prime Shares
Nationwide S&P 500 Index Fund Class R, Class Y,
Local Fund Shares
Morley Capital Accumulation Fund ISC Shares, IC Shares,
IRA Shares
Prestige Large Cap Value Fund Class A, Class B, Class Y
Prestige Large Cap Growth Fund Class A, Class B, Class Y
Prestige Small Cap Fund Class A, Class B, Class Y
Prestige Balanced Fund Class A, Class B, Class Y
Prestige International Fund Class A, Class B, Class Y

You have an interest only in the assets of the shares of the Fund which you own.
Shares of a particular class are equal in all respects to the other shares of
that class. In the event of liquidation of a Fund, shares of the same class will
share pro rata in the distribution of the net assets of such Fund with all other
shares of that class. All shares are without par value and when issued and paid
for, are fully paid and nonassessable by the Trust. Shares may be exchanged or
converted as described in this Statement of Additional Information and in the
Prospectus but will have no other preference, conversion, exchange or preemptive
rights.

VOTING RIGHTS--Shareholders of each class of shares have one vote for each share
held and a proportionate fractional vote for any fractional share held. An
annual or special meeting of shareholders to conduct necessary business is not
required by the Declaration of Trust, the 1940 Act or other authority except,
under certain circumstances, to amend the Declaration of Trust, the Investment
Advisory Agreement, fundamental investment objectives, investment policies,
investment restrictions, to elect and remove Trustees, to reorganize the Trust
or any series or class thereof and to act upon certain other business matters.
In regard to termination, sale of assets, the change of fundamental investment
objectives, policies and restrictions or the approval of an Investment Advisory
Agreement, the right to vote is limited to the holders of shares of the
particular fund affected by the proposal. In addition, holders of Class A
shares, Class B shares, or Prime Shares will vote as a class and not with
holders of any other class with respect to the approval of the Distribution
Plan.

To the extent that such a meeting is not required, the Trust does not intend to
have an annual or special meeting of shareholders. The Trust has represented to
the Commission that the Trustees will call a special meeting of shareholders for
purposes of considering the removal of one or more Trustees upon written request
therefor from shareholders holding not less than 10% of the outstanding votes of
the Trust and the Trust will assist in communicating with other shareholders as
required by Section 16(c) of the 1940 Act. At such meeting, a quorum of
shareholders (constituting a

45
<PAGE> 54

majority of votes attributable to all outstanding shares of the Trust), by
majority vote, has the power to remove one or more Trustees.

ADDITIONAL GENERAL TAX INFORMATION

Each of the fifteen Funds of the Trust is treated as a separate entity
for Federal income tax purposes and intends to qualify as a "regulated
investment company" under the Code, for so long as such qualification is in the
best interest of that Fund's shareholders. In order to qualify as a regulated
investment company, a Fund must, among other things: diversify its investments
within certain prescribed limits; and derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies. In addition, to utilize the tax provisions specially
applicable to regulated investment companies, a Fund must distribute to its
shareholders at least 90% of its investment company taxable income for the year.
In general, the Fund's investment company taxable income will be its taxable
income subject to certain adjustments and excluding the excess of any net
long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year.

A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, the
Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.

Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year a Fund does not qualify for the special tax treatment afforded
regulated investment companies, all of its taxable income will be subject to
federal tax at regular corporate rates (without any deduction for distributions
to its shareholders). In such event, dividend distributions would be taxable to
shareholders to the extent of earnings and profits, and would be eligible for
the dividends received deduction for corporations.

It is expected that each Fund will distribute annually to shareholders
all or substantially all of that Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to shareholders for federal income
tax purposes, even if paid in additional shares of that Fund and not in cash.

Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss, if any, is taxable to shareholders as long-term
capital gain in the year in which it is received, regardless of how long the
shareholder has held the shares. Such distributions are not eligible for the
dividends-received deduction.

Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the effective marginal tax rate may be
in excess of 39.6%, because adjustments reduce or eliminate the benefit of the
personal exemption and itemized deductions for individuals with gross income in
excess of certain threshold amounts.

Long-term capital gains of individuals are subject to a maximum tax
rate of 20% (10% for individuals in the 15% ordinary income tax bracket).
Capital losses may be used to offset capital gains. In addition, individuals may
deduct up to $3,000 of net capital loss each year to offset ordinary income.
Excess net capital loss may be

46
<PAGE> 55

carried forward and deducted in future years. The holding period for long-term
capital gains is more than one year.

Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.

Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.

Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Each Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by that
Fund for its taxable year that qualifies for the dividends received deduction.
Because all of the Money Market Fund's and each of the Bond Fund's net
investment income is expected to be derived from earned interest and short term
capital gains, it is anticipated that no distributions from such Funds will
qualify for the 70% dividends received deduction.

Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities. Since less than 50% in value of
any Fund's total assets at the end of its fiscal year are expected to be
invested in stocks or securities of foreign corporations, such Fund will not be
entitled under the Code to pass through to its Shareholders their pro rata share
of the foreign taxes paid by that Fund. These taxes will be taken as a deduction
by the Fund.

Under Section 1256 of the Code, gain or loss realized by a Fund from
certain financial futures and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Gain or
loss will arise upon exercise or lapse of such futures and options as well as
from closing transactions. In addition, any such futures and options remaining
unexercised at the end of a Fund's taxable year will be treated as sold for
their then fair market value, resulting in additional gain or loss to such Fund
characterized in the manner described above.

Offsetting positions held by a Fund involving certain futures contracts
or options transactions may be considered, for tax purposes, to constitute
"straddles." Straddles are defined to include "offsetting positions" in actively
traded personal property. The tax treatment of straddles is governed by Sections
1092 and 1258 of the Code, which, in certain circumstances, overrides or
modifies the provisions of Section 1256. As such, all or a portion of any short
or long-term capital gain from certain straddle and/or conversion transactions
may be recharacterized as ordinary income.

If a Fund were treated as entering into straddles by reason of its
engaging in futures or options transactions, such straddles would be
characterized as "mixed straddles" if the futures or options comprising a part
of such straddles were governed by Section 1256 of the Code. A Fund may make one
or more elections with respect to mixed straddles. If no election is made, to
the extent the straddle rules apply to positions established by a Fund, losses
realized by such Fund will be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle and conversion
transaction rules, short-term capital losses on straddle positions may be
recharacterized as long-term capital losses and long-term capital gains may be
recharacterized as short-term capital gain or ordinary income.

Investment by a Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of

47
<PAGE> 56

distributions to Shareholders. For example, a Fund could be required to take
into account annually a portion of the discount (or deemed discount) at which
such securities were issued and to distribute such portion in order to maintain
its qualification as a regulated investment company. In that case, that Fund may
have to dispose of securities which it might otherwise have continued to hold in
order to generate cash to satisfy these distribution requirements.

Each Fund may be required by federal law to withhold and remit to the
U.S. Treasury 31% of taxable dividends, if any, and capital gain distributions
to any Shareholder, and the proceeds of redemption or the values of any
exchanges of Shares of the Fund, if such Shareholder (1) fails to furnish the
Fund with a correct taxpayer identification number, (2) under-reports dividend
or interest income, or (3) fails to certify to the Fund that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security number.

Information set forth in the Prospectuses and this Statement of
Additional Information which relates to Federal taxation is only a summary of
some of the important Federal tax considerations generally affecting purchasers
of shares of the Funds. No attempt has been made to present a detailed
explanation of the Federal income tax treatment of the Funds or their
shareholders and this discussion is not intended as a substitute for careful tax
planning. Accordingly, potential purchasers of shares of a Fund are urged to
consult their tax advisers with specific reference to their own tax situation.
In addition, the tax discussion in the Prospectus and this Statement of
Additional Information is based on tax laws and regulations which are in effect
on the date of the prospectuses and this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action.

Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.

ADDITIONAL TAX INFORMATION WITH RESPECT TO THE TAX-FREE INCOME FUND

The Tax-Free Income Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Free Income Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans, and individual retirement
accounts, since such plans and accounts are generally tax-exempt and, therefore,
would not gain any additional benefit from all or a portion of the Tax-Free
Income Fund's dividends being tax-exempt and such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Tax-Free
Income Fund may not be an appropriate investment for entities which are
"substantial users," or "related persons" thereof, of facilities financed by
private activity bonds held by the Tax-Free Income Fund.

The Code permits a regulated investment company which invests in
municipal securities to pay to its shareholders "exempt-interest dividends,"
which are excluded from gross income for federal income tax purposes, if at the
close of each quarter of its taxable year at least 50% of its total assets
consist of municipal securities.

An exempt-interest dividend is any dividend or part thereof (other than
a capital gain dividend) paid by the Tax-Free Income Fund that is derived from
interest received by the Tax-Free Income Fund that is excluded from gross income
for federal income tax purposes, net of certain deductions, provided the
dividend is designated as an exempt-interest dividend in a written notice mailed
to shareholders not later than sixty days after the close of the Tax-Free Income
Fund's taxable year. The percentage of the total dividends paid by the Tax-Free
Income Fund during any taxable year that qualifies as exempt-interest dividends
will be the same for all shareholders of the Tax-Free Income Fund receiving
dividends during such year. Exempt-interest dividends shall be treated by the
Tax-Free Income Fund's shareholders as items of interest excludable from their
gross income for Federal income tax purposes under Section 103(a) of the Code.
However, a shareholder is advised to consult his or her tax adviser with respect
to whether exempt-interest dividends retain the exclusion under Section 103(a)
of the Code if such shareholder is a

48
<PAGE> 57

"substantial user" or a "related person" to such user under Section 147(a) of
the Code with respect to any of the municipal securities held by the Tax-Free
Income Fund. If a shareholder receives an exempt-interest dividend with respect
to any share and such share is held by the shareholder for six months or less,
any loss on the sale or exchange of such share shall be disallowed to the extent
of the amount of such exempt-interest dividend.

In general, interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares is not deductible for federal income tax
purposes if the Tax-Free Income Fund distributes exempt-interest dividends
during the shareholder's taxable year. A shareholder of the Tax-Free Income Fund
that is a financial institution may not deduct interest expense attributable to
indebtedness incurred or continued to purchase or carry shares of the Tax-Free
Income Fund if the Tax-Free Income Fund distributes exempt-interest dividends
during the shareholder's taxable year. Certain federal income tax deductions of
property and casualty insurance companies holding shares of the Tax-Free Income
Fund and receiving exempt-interest dividends may also be adversely affected. In
certain limited instances, the portion of Social Security benefits received by a
shareholder which may be subject to federal income tax may be affected by the
amount of tax-exempt interest income, including exempt-interest dividends
received by shareholders of the Tax-Free Income Fund.

In the event the Tax-Free Income Fund realizes long-term capital gains,
the Tax-Free Income Fund intends to distribute any realized net long-term
capital gains annually. If the Tax-Free Income Fund distributes such gains, the
Tax-Free Income Fund will have no tax liability with respect to such gains, and
the distributions will be taxable to shareholders as mid-term or long-term
capital gains, respectively, regardless of how long the shareholders have held
their shares. Any such distributions will be designated as a capital gain
dividend in a written notice mailed by the Tax-Free Income Fund to the
shareholders not later than sixty days after the close of the Tax-Free Income
Fund's taxable year. It should be noted, however, that long-term capital gains
of individuals are subject to a maximum tax rate of 20% (or 10% for individuals
in the 15% ordinary income tax bracket). Any net short-term capital gains are
taxed at ordinary income tax rates. If a shareholder receives a capital gain
dividend with respect to any share and then sells the share before he has held
it for more than six months, any loss on the sale of the share is treated as
long-term capital loss to the extent of the capital gain dividend received.

Interest earned on certain municipal obligations issued on or after
August 8, 1986, to finance certain private activities will be treated as a tax
preference item in computing the alternative minimum tax. Since the Tax-Free
Income Fund may invest up to 20% of its net assets in municipal securities the
interest on which may be treated as a tax preference item, a portion of the
exempt-interest dividends received by shareholders from the Tax-Free Income Fund
may be treated as tax preference items in computing the alternative minimum tax
to the extent that distributions by the Tax-Free Income Fund are attributable to
such obligations. Also, a portion of all other interest excluded from gross
income for federal income tax purposes earned by a corporation may be subject to
the alternative minimum tax as a result of the inclusion in alternative minimum
taxable income of 75% of the excess of adjusted current earnings and profits
over pre-book alternative minimum taxable income. Adjusted current earnings and
profits would include exempt-interest dividends distributed by the Tax-Free
Income Fund to corporate shareholders. For individuals the alternative minimum
tax rate is 26% on alternative minimum taxable income up to $175,000 and 28% on
the excess of $175,000; for corporations the alternative minimum tax rate is
20%.

For taxable years of corporations beginning before 1996, the Superfund
Revenue Act of 1986 imposes an additional tax (which is deductible for federal
income tax purposes) on a corporation at a rate of 0.12 of one percent on the
excess over $2,000,000 of such corporation's "modified alternative minimum
taxable income", which would include a portion of the exempt-interest dividends
distributed by the Tax-Free Income Fund to such corporation. In addition,
exempt-interest dividends distributed to certain foreign corporations doing
business in the United States could be subject to a branch profits tax imposed
by Section 884 of the Code.

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Distributions of exempt-interest dividends by the Tax-Free Income Fund
may be subject to state and local taxes even though a substantial portion of
such distributions may be derived from interest on obligations which, if
received directly, would be exempt from such taxes. The Tax-Free Income Fund
will report to its shareholders annually after the close of its taxable year the
percentage and source, on a state-by-state basis, of interest income earned on
municipal obligations held by the Tax-Free Income Fund during the preceding
year. Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes.

As indicated in its Prospectus, the Tax-Free Income Fund may acquire
rights regarding specified portfolio securities under puts. See "INVESTMENT
OBJECTIVES AND POLICIES -- Additional Information on Portfolio Instruments Puts"
in this Statement of Additional Information. The policy of the Tax-Free Income
Fund is to limit its acquisition of puts to those under which it will be treated
for federal income tax purposes as the owner of the Exempt Securities acquired
subject to the put and the interest on the Exempt Securities will be tax-exempt
to it. Although the Internal Revenue Service has issued a published ruling that
provides some guidance regarding the tax consequences of the purchase of puts,
there is currently no guidance available from the Internal Revenue Service that
definitively establishes the tax consequences of many of the types of puts that
the Tax-Free Income Fund could acquire under the 1940 Act. Therefore, although
the Tax-Free Income Fund will only acquire a put after concluding that it will
have the tax consequences described above, the Internal Revenue Service could
reach a different conclusion.

Under Section 1256 of the Code, gain or loss realized by the Tax-Free
Income Fund from certain financial futures and options transactions will be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Gain or loss will arise upon exercise or lapse of such futures and options
as well as from closing transactions. In addition, any such futures and options
remaining unexercised at the end of the Tax-Free Income Fund's taxable year will
be treated as sold for their then fair market value, resulting in additional
gain or loss to the Tax-Free Income Fund characterized in the manner described
above.

Offsetting positions held by the Tax-Free Income Fund involving certain
futures contracts or options transactions may be considered, for tax purposes,
to constitute "straddles." Straddles are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of straddles
is governed by Sections 1092 and 1258 of the Code, which, in certain
circumstances, overrides or modifies the provisions of Section 1256. As such,
all or a portion of any short or long-term capital gain from certain straddle
and/or conversion transactions may be recharacterized as ordinary income.

If the Tax-Free Income Fund were treated as entering into straddles by
reason of its engaging in futures or options transactions, such straddles would
be characterized as "mixed straddles" if the futures or options comprising a
part of such straddles were governed by Section 1256 of the Code. The Tax-Free
Income Fund may make one or more elections with respect to mixed straddles. If
no election is made, to the extent the straddle rules apply to positions
established by the Tax-Free Income Fund, losses realized by the Tax-Free Income
Fund will be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle and conversion transaction
rules, short-term capital losses on straddle positions may be recharacterized as
long-term capital losses and long-term capital gains may be recharacterized as
short-term capital gain or ordinary income.

Investment by the Tax-Free Income Fund in securities issued at a
discount or providing for deferred interest or for payment of interest in the
form of additional obligations could, under special tax rules, affect the
amount, timing and character of distributions to shareholders. For example, the
Tax-Free Income Fund could be required to take into account annually a portion
of the discount (or deemed discount) at which such securities were issued and to
distribute such portion in order to maintain its qualification as a regulated
investment company. In that case, the Tax-Free Income Fund may have to dispose
of securities which it might otherwise have continued to hold in order to
generate cash to satisfy these distribution requirements.

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Income itself exempt from Federal income taxation may be considered in
addition to taxable income when determining whether Social Security payments
received by a shareholder are subject to federal income taxation.

MAJOR SHAREHOLDERS

As of February 22, 1999, Nationwide Life Insurance Company directly owned,
controlled and held power to vote 5.4% of the outstanding shares of the Mid Cap
Growth Fund. As of February 22, 1999, Nationwide Life Insurance Company and its
affiliates directly or indirectly owned, controlled or held power to vote 28.1%
of the Growth Fund, 36.2% of the Nationwide Fund, 23.4% of the Bond Fund, and
50.8% of the Money Market Fund.

Nationwide Life Insurance Company, One Nationwide Plaza, Columbus, Ohio 43215 is
wholly-owned by Nationwide Financial Services, Inc. (NFS). NFS, a holding
company, has two classes of common stock outstanding with different voting
rights enabling Nationwide Corporation (the holder of all outstanding Class B
Common Stock) to control NFS. Nationwide Corporation is also a holding company
in the Nationwide Insurance Enterprise. All of the Common Stock of Nationwide
Corporation is held by Nationwide Mutual Insurance Company (95.3%) and
Nationwide Mutual Fire Insurance Company (4.7%), each of which is a mutual
company owned by its policyholders.

FINANCIAL STATEMENTS

The Report of Independent Auditors and Financial Statements of the Funds for
the period ended October 31, 1998 are incorporated by reference to the Trust's
Annual Report. Copies of the Annual Report are available without charge upon
request by writing the Trust or by calling toll-free 1-800-848-0920.

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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.

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.

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

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

CC - Debt rated 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' rating.

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

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

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

MOODY'S LONG-TERM DEBT RATINGS

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

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

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

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

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

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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.

MUNICIPAL BOND

Excerpts from Moody's Investors Service Inc., description of its three highest
bond ratings: Aaa--judged to be the best quality. They carry the smallest degree
of investment risk; Aa--judged to be of high quality by all standards;
A--possess favorable attributes and are considered "upper medium" grade
obligations. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbol Aa 1, A 1, Ba 1 and B 1.

Excerpts from Standard & Poor's Corporation description of its three highest
bond ratings: AAA--highest grade obligations; AA--also qualify as highgrade
obligations, and, in the majority of instances, differ from AAA issues only in
small degree; A--strong ability to pay interest and repay principle although
more susceptible to change in circumstances.

STATE AND MUNICIPAL NOTES

Excerpts from Moody's Investors Service, Inc., description of state and
municipal note ratings:

MIG-1--Notes bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing from
established and board-based access to the market for refinancing, or both.

MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.

MIG-3--Notes bearing this designation are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding grade.
Market access for refinancing, in particular, is likely to be less well
established.

FITCH/IBCA, INC. BOND RATINGS

Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch/IBCA's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.

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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/IBCA 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/IBCA ratings are based on information obtained from issuers,
other obligors, underwriters, their experts, and other sources Fitch/IBCA
believes to be reliable. Fitch/IBCA 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/IBCA 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/IBCA'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.

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.

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.

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CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C Bonds are in imminent default in payment of interest or principal.

DDD, Bonds are in default on interest and/or principal payments. Such bonds
DD are & extremely speculative, and should be valued on the basis of their
D ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery of these
bonds, and 'D' represents the lowest potential for recovery.

DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS

These ratings represent a summary opinion of the issuer's
long-term fundamental quality. Rating determination is based on
qualitative and quantitative factors which may vary according to the
basic economic and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to economic cycles
as well as risks related to such factors as competition, government
action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability
of the obligor at the trough of the cycle is a critical determination.

Each rating also takes into account the legal form of the
security, (e.g., first mortgage bonds, subordinated debt, preferred
stock, etc.). The extent of rating dispersion among the various classes
of securities is determined by several factors including relative
weightings of the different security classes in the capital structure,
the overall credit strength of the issuer, and the nature of covenant
protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.

The Credit Rating Committee formally reviews all ratings once
per quarter (more frequently, if necessary). Ratings of 'BBB-' and
higher fall within the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.

RATING
SCALE DEFINITION
- ----- ----------

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

AA+ High credit quality. Protection factors are strong. Risk is
AA modest, but may vary slightly

AA- from time to time because of economic conditions.

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

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

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

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B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent Changes in the rating within this category
or into a higher or lower rating grade.

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

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

DP Preferred stock with dividend arrearages.

SHORT-TERM RATINGS

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.

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:

1. Amortization schedule - the larger the final maturity relative
to other maturities, the more likely the issue is to be
treated as a note.

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2. Source of payment - the more the issue depends on the market
for its refinancing, the more likely it is to be considered a
note.

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.

SP-3 Speculative capacity to pay principal and interest.

MOODY'S SHORT-TERM RATINGS

Moody's short-term debt ratings are opinions on the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:

Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term debt obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (I)
leading market positions in well established industries, (II) high rates of
return on funds employed, (III) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (IV) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (V) well established access to a range of financial markets and assured
sources of alternative liquidity.

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

Issuers rated Prime-3 (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

Issuers rated Not Prime do not fall within any of the prime rating
categories.

MOODY'S NOTE RATINGS

MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.

MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.

MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.

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SG This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.

FITCH/IBCA, INC. 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.

F1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.

F1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree
than issues rated 'F1+'.

F2 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 'F1+' and 'F1' ratings.

F3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.

B Speculative. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.

C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.

D Default. Issues assigned this rating are in actual or
imminent payment default.

DUFF & PHELPS SHORT-TERM DEBT RATINGS

Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.

Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.

RATING SCALE DEFINITION

High Grade

D-1+ Highest certainty of timely payment. short-term
liquidity, including internal operating factors and/or access
to alternative sources of funds, is outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.

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<PAGE> 68

D-1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.

D-1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection
factors. Risk factors are very small.

Good Grade

D-2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.

Satisfactory Grade

D-3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is
expected.

Non-investment Grade

D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.

Default

D-5 Issuer failed to meet scheduled principal and/or interest
payments.

THOMSON'S SHORT-TERM RATINGS

The Thomson Short-Term Ratings apply, unless otherwise noted, to
specific debt instruments of the rated entities with a maturity of one year or
less. Thomson short-term ratings are intended to assess the likelihood of an
untimely or incomplete payments of principal or interest.

TBW-1 the highest category, indicates a very high likelihood that
principal and interest will be paid on a timely basis.

TBW-2 the second highest category, while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".

TBW-3 the lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.

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

BOND RATINGS

Bonds rated AA or AAA by Duff & Phelps are deemed to be high quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.

Bonds rated AA or AAA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong.

Moody's three highest bond ratings are: Aaa - judged to be the best quality -
carry the smallest degree of investment risk; Aa - judged to be high quality by
all

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standards; A possess favorable attributes and are considered "upper medium"
grade obligations.

Standard & Poor's three highest bond ratings are: AAA - highest grade
obligations - possess the ultimate degree of protection and indicates an
extremely strong capacity to pay principal and interest; AA - also qualify as
high grade obligations, and in the majority of instances differ only in small
degrees from issues rated AAA; A - strong ability to pay interest and repay
principal although more susceptible to change in circumstances.

Bonds rated AA or AAA by IBCA indicates a very strong capacity for timely
repayment of debt. Margins of protection may not be as large as for AAA issues.

Bonds rated AA or AAA by Thomson indicates ability to repay principal and
interest on a timely basis. Bonds rated AA may have limited incremental risk
versus AAA issues.

Bonds BBB are 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 repay principal for debt in this category than in higher
rated categories.

<PAGE> 70
PART B:
STATEMENT OF ADDITIONAL INFORMATION NOVEMBER 2, 1998 (REVISED SEPTEMBER 1, 1999)

NATIONWIDE MUTUAL FUNDS
CLASS R AND Y SHARES
NATIONWIDE S&P 500 INDEX FUND

This Statement of Additional Information is not a prospectus. It
contains information in addition to and more detailed than that set forth in the
prospectuses for the Class R and Class Y shares of the Nationwide S&P 500 Index
Fund and should be read in conjunction with those prospectuses dated November
2,1998 as supplemented September 1, 1999. The prospectuses for all three classes
of the S&P 500 Index Fund may be obtained from Nationwide Advisory Services,
Inc. (NAS), P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio 43216.

Terms not defined in this Statement of Additional Information have the
meanings assigned to them in the Prospectus.

TABLE OF CONTENTS

General Information and History 1
Investment Objectives and Policies 1
Investment Restrictions 8
Trustees and Officers of the Trust 10
Investment Advisory and Other Services 12
Brokerage Allocation 18
Calculating Yield and Total Return 18
Nonstandard Returns 18
Additional Information 19
Additional General Tax Information 19
Financial Statement 22

GENERAL INFORMATION AND HISTORY

Nationwide Mutual Funds ("NMF") (formerly Nationwide Investing Foundation III
("NIF III")) is an open-end management investment company, created under the
laws of Ohio by a Declaration of Trust dated as of October 30, 1997, as
subsequently amended.

INVESTMENT OBJECTIVES AND POLICIES

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES

The following information supplements the discussion of the Fund's investment
objectives and policies discussed in the Prospectus. The investment objective is
fundamental and may not be changed without shareholder approval. The investment
policy and types of permitted investments described here may be changed without
approval by the shareholders. There is no guarantee that the Fund's investment
objective will be realized.

MONEY MARKET INSTRUMENTS. The Fund may invest in certain types of money market
instruments which may include the following types of instruments:

<PAGE> 71

-- repurchase agreements;

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain banks or non-bank dealers. In connection with the purchase of a
repurchase agreement by the 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 the Fund may invest or government securities
regardless of their remaining maturities. The Fund will require that additional
securities be deposited with its custodian 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 the 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 the Fund seeks to assert its
rights to the securities, 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.

LENDING PORTFOLIO SECURITIES. The 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 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) the Fund must receive from the
borrower at

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<PAGE> 72

least 100% collateral of the type discussed in the preceding paragraph; (2) the
borrower must increase such collateral whenever the market value of the
securities loaned rises above the level of such collateral; (3) the Fund must be
able to terminate the loan at any time; (4) the 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) the 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, the
Trust's Board of Trustees must be able to terminate the loan and regain the
right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification. Loan
agreements involve certain risks in the event of default or insolvency of the
other party including possible delays or restrictions upon the Fund's ability to
recover the loaned securities or dispose of the collateral for the loan.

BORROWING. The Fund may borrow money from banks, limited by the Fund's
fundamental investment restriction to 33-1/3% of its total assets (including the
amount borrowed). In addition, the Fund may borrow up to an additional 5% of its
total assets from banks for temporary or emergency purposes. The Fund will not
purchase securities when bank borrowings exceed 5% of the Fund's total assets.

The 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 Fund has established a line-of-credit ("LOC")
with its custodian by which it may borrow for temporary or emergency purposes.
The Fund intends to use the LOC to meet large or unexpected redemptions that
would otherwise force the Fund to liquidate securities under circumstances which
are unfavorable to the Fund's remaining shareholders.

DERIVATIVE INSTRUMENTS. As discussed in the Prospectuses, Villanova Mutual Fund
Capital Trust ("VMF") (the "Adviser") or the Subadviser may use a variety of
derivative instruments, including options, futures contracts (sometimes referred
to as "futures"), options on futures contracts, stock index options and forward
currency contracts, but primarily stock index futures, to hedge the Fund's
portfolio or for risk management. Derivations are financial instruments whose
value and performance are based on the value and performance of another
security, financial instrument or index.

(1) Successful use of most of these instruments depends upon VMF's or
the 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.

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<PAGE> 73

(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 the Fund entered into a
short hedge because VMF or the 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, the Fund could
suffer a loss.

(4) As described below, the 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 the Fund's
derivative instruments, see "Additional General Tax Information".

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<PAGE> 74

writer in exchange for the right under the option contract. Option contracts may
be written with terms which would permit the holder of the option to purchase or
sell the underlying security only upon the expiration date of the option. The
initial purchase or sale of an option contract is an "opening transaction". In
order to close out an option position, the Fund may enter into a "closing
transaction", the sale or purchase, as the case may be, of an option contract on
the same security with the same exercise price and expiration date as the option
contract originally opened. 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 the 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 the 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 Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the 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, the 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.

The 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

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<PAGE> 75

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.

The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The 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 the Fund
will enter into OTC options only with counterparties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the 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, the Fund might be unable to close out an OTC option position at any time
prior to its expiration.

If the 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 the 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.

Transactions using OTC options expose the Fund to certain risks. To the
extent required by SEC guidelines, the 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. The Fund will also set aside cash and/or
appropriate liquid assets in a segregated custodial account if required to do so
by the SEC and CFTC regulations. Assets used as cover or held in a segregated
account cannot be sold while the position in the corresponding option or futures
contract is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Fund's assets to segregated accounts as a
cover could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.

The 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. Index options (or options on securities indices) are similar in many
respects to options on securities except that an index option gives the holder
the right to receive, upon exercise, cash instead of securities, if the closing
level of the securities index upon which the option is based is greater than, in
the case of a call , or less than, in the case of a put, the exercise price of
the option. Price movements in securities in which the Fund owns or intends to
purchase probably will not correlate perfectly with movements in the level of an
index and, therefore, the Fund bears the risk of a loss on an index option that
is not completely offset by movements in the price of such securities. Because
index options are settled in cash, a call writer cannot determine the amount of
its settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations acquiring and holding

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<PAGE> 76

the underlying securities. The Fund will be required to segregate assets and/or
provide an initial margin to cover index options that would require it to pay
cash upon exercise.

FUTURES CONTRACTS. The 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. The 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. The
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. The Fund will engage in this strategy only
when VMF or the Subadviser believes it is more advantageous to the Fund than is
purchasing the futures contract.

To the extent required by regulatory authorities, the 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 the Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.

The 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 the 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 the Fund's exposure to market, currency, or interest rate
fluctuations, the 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

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<PAGE> 77

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, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the futures contract.

No price is paid by the 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 the Fund
at the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
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 the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the 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 the 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

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<PAGE> 78

through a linked exchange). Although the Fund intends to enter into futures
transactions only on exchanges or boards of trade where there appears to be an
active market, there can be no assurance that such a market will exist for a
particular contract at a particular time.

If the 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.

INVESTMENT RESTRICTIONS

The following are fundamental investment restrictions of the Fund which cannot
be changed without the authorization of the majority of the outstanding shares
of the Fund.

THE FUND:

- May not borrow money or issue senior securities, except that the
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.

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<PAGE> 79

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

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

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

- May not lend any security or make any other loan, except that the
Fund may purchase or hold debt securities and lend portfolio
securities in accordance with its investment objective and
policies, make time deposits with financial institutions and enter
into repurchase agreements.

- May not purchase the securities of any issuer if, as a result, 25%
or more than (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 and obligations issued by state,
county or municipal governments. The following industries are
considered separate industries for purposes of this investment
restriction: electric, natural gas distribution, natural gas
pipeline, combined electric and natural gas, and telephone
utilities, captive borrowing conduit, equipment finance, premium
finance, leasing finance, consumer finance and other finance.

In addition, the Fund may not purchase securities of one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if at the end of each fiscal quarter, (a) more than 5% of the
Fund's total assets (taken at current value) would be invested in such issuer
(except that up to 50% of the Fund's total assets may be invested without regard
to such 5% limitation), and (b) more than 25% of its total assets (taken at
current value) would be invested in securities of a single issuer. 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.

The following are the non-fundamental operating policies of the Funds which may
be changed by the Board of Trustees of the Trust without shareholder approval:

The Fund may not:

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<PAGE> 80

futures contracts, options on futures contracts, or other derivative
instruments are not deemed to constitute selling securities short.

- - 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%
(10% with respect to the Money Market Fund) of its net assets would be
invested in securities that are illiquid.

- - Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or (b) to the extent permitted by the 1940 Act or any
rules or regulations thereunder or pursuant to any exemptions therefrom.

- - Pledge, mortgage or hypothecate any assets owned by the Fund in excess of
33 1/3% of the Fund's total assets at the time of such pledging,
mortgaging or hypothecating.

TRUSTEES AND OFFICERS
OF THE TRUST

TRUSTEES AND OFFICERS

The principal occupation of the Trustees and Officers during the last five
years, their ages and their affiliations are:

JOHN C. BRYANT, Trustee*, Age 62
411 Oak St., Suite 306, Cincinnati, Ohio 45219
Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a partnership
of business, government, schools and social service agencies to address the
educational needs of students. He was formerly Professor of Education,
Wilmington College.

C. BRENT DEVORE, Trustee, Age 58
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.

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THOMAS J. KERR, IV, Trustee*, Age 65
4890 Smoketalk Lane, Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.

DOUGLAS F. KRIDLER, Trustee, Age 43
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.

DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise.

DAVID C. WETMORE, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.

JAMES F. LAIRD, JR., Treasurer
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.

CHRISTOPHER A. CRAY, Assistant Treasurer
Three Nationwide Plaza, Columbus, Ohio

Mr. Cray is Treasurer of Villanova Mutual Fund Capital Trust, the adviser and
Nationwide Advisory Services, Inc., the Distributor. Prior to that he was
Director - Corporate Accounting of Nationwide Insurance Enterprise.

ELIZABETH A. DAVIN, Secretary
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.

+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.

All Trustees and Officers of the Trust own less than 1% of its outstanding
shares.

The Trustees receive fees and reimbursement for expenses of attending board
meetings from the Trust. VMF reimburses the Trust for fees and expenses paid to
Trustees who are interested persons of the Trust. The Compensation Table below
sets forth the total compensation to be paid to the Trustees of the Trust,
before reimbursement, for the fiscal period ended October 31, 1998. In addition,
the table sets forth the total compensation to be paid to the Trustees from all
funds in the Nationwide Fund

<PAGE> 82
Complex, including the predecessor investment companies to the Trust, for the
fiscal year ended October 31, 1998. Trust officers receive no compensation from
the Trust in their capacity as officers.

<TABLE>
<CAPTION>
COMPENSATION TABLE

PENSION
RETIREMENT
AGGREGATE BENEFITS ANNUAL TOTAL
COMPENSATION ACCRUED AS BENEFITS COMPENSATION
NAME OF PERSON, FROM PART OF FUND UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $ 10,000 --0-- --0-- $21,000
C. Brent DeVore, Trustee 10,000 --0-- --0-- 12,250
Sue A. Doody, Trustee 10,000 --0-- --0-- 21,000
Robert M Duncan, Trustee 10,000 --0-- --0-- 21,000
Thomas J. Kerr, IV, Trustee 10,000 --0-- --0-- 21,000
Douglas F. Kridler, Trustee 10,000 --0-- --0-- 21,000
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee 10,000 --0-- --0-- 10,000
David C. Wetmore, Trustee 10,000 --0-- --0-- 12,250

</TABLE>

**The Fund Complex includes Trusts comprised of thirty four investment company
portfolios.

INVESTMENT ADVISORY AND OTHER SERVICES

Under the terms of the Investment Advisory Agreement dated May 9, 1998, as
amended as of November 2, 1998 and September 1, 1999, VMF oversees the
investment of the assets for the S&P 500 Index Fund. Subject to the supervision
and direction of the Trustees, the Adviser also evaluates and monitors the
performance of the subadviser. The Adviser is also authorized to select and
place portfolio investments on behalf of the Fund, however the Adviser does not
intend to do so at this time.

VMF, a Delaware business trust, is a wholly owned subsidiary Villonova Capital
Inc., 97% of the common stock of which is held by Nationwide Financial Services,
Inc. (NFS). NFS, a holding company, has two classes of common stock outstanding
with different voting rights enabling Nationwide Corporation (the holder of all
of the outstanding Class B common stock) to control NFS. Nationwide Corporation,
is also a holding company in the Nationwide Insurance Enterprise. All of the
Common Stock of Nationwide Corporation is held by Nationwide Mutual Insurance
Company (95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of
which is a mutual company owned by its policyholders.

The Adviser and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 days of such changes, and all
changes will be approved by the Trust's Board of Trustees, including a majority
of the Trustees who are not interested persons of the Trust or the Adviser. The
order is intended to facilitate

13
<PAGE> 83

the efficient operation of the Fund and afford the Trust increased management
flexibility.

The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective Subadvisers for
the Fund and thereafter monitoring the performance of the Subadviser through
quantitative and qualitative analysis as well as periodic in-person, telephonic
and written consultations with the Subadviser. The Adviser has responsibility
for communicating performance expectations and evaluations to the Subadviser and
ultimately recommending to the Trust's Board of Trustees whether the
Subadviser's contract should be renewed, modified or terminated; however, the
Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Trust's Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the Subadvisers, there is no certainty
that the Subadviser or the Fund will obtain favorable results at any given time.

The S&P 500 Index Fund pays the Adviser a fee at the annual rate of .13% of the
Fund's average daily net assets for investment advisory services.

The Adviser may from time to time waive some or all of its investment advisory
fee or other fees. The waiver of such fees will cause the total return and yield
of the Fund to be higher than they would otherwise be in the absence of such a
waiver.

The Adviser pays the compensation of the Trustees and officers affiliated with
the Adviser. The Adviser also furnishes, at its own expense, all necessary
administrative services, office space, equipment, and clerical personnel for
servicing the investments of the Trust and maintaining its investment advisory
facilities, and executive and supervisory personnel for managing the investments
and effecting the portfolio transactions of the Trust.

The Investment Advisory Agreement also specifically provides that the Adviser,
including its directors, officers, and employees, 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
Trust, 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 the Agreement. The Agreement will continue in effect for an
initial period of two years and thereafter shall continue automatically for
successive annual periods provided such continuance is specifically approved at
least annually by the Trustees, or by vote of a majority of the outstanding
voting securities of the Trust, and, in either case, by a majority of the
Trustees who are not parties to the Agreement or interested persons of any such
party. The Agreement terminates automatically in the event of its "assignment",
as defined under the 1940 Act. It may be terminated as to the Fund without
penalty by vote of a majority of the outstanding voting securities of that Fund,
or by either party, on not less than 60 days written notice. The Agreement
further provides that the Adviser may render similar services to others.

14
<PAGE> 84

Agreement; fees and expenses of independent certified public
accountants, legal counsel, and any transfer agent, registrar, and dividend
disbursing agent of the Trust; expenses of preparing, printing, and mailing
shareholders' reports, notices, proxy statements, and reports to governmental
offices and commissions; expenses connected with the execution, recording, and
settlement of portfolio security transactions, insurance premiums, fees and
expenses of the custodian for all services to the Trust; and expenses of
calculating the net asset value of shares of the Trust, expenses of
shareholders' meetings, and expenses relating to the issuance, registration, and
qualification of shares of the Trust.

Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
served as the investment adviser to the Fund. Effective September 1, 1999, the
investment advisory services previously performed for the Fund by NAS were
transferred to VMF, an affiliate of NAS and an indirect subsidiary of Nationwide
Financial Services, Inc. After the transfer, there was no change in the fees
charged for investment advisory services to the Fund.

For services provided under the Investment Management Agreement, VMF receives an
annual fee paid monthly based on average daily net assets of each fund in the
Trust (except the Morley Capital Accumulation Fund) (the "Funds") according to
the following schedule:

FUND ASSETS FEE

Nationwide Mid Cap $0 up to $250 million 0.60%
Growth Fund, Nationwide $250 million up to $1 billion 0.575%
Growth Fund, and $1 billion up to $2 billion 0.55%
Nationwide Fund $2 billion up to $5 billion 0.525%
$5 Billion and more 0.50%

Nationwide Bond Fund, $0 up to $250 million 0.50%
Nationwide Tax-Free $250 million up to $1 billion 0.475%
Income Fund, Nationwide $1 billion up to $2 billion 0.45%
Long-Term U.S. $2 billion up to $5 billion 0.425%
Government Bond Fund, $5 Billion and more 0.40%
and Nationwide
Intermediate U.S.
Government Bond Fund

Nationwide Money Market $0 up to $1 billion 0.40%
Fund $1 billion up to $2 billion 0.38%
$2 billion up to $5 billion 0.36%
$5 billion and more 0.34%

Nationwide S&P 500 Index all assets 0.13%
Fund up to $100 million 0.75%
Large Cap Value $100 million or more 0.70%

15
<PAGE> 85

FUND ASSETS FEE

Large Cap Growth up to $150 million 0.80%
$150 million or more 0.70%

Balanced up to $100 million 0.75%
$100 million or more 0.70%

Small Cap up to $100 million 0.95%
$100 million or more 0.80%

International up to $200 million 0.85%
$200 million or more 0.80%

During the fiscal years ended October 31, 1998, 1997 and 1996, NAS received the
following fees for investment advisory services*:

FISCAL YEARS ENDED OCTOBER 31,

NATIONWIDE FUND 1998 1997 1996

Mid Cap Growth $61,706 $63,883 $54,053
Growth 4,894,110 3,750,599 3,212,196
Nationwide Fund 9,977,231 5,938,011 4,425,921
Bond 647,809 629,068 663,545
Tax-Free 1,505,626 1,810,070 1,855,962
Long-Term U.S. Government 254,928 343,259 414,415
Intermediate U.S. Government 266,473 256,016 255,149
Money Market** 3,857,898 3,519,727 2,969,392

* The fees paid to NAS during the fiscal years ended October 31, 1998, 1997, and
1996 were paid by funds that were acquired by NIF III in a reorganization that
occurred on May 9, 1998. As part of the reorganization, NIF III acquired all of
the assets and assumed all of the liabilities of each of the funds in Nationwide
Investing Foundation, Nationwide Investing Foundation II, and Financial Horizons
Investment Trust.

** Net of waivers of $221,174, $389,150 and $328,076 for 1998, 1997 and 1996,
respectively.

The Subadviser - Subject to the supervision of the Adviser and the Trust's Board
of Trustees, The Dreyfus Corporation manages the S&P 500 Index Fund's assets in
accordance with such Fund's investment objective and policies. The Subadviser
shall make investment decisions for the S&P 500 Index Fund, and in connection
with such investment decisions shall place purchase and sell orders for
securities. For the investment management services it provides to the Fund, the
Subadviser receives an annual fee from the Adviser in the following amounts:

16
<PAGE> 86

.07% on the first $250 million in assets
.06% on the next $250 million in assets
.05% on the next $500 million in assets
.04% over $1 billion in assets

Below is a brief description of the Subadviser.

The Dreyfus Corporation ("Dreyfus"), 200 Park Avenue, New York, N.Y. 10166,
which was formed in 1947 and is registered under the Investment Advisers Act of
1940, serves as subadviser to the Fund pursuant to a Subadvisory Agreement dated
July 23, 1998. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which
is a wholly-owned subsidiary of Mellon Bank Corporation.

DISTRIBUTOR

NAS serves as agent for the Fund in the distribution of its Shares pursuant to
an Underwriting Agreement dated as of May 9, 1998, as amended as of November 2,
1998, (the "Underwriting Agreement"). Unless otherwise terminated, the
Underwriting Agreement will continue in effect until May 9, 2000, and year to
year thereafter for successive annual periods, if, as to each Fund, such
continuance is approved at least annually by (i) the Trust's Board of Trustees
or by the vote of a majority of the outstanding shares of that Fund, and (ii)
the vote of a majority of the Trustees of the Trust who are not parties to the
Underwriting Agreement or interested persons (as defined in the 1940 Act) of any
party to the Underwriting Agreement, cast in person at a meeting called for the
purpose of voting on such approval. The Underwriting Agreement may be terminated
in the event of any assignment, as defined in the 1940 Act.

DISTRIBUTION PLAN

The Fund has adopted a Distribution Plan (the "Plan") under Rule 12b-1 of the
1940 Act which permits the Fund to compensate NAS as the Fund's Distributor, for
expenses associated with distribution of shares. Although actual distribution
expenses may be more or less, under the Plan the Fund shall pay an annual fee
not exceeding .15% of the average daily net assets of Class R shares of the
Nationwide S&P 500 Index Fund to NAS. Distribution expenses paid by NAS may
include the costs of marketing, printing and mailing prospectuses and sales
literature to prospective investors, advertising, and compensation to sales
personnel and broker-dealers.

17
<PAGE> 87

vote of majority of the outstanding shares of the 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 may be
amended by the vote of the Trustees including a majority of 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 Fund. 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 must determine that there is a reasonable likelihood that the Plan will
benefit the Fund and its Shareholders.

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

The Fund has entered into a licensing agreement which authorizes the Fund to use
the trademarks of the McGraw-Hill Companies, Inc. (1)

- -----------------------------
(1)Standard & Poor's 500 and S&P 500(R) are trademarks of The McGraw-Hill
Companies, Inc. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.("S&P"). S&P
makes no representation or warranty, expressed or implied, to the shareholders
of the Fund or any member of the public regarding the advisability of investing
in securities generally or in the Fund particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only relationship to
the Fund or the Adviser is the licensing of certain trademarks and trade names
of S&P and of the S&P 500 index which is determined, composed and calculated by
S&P without regard to the Fund. S&P has no obligation to take the needs of the
Fund or its shareholders into consideration in
- -------------------

<PAGE> 88
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for or has not participated in the determination of the prices and amount of the
Fund shares or the timing of the issuance or sale of Fund shares or in the
determination or calculation of the equation by which Fund shares are redeemed.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Fund. S&P does not guarantee the accuracy makes no
warranty, expressed or implied as to the results to be obtained by the Fund,
shareholders of the Fund, or any other person or entity from the use of the S&P
500 Index or any data included therein. Without limiting any of the foregoing,
in no event shall S&P 500 Index have any liability for any special, punitive,
indirect, or consequential damages, including lost profits even if notified of
the possibility of such damages.

OTHER SERVICES FOR THE FUND

Under a separate Fund Administration Agreement dated May 9, 1998 as amended
September 1, 1999, Villanova SA Capital Trust ("VSA") provides for various
administrative and accounting services, including daily valuation of the Fund's
shares and preparation of financial statements, tax returns and regulatory
reports. For these services the Fund pays NAS an annual fee in the amount of
0.05% on assets up to $1 billion and 0.04% on assets of $1 billion and more.

Prior to September 1, 1999, Nationwide Advisory Services, Inc. provided fund
administration services to the Fund. Effective September 1, 1999, the fund
administration services previously performed for the Funds by NAS were
transferred to VSA, an affiliate of NAS and an indirect subsidiary of Nationwide
Financial Services, Inc. In addition, BISYS Fund Services Ohio, Inc. began
performing 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 the Fund.

Under the terms of an Administrative Services Plan, the Fund may enter into
Servicing Agreements with entities who agree to provide certain administrative
support services in connection with the Class R and Class Y shares of the Fund.
Such administrative support services include but are not limited to the
following: establishing and maintaining contractholder accounts, processing
purchase and redemption transactions, arranging for bank wires, performing
contract sub-accounting, answering inquiries regarding the contracts and the
Fund, providing periodic statements showing the account balance for beneficial
owners or for plan participants or insurance company separate accounts,
transmitting proxy statements, periodic reports, updated prospectuses and other
communications to shareholders as necessary 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, pursuant to which Nationwide Financial Services Inc. has
agreed to provide certain administrative support services in connection with
Class R and Class Y shares 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, including NAS, will receive a fee, computed at the annual rate of up
to 0.25% of the average daily

19
<PAGE> 89

net assets of the Class R and Class Y shares held by customers of Nationwide
Life Insurance Company or such other entity.

Nationwide Investors Services, Inc. ("NISI") is the Transfer and Dividend
Disbursing Agent for all Nationwide Funds. NISI, a wholly-owned subsidiary of
VSA receives fees for transfer agent services to the Fund in the amount of .01%
annually of average daily net assets of the S&P 500 Index Fund. Management
believes the charges for the services performed are comparable to fees charged
by other companies performing similar services.

The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza, Cincinnati, OH
45263, is the custodian for the Fund and makes all receipts and disbursements
under a Custody Agreement. Fifth Third performs no managerial or policy making
functions for the Funds.

KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the independent
auditors for the Trust.

BROKERAGE ALLOCATION

ALLOCATION OF PORTFOLIO BROKERAGE-- There is no commitment by VMF or the
Subadviser to place orders with any particular broker/dealer or group of
broker/dealers. Orders for the purchases and sales of portfolio securities of
the Fund are placed where, in the judgment of VMF or the Subadviser, the best
executions can be obtained. None of the firms with whom orders are placed are
engaged in the sale of shares of the Fund. In allocating orders among brokers
for execution on an agency basis, in addition to price considerations, the
usefulness of the brokers' overall services is also considered. Services
provided by brokerage firms include efficient handling of orders, useful
analyses of corporations, industries and the economy, statistical reports and
other related services for which no charge is made by the broker above the
negotiated brokerage commissions. The Fund and the Subadviser believe that these
services and information, which in many cases would be otherwise unavailable to
the Subadviser, are of significant value to the Subadviser, but it is not
possible to place an exact dollar value thereon. The Subadviser does not believe
that the receipt of such services and information tends to reduce materially its
expenses.

In the case of securities traded in the over-the-counter market, the Fund will
normally deal with the market makers for such securities unless better prices
can be obtained through brokers.

CALCULATING YIELD AND TOTAL RETURN

20
<PAGE> 90

hypothetical initial payment of $1,000 minus the maximum sales charge, for a
specified period of time, by the amount of the initial payment, assuming
reinvestment of all dividends and distributions. In calculating the standard
total returns, the current maximum applicable sales charge is deducted from the
initial investment. The one, five, and ten-year periods are calculated based on
periods that end on the last day of the calendar quarter preceding the date on
which an advertisement is submitted for publication.

NONSTANDARD RETURNS

The Fund may also choose to show nonstandard returns including total return, and
simple average total return. Nonstandard returns may or may not reflect
reinvestment of all dividends and capital gains; in addition, sales charge
assumptions will vary. Sales charge percentages decrease as amounts invested
increase as outlined in the prospectus; therefore, returns increase as sales
charges decrease.

Total return represents the cumulative percentage change in the value of an
investment over time, calculated by subtracting the initial investment from the
redeemable value and dividing the result by the amount of the initial
investment. The simple average total return is calculated by dividing total
return by the number of years in the period, and unlike average annual
(compound) total return, does not reflect compounding.

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 the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different portfolios or series. In that case, the shares
of each fund would participate equally in the earnings, dividends, and assets of
the particular portfolio or series, but shares of all funds would vote together
in the election of Trustees. Upon liquidation of a portfolio or series, its
shareholders are entitled to share pro rata in the net assets of such portfolio
or series available for distribution to shareholders.

VOTING RIGHTS--Shareholders of each class of shares have one vote for each share
held and a proportionate fractional vote for any fractional share held. An
annual or special meeting of shareholders to conduct necessary business is not
required by the Declaration of Trust, the 1940 Act or other authority except,
under certain circumstances, to amend the Declaration of Trust, the Investment
Advisory Agreement, fundamental investment objectives, investment policies,
investment restrictions, to elect and remove Trustees, to reorganize the Trust
or any series or class thereof and to act upon certain other business matters.
In regard to termination, sale of assets, the change of investment objectives,
policies and restrictions or the approval of an Investment Advisory Agreement,
the right to vote is limited to the holders of shares of the particular fund
affected by the proposal.

To the extent that such a meeting is not required, the Trust does not intend to
have an annual or special meeting of shareholders. The Trust has represented to
the

21
<PAGE> 91

Commission that the Trustees will call a special meeting of shareholders for
purposes of considering the removal of one or more Trustees upon written request
therefor from shareholders holding not less than 10% of the outstanding votes of
the Trust and the Trust will assist in communicating with other shareholders as
required by Section 16(c) of the 1940 Act. At such meeting, a quorum of
shareholders (constituting a majority of votes attributable to all outstanding
shares of the Trust), by majority vote, has the power to remove one or more
Trustees.

ADDITIONAL GENERAL TAX INFORMATION

Each of the fifteen Funds of the Trust is treated as a separate entity
for Federal income tax purposes and intends to qualify as a "regulated
investment company" under the Code, for so long as such qualification is in the
best interest of that Fund's shareholders. In order to qualify as a regulated
investment company, the Fund must, among other things: diversify its investments
within certain prescribed limits; and derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies. In addition, to utilize the tax provisions specially
applicable to regulated investment companies, the Fund must distribute to its
shareholders at least 90% of its investment company taxable income for the year.
In general, the Fund's investment company taxable income will be its taxable
income subject to certain adjustments and excluding the excess of any net
long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year.

Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year the Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to federal tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions would
be taxable to shareholders to the extent of earnings and profits, and would be
eligible for the dividends received deduction for corporations.

22
<PAGE> 92

gains will be taxable income to shareholders for federal income tax purposes,
even if paid in additional shares of that Fund and not in cash.

Distribution by the Fund of the excess of net long-term capital gain
over net short-term capital loss, if any, is taxable to shareholders as
long-term capital gain in the year in which it is received, regardless of how
long the shareholder has held the shares. Such distributions are not eligible
for the dividends-received deduction.

Foreign taxes may be imposed on the Fund by foreign countries with
respect to its income from foreign securities. Since less than 50% in value of
the Fund's total assets at the end of its fiscal year are expected to be
invested in stocks or securities of foreign corporations, the Fund will not be
entitled under the Code to pass through to its Shareholders their pro rata share
of the foreign taxes paid by that Fund. These taxes will be taken as a deduction
by the Fund.

23
<PAGE> 93

Under Section 1256 of the Code, gain or loss realized by the Fund from
certain financial futures and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Gain or
loss will arise upon exercise or lapse of such futures and options as well as
from closing transactions. In addition, any such futures and options remaining
unexercised at the end of the Fund's taxable year will be treated as sold for
their then fair market value, resulting in additional gain or loss to such Fund
characterized in the manner described above.

Offsetting positions held by the Fund involving certain futures
contracts or options transactions may be considered, for tax purposes, to
constitute "straddles." Straddles are defined to include "offsetting positions"
in actively traded personal property. The tax treatment of straddles is governed
by Sections 1092 and 1258 of the Code, which, in certain circumstances,
overrides or modifies the provisions of Section 1256. As such, all or a portion
of any short or long-term capital gain from certain straddle and/or conversion
transactions may be recharacterized as ordinary income.

If the Fund were treated as entering into straddles by reason of its
engaging in futures or options transactions, such straddles would be
characterized as "mixed straddles" if the futures or options comprising a part
of such straddles were governed by Section 1256 of the Code. The Fund may make
one or more elections with respect to mixed straddles. If no election is made,
to the extent the straddle rules apply to positions established by the Fund,
losses realized by such Fund will be deferred to the extent of unrealized gain
in any offsetting positions. Moreover, as a result of the straddle and
conversion transaction rules, short-term capital losses on straddle positions
may be recharacterized as long-term capital losses and long-term capital gains
may be recharacterized as short-term capital gain or ordinary income.

Investment by the Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to Shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such portion in
order to maintain its qualification as a regulated investment company. In that
case, that Fund may have to dispose of securities which it might otherwise have
continued to hold in order to generate cash to satisfy these distribution
requirements.

The Fund may be required by federal law to withhold and remit to the
U.S. Treasury 31% of taxable dividends, if any, and capital gain distributions
to any Shareholder, and the proceeds of redemption or the values of any
exchanges of Shares of the Fund, if such Shareholder (1) fails to furnish the
Fund with a correct taxpayer identification number, (2) under-reports dividend
or interest income, or (3) fails to certify to the Fund that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security number.

24
<PAGE> 94

income tax treatment of the Funds or their shareholders and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax situation. In addition, the tax discussion
in the prospectuses and this Statement of Additional Information is based on tax
laws and regulations which are in effect on the date of the prospectuses and
this Statement of Additional Information; such laws and regulations may be
changed by legislative or administrative action.

Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.

FINANCIAL STATEMENTS

Since Class R and Y shares of the Fund did not begin operations until after
November 1, 1998, there are no financial statements for these classes.

<PAGE> 95
PART B:
STATEMENT OF ADDITIONAL INFORMATION DECEMBER 21, 1999
(REVISED SEPTEMBER 1, 1999)

NATIONWIDE MUTUAL FUNDS
LOCAL FUND SHARES
NATIONWIDE S&P 500 INDEX FUND

This Statement of Additional Information is not a prospectus. It
contains information in addition to and more detailed than that set forth in the
prospectus for the Local Fund Shares of the Nationwide S&P 500 Index Fund and
should be read in conjunction with the prospectus dated December 21, 1998 as
supplemented September 1, 1999. The prospectuses for all three classes of the
S&P 500 Index Fund may be obtained from Nationwide Advisory Services, Inc.
(NAS), P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio 43216.

Terms not defined in this Statement of Additional Information have the
meanings assigned to them in the Prospectus.

TABLE OF CONTENTS

General Information and History 1
Investment Objectives and Policies 1
Investment Restrictions 9
Trustees and Officers of the Trust 11
Investment Advisory and Other Services 13
Brokerage Allocation 19
Calculating Yield and Total Return 19
Nonstandard Returns 19
Additional Information 20
Additional General Tax Information 20
Major Shareholders 23
Financial Statements 24

GENERAL INFORMATION AND HISTORY

Nationwide Mutual Funds ("NMF") (formerly Nationwide Investing Foundation III
("NIF III") is an open-end management investment company, created under the laws
of Ohio by a Declaration of Trust dated as of October 30, 1997, as subsequently
amended.

INVESTMENT OBJECTIVES AND POLICIES

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES

MONEY MARKET INSTRUMENTS. The Fund may invest in certain types of money market
instruments which may include the following types of instruments:

<PAGE> 96

- -- obligations with remaining maturities of 13 months or less issued or
guaranteed as to interest and principal by the U.S. Government, its agencies, or
instrumentalities, or any federally chartered corporation;

-- repurchase agreements;

-- certificates of deposit, time deposits and bankers' acceptances issued
by domestic banks (including their branches located outside the United
States (Eurodollars) and subsidiaries located in Canada), domestic branches
of foreign banks (Yankees dollars), savings and loan associations and
similar institutions;

-- commercial paper, which are short-term unsecured promissory notes issued
by corporations in order to finance their current operations. Generally the
commercial paper will be rated within the top two rating categories by an
NRSRO, or if not rated, is issued and guaranteed as to payment of principal
and interest by companies which at the date of investment have outstanding
debt issue with a high quality rating.

loaned rises above the level of such collateral; (3) the Fund must be able to
terminate the loan at any time; (4) the 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) the 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, the Trust's
Board of Trustees must be able to terminate the loan and regain the right to
vote the securities if a material event adversely affecting the investment
occurs. These conditions may be subject to future modification. Loan agreements
involve certain risks in the event of default or insolvency of the other party
including possible delays or restrictions upon the Fund's ability to recover the
loaned securities or dispose of the collateral for the loan.

3
<PAGE> 98

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 the Fund entered into a
short hedge because VMF or the 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, the Fund could
suffer a loss.

For a discussion of the Federal income tax treatment of the Fund's
derivative instruments, see "Additional General Tax Information".

OPTIONS. The 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. A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the agreed upon
exercise (or "strike") price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the strike price during the option period. Purchasers of
options pay an amount, known as a premium, to the option writer in exchange for
the right under the option contract. Option contracts may be written with terms
which would permit the holder of the option to purchase or sell the underlying
security only upon the expiration date of the option. The initial purchase or
sale of an option contract is an "opening transaction". In order to close out an
option position, the Fund may enter into a "closing transaction", the sale or
purchase, as the case may be, of an option contract on the same security

4
<PAGE> 99

with the same exercise price and expiration date as the option contract
originally opened. 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 the 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 the 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.

5
<PAGE> 100

negotiating directly with the counterparty, or by a transaction in the secondary
market if any such market exists. Although the Fund will enter into OTC options
only with counterparties that are expected to be capable of entering into
closing transactions with the Fund, there is no assurance that the 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, the Fund might be
unable to close out an OTC option position at any time prior to its expiration.

6
<PAGE> 101

7
<PAGE> 102

those securities is made. If the offsetting purchase price is less than the
original sale price, the Fund realizes a gain; if it is more, the Fund realizes
a loss. Conversely, if the offsetting sale price is more than the original
purchase price, the Fund realizes a gain; if it is less, the Fund realizes a
loss. The transaction costs must also be included in these calculations. There
can be no assurance, however, that the Fund will be able to enter into an
offsetting transaction with respect to a particular futures contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the futures contract.

8
<PAGE> 103

SPDRS

The Fund may invest in Standard & Poor's Depository Receipts ("SPDRS"). SPDRs
are interests in unit investment trusts. Such investment trusts invest in a
securities portfolio that includes substantially all of the common stocks (in
substantially the same weights) as the common stocks included in a particular
Standard & Poor's Index such as the S&P 500. SPDRs are traded on the American
Stock Exchange, but may not be redeemed. The results of SPDRs will not match the
performance of the designated S&P Index due to reductions in the SPDRs'
performance attributable to transaction and other expenses, including fees paid
by the SPDR to service providers. SPDRs distribute dividends on a quarterly
basis.

SPDRs are not actively managed. Rather, a SPDR's objective is to track the
performance of a specified index. Therefore, securities may be purchased,
retained and sold by SPDRs at times when an actively managed trust would not do
so. As a result, you can expect greater risk of loss (and a correspondingly
greater prospect of gain) from changes in the value of the securities that are
heavily weighted in the index than would be the case if SPDR was not fully
invested in such securities. Because of this, a SPDRs price can be volatile, a
Fund may sustain sudden, and sometimes substantial, fluctuations in the value of
its investment in SPDRs.

INVESTMENT RESTRICTIONS

The following are fundamental investment restrictions of the Fund which cannot
be changed without the authorization of the majority of the outstanding shares
of the Fund.

THE FUND:

9
<PAGE> 104

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

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

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

- - May not lend any security or make any other loan, except that the Fund
may purchase or hold debt securities and lend portfolio securities in
accordance with its investment objective and policies, make time
deposits with financial institutions and enter into repurchase
agreements.

- - May not purchase the securities of any issuer if, as a result, 25% or
more than (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 and obligations issued by state, county or municipal
governments. The following industries are considered separate
industries for purposes of this investment restriction: electric,
natural gas distribution, natural gas pipeline, combined electric and
natural gas, and telephone utilities, captive borrowing conduit,
equipment finance, premium finance, leasing finance, consumer finance
and other finance.

The following are the non-fundamental operating policies of the Funds which may
be changed by the Board of Trustees of the Trust without shareholder approval:

The Fund may not:

- - Sell securities short, 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

10
<PAGE> 105

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.

- - 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% (10% with respect to the Money Market Fund) of its net assets would
be invested in securities that are illiquid.

- - Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or (b) to the extent permitted by the 1940 Act or
any rules or regulations thereunder or pursuant to any exemptions
therefrom.

- - Pledge, mortgage or hypothecate any assets owned by the Fund in excess
of 33 1/3% of the Fund's total assets at the time of such pledging,
mortgaging or hypothecating.

TRUSTEES AND OFFICERS
OF THE TRUST

TRUSTEES AND OFFICERS

The principal occupation of the Trustees and Officers during the last five
years, their ages and their affiliations are:

C. BRENT DEVORE, Trustee, Age 58
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.

11
<PAGE> 106

THOMAS J. KERR, IV, Trustee*, Age 65
4890 Smoketalk Lane, Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.

DOUGLAS F. KRIDLER, Trustee, Age 43
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.

DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise.

DAVID C. WETMORE, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.

JAMES F. LAIRD, JR., Treasurer
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.

CHRISTOPHER A. CRAY, Assistant Treasurer
Three Nationwide Plaza, Columbus, Ohio
Mr. Cray is Treasurer of Villanova Mutual Fund Capital Trust, the adviser and
Nationwide Advisory Services, Inc., the Distributor. Prior to that he was
Director - Corporate Accounting of Nationwide Insurance Enterprise.

ELIZABETH A. DAVIN, Secretary
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.

+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.

All Trustees and Officers of the Trust own less than 1% of its outstanding
shares.

The Trustees receive fees and reimbursement for expenses of attending board
meetings from the Trust. VMF reimburses the Trust for fees and expenses paid to
Trustees who are interested persons of the Trust. The Compensation Table below
sets forth the total compensation paid to the Trustees of the Trust, before
reimbursement, for the fiscal year ended October 31, 1998. In addition, the
table sets forth the total compensation to be paid to the Trustees from all
funds in the Nationwide Fund Complex, including the predecessor investment
companies to the Trust, for the fiscal

12
<PAGE> 107

year ended October 31, 1998. Trust
officers receive no compensation from the Trust in their capacity as officers.

COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION
RETIREMENT
AGGREGATE BENEFITS ANNUAL TOTAL
COMPENSATION ACCRUED AS BENEFITS COMPENSATION
NAME OF PERSON, FROM PART OF FUND UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $ 10,000 --0-- --0-- $21,000
C. Brent DeVore, Trustee 10,000 --0-- --0-- 12,250
Sue A. Doody, Trustee 10,000 --0-- --0-- 21,000
Robert M Duncan, Trustee 10,000 --0-- --0-- 21,000
Thomas J. Kerr, IV, Trustee 10,000 --0-- --0-- 21,000
Douglas F. Kridler, Trustee 10,000 --0-- --0-- 21,000
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee 10,000 --0-- --0-- 10,000
David C. Wetmore, Trustee 10,000 --0-- --0-- 12,250
</TABLE>

**The Fund Complex includes Trusts comprised of thirty four investment company
portfolios.

INVESTMENT ADVISORY AND OTHER SERVICES

Under the terms of the Investment Advisory Agreement dated May 9, 1998, as
amended as of November 1, 1998 and September 1, 1999, VMF oversees the
investment of the assets for the S&P 500 Index Fund. Subject to the supervision
and direction of the Trustees, the Adviser also evaluates and monitors the
performance of the Subadviser. The Adviser is also authorized to select and
place portfolio investments on behalf of the Fund, however the Adviser does not
intend to do so at this time.

<PAGE> 108

The S&P 500 Index Fund pays the Adviser a fee at the annual rate of .13% of the
Fund's average daily net assets for investment advisory services.

The Trust pays the compensation of the Trustees who are not affiliated with the
Adviser and all expenses (other than those assumed by the Adviser), including
governmental fees, interest charges, taxes, membership dues in the Investment
Company Institute allocable to the Trust; fees under the Trust's Fund
Administration Agreement; fees and expenses of independent certified public
accountants, legal counsel, and any transfer agent, registrar, and dividend
disbursing agent of the Trust; expenses of preparing, printing, and mailing
shareholders' reports, notices, proxy statements, and reports to governmental
offices and commissions; expenses connected with the execution, recording, and
settlement of portfolio security

14
<PAGE> 109

transactions, insurance premiums, fees and expenses of the custodian for all
services to the Trust; and expenses of calculating the net asset value of shares
of the Trust, expenses of shareholders' meetings, and expenses relating to the
issuance, registration, and qualification of shares of the Trust.

For services provided under the Investment Advisory Agreement, VMF receives an
annual fee paid monthly based on average daily net assets of each fund in the
Trust (the "Funds") (except the Morley Capital Accumulation Fund) according to
the following schedule:

<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
Nationwide Mid Cap Growth Fund, $0 up to $250 million 0.60%
Nationwide Growth Fund, and
Nationwide Fund
$250 million up to $1 billion 0.575%
$1 billion up to $2 billion 0.55%
$2 billion up to $5 billion 0.525%
$5 Billion and more 0.50%

Nationwide Bond Fund, $0 up to $250 million 0.50%
Nationwide Tax-Free Income Fund,
Nationwide Long-Term U.S. Government
Bond Fund, and Nationwide
Intermediate U.S. Government Bond Fund

$250 million up to $1 billion 0.475%
$1 billion up to $2 billion 0.45%
$2 billion up to $5 billion 0.425%
$5 Billion and more 0.40%
Nationwide Money Market Fund $0 up to $1 billion 0.40%
$1 billion up to $2 billion 0.38%
$2 billion up to $5 billion 0.36%
$5 billion and more 0.34%

Nationwide S&P 500 Index Fund all assets 0.13%

Large Cap Value up to $100 million 0.75%
$100 million or more 0.70%

Large Cap Growth up to $150 million 0.80%
$150 million or more 0.70%

Balanced up to $100 million 0.75%
</TABLE>

15
<PAGE> 110
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
$100 million or more 0.70%

Small Cap up to $100 million 0.95%
$100 million or more 0.80%

International up to $200 million 0.85%
$200 million or more 0.80%
</TABLE>

During the fiscal years ended October 31, 1998, 1997 and 1996, NAS received the
following fees for investment advisory services*:

FISCAL YEARS ENDED OCTOBER 31,

<TABLE>
<CAPTION>
NATIONWIDE FUND
1998 1997 1996
<S> <C> <C> <C>
Mid Cap Growth $61,706 $63,883 $54,053
Growth 4,894,110 3,750,599 3,212,196
Nationwide Fund 9,977,231 5,938,011 4,425,921
Bond 647,809 629,068 663,545
Tax-Free 1,505,626 1,810,070 1,855,962
Long-Term U.S. Government 254,928 343,259 414,415
Intermediate U.S. Government 266,473 256,016 255,149
Money Market** 3,857,898 3,519,727 2,969,392
</TABLE>

** Net of waivers of $221,174, $389,150 and $328,076 for 1998, 1997 and 1996,
respectively.

During the period from July 24, 1998 (date of commencement of operations)
through October 31, 1998, NAS waived advisory fees for the S&P 500 Index Fund in
the amount of $7,315.

THE SUBADVISER - Subject to the supervision of the Adviser and the Trust's Board
of Trustees, The Dreyfus Corporation manages the S&P 500 Index Fund's assets in
accordance with such Fund's investment objective and policies. The Subadviser
shall make investment decisions for the S&P 500 Index Fund, and in connection
with such investment decisions shall place purchase and sell orders for
securities. For the investment management services it provides to the Fund, the
Subadviser receives an annual fee from the Adviser in the following amounts:

.07% on the first $250 million in assets
.06% on the next $250 million in assets
.05% on the next $500 million in assets
.04% over $1 billion in assets.

16
<PAGE> 111

During the period from July 24, 1998 (date of commencement of operations)
through October 31, 1998, NAS paid $3,939 in fees to the Subadviser.

Below is a brief description of the Subadviser.

DISTRIBUTOR

DISTRIBUTION PLAN

The Fund has adopted a Distribution Plan (the "Plan") under Rule 12b-1 of the
1940 Act which permits the Fund to compensate NAS as the Fund's Distributor, for
expenses associated with distribution of shares. Although actual distribution
expenses may be more or less, under the Plan the Fund shall pay an annual fee
not exceeding .07% of the average daily net assets of the Local Fund Shares of
the Nationwide S&P 500 Index Fund to NAS. Distribution expenses paid by NAS may
include the costs of marketing, printing and mailing prospectuses and sales
literature to prospective investors, advertising, and compensation to sales
personnel and broker-dealers. During the period from July 24, 1998 (date of
commencement of operations) through October 31, 1998, NAS received $3,939 in
12b-1 fees from the Fund.

17
<PAGE> 112

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 may be amended by the vote of the Trustees including a majority of
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 Fund. 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 must determine that there is a reasonable likelihood that the Plan will
benefit the Fund and its Shareholders.

The Fund has entered into a licensing agreement which authorizes the Fund to use
the trademarks of the McGraw-Hill Companies, Inc. 1

(1)Standard & Poor's 500 and S&P 500(R) are trademarks of The McGraw-Hill
Companies, Inc. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.("S&P"). S&P
makes no representation or warranty, expressed or implied, to the shareholders
of the Fund or any member of the public regarding the advisability of investing
in securities generally or in the Fund particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only relationship to
the Fund or the Adviser is the licensing of certain trademarks and trade names
of S&P and of the S&P 500 index which is determined, composed and calculated by
S&P without regard to the Fund. S&P has no obligation to take the needs of the
Fund or its shareholders into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for or has not
participated in the determination of the prices and amount of the Fund shares or
the timing of the issuance or sale of Fund shares or in the determination or
calculation of the equation by which Fund shares are redeemed. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Fund. S&P does not guarantee the accuracy makes no warranty,
expressed or implied as to the results to be obtained by the Fund, shareholders
of the Fund, or any other person or entity from the use of the S&P 500 Index or
any data included therein. Without limiting any of the foregoing, in no event
shall S&P 500 Index

18
<PAGE> 113

have any liability for any special, punitive, indirect, or consequential
damages, including lost profits even if notified of the possibility of such
damages.

OTHER SERVICES FOR THE FUND

Under a separate Fund Administration Agreement dated May 9, 1998 as amended
November 2, 1998 and September 1, 1999, Villanova SA Capital Trust ("VSA") also
for provides various administrative and accounting services, including daily
valuation of the Fund's shares and preparation of financial statements, tax
returns and regulatory reports. For these services the Fund pays VSA an annual
fee in the amount of 0.05% on assets up to $1 billion and 0.04% on assets of $1
billion and more.

Prior to September 1, 1999, Nationwide Advisory Services, Inc. provided fund
administration services to the Funds. Prior to September 1, 1999, Nationwide
Advisory Services, Inc. provided fund administration services to the Fund.
Effective September 1, 1999, the fund administration services previously
performed for the Funds by NAS were transferred to VSA, an affiliate of NAS and
an indirect subsidiary of Nationwide Financial Services, Inc. In addition, BISYS
Fund Services Ohio, Inc. began performing 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 the Fund.

Nationwide Investors Services, Inc. ("NISI") is the Transfer and Dividend
Disbursing Agent for all Nationwide Funds. NISI, a wholly-owned subsidiary of
VSA receive fees for transfer agent services to the Fund in the amount of .01%
annually of average daily net assets of the S&P 500 Index Fund. Management
believes the charges for the services performed are comparable to fees charged
by other companies performing similar services. During the period from July 24,
1998 (date of commencement of operations) through October 31 1998, NISI received
$563 in transfer agent fees from the Fund.

KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the independent
auditors for the Trust.

BROKERAGE ALLOCATION

ALLOCATION OF PORTFOLIO BROKERAGE-- ALLOCATION OF PORTFOLIO BROKERAGE-- There is
no commitment by VMF or the Subadviser to place orders with any particular
broker/dealer or group of broker/dealers. Orders for the purchases and sales of
portfolio securities of the Fund are placed where, in the judgment of VMF or the
Subadviser, the best executions can be obtained. None of the firms with whom
orders are placed are engaged in the sale of shares of the Fund. In allocating
orders among brokers for execution on an agency basis, in addition to price
considerations, the usefulness of the brokers' overall services is also
considered. Services provided by brokerage firms include efficient handling of
orders, useful analyses of corporations, industries and the economy, statistical
reports and other related services for which no charge is made by the broker
above the negotiated brokerage commissions. The Fund and the Subadviser believe
that these services and information, which in many cases

<PAGE> 114

would be otherwise unavailable to the Subadviser, are of significant value to
the Subadviser, but it is not possible to place an exact dollar value thereon.
The Subadviser does not believe that the receipt of such services and
information tends to reduce materially its expenses.

During the period from July 24, 1998 (date of commencement of operations)
through October 31, 1998, the Fund paid brokerage commissions in the amount of
$8,386.

In the case of securities traded in the over-the-counter market, the Fund will
normally deal with the market makers for such securities unless better prices
can be obtained through brokers.

CALCULATING YIELD AND TOTAL RETURN

The Fund may from time to time advertise historical performance, subject to Rule
482 under the Securities Act. 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
(compound) total return quotations for the most recent one, five, and ten-year
periods (or life if the Fund has been in operation less than one of the
prescribed periods). Average annual (compound) total return represents
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 minus the maximum sales charge, for a specified period of time, by the
amount of the initial payment, assuming reinvestment of all dividends and
distributions. In calculating the standard total returns, the current maximum
applicable sales charge is deducted from the initial investment. The one, five,
and ten-year periods are calculated based on periods that end on the last day of
the calendar quarter preceding the date on which an advertisement is submitted
for publication. The Fund's average annual total return for the period from July
24, 1998 (date of commencement of operations) through October 31, 1998 was
(3.08%).

NONSTANDARD RETURNS

Total return represents the cumulative percentage change in the value of an
investment over time, calculated by subtracting the initial investment from the
redeemable value and dividing the result by the amount of the initial
investment. The simple average total return is calculated by dividing total
return by the number of years in the period, and unlike average annual
(compound) total return, does not reflect compounding.

ADDITIONAL INFORMATION

20
<PAGE> 115

share of the Fund represents an equal proportionate interest in the Fund with
each other share. The Trust reserves the right to create and issue shares of a
number of different portfolios or series. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular portfolio or series, but shares of all funds would vote together in
the election of Trustees. Upon liquidation of a portfolio or series, its
shareholders are entitled to share pro rata in the net assets of such portfolio
or series available for distribution to shareholders.

VOTING RIGHTS--Shareholders of each class of shares have one vote for each share
held and a proportionate fractional vote for any fractional share held. An
annual or special meeting of shareholders to conduct necessary business is not
required by the Declaration of Trust, the 1940 Act or other authority except,
under certain circumstances, to amend the Declaration of Trust, the Investment
Advisory Agreement, fundamental investment objectives, investment policies,
investment restrictions, to elect and remove Trustees, to reorganize the Trust
or any series or class thereof and to act upon certain other business matters.
In regard to termination, sale of assets, the change of investment objectives,
policies and restrictions or the approval of an Investment Advisory Agreement,
the right to vote is limited to the holders of shares of the particular fund
affected by the proposal.

ADDITIONAL GENERAL TAX INFORMATION

Each of the fourteen Funds of the Trust is treated as a separate entity
for Federal income tax purposes and intends to qualify as a "regulated
investment company" under the Code, for so long as such qualification is in the
best interest of that Fund's shareholders. In order to qualify as a regulated
investment company, the Fund must, among other things: diversify its investments
within certain prescribed limits; and derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies. In addition, to utilize the tax provisions specially
applicable to regulated investment companies, the Fund must distribute to its
shareholders at least 90% of its investment company taxable income for the year.
In general, the Fund's investment company taxable income will be its taxable
income subject to certain adjustments and excluding the excess of any net
long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year.

21
<PAGE> 116

be distributed during the next calendar year. If distributions during a calendar
year were less than the required amount, the Fund would be subject to a
non-deductible excise tax equal to 4% of the deficiency.

Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year the Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to federal tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions would
be taxable to shareholders to the extent of earnings and profits, and would be
eligible for the dividends received deduction for corporations.

22
<PAGE> 117

23
<PAGE> 118

qualification as a regulated investment company. In that case, that Fund may
have to dispose of securities which it might otherwise have continued to hold in
order to generate cash to satisfy these distribution requirements.

Information set forth in the Prospectuses and this Statement of
Additional Information which relates to Federal taxation is only a summary of
some of the important Federal tax considerations generally affecting purchasers
of shares of the Funds. No attempt has been made to present a detailed
explanation of the Federal income tax treatment of the Funds or their
shareholders and this discussion is not intended as a substitute for careful tax
planning. Accordingly, potential purchasers of shares of the Fund are urged to
consult their tax advisers with specific reference to their own tax situation.
In addition, the tax discussion in the prospectuses and this Statement of
Additional Information is based on tax laws and regulations which are in effect
on the date of the prospectuses and this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action.

Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.

MAJOR SHAREHOLDERS

As of October 31, 1998 Nationwide Life Insurance Company and its affiliates
directly or indirectly owned, controlled or held power to vote all of the
outstanding shares of the Fund.

24
<PAGE> 119

FINANCIAL STATEMENTS

25
<PAGE> 120

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

NATIONWIDE(R) S&P 500 INDEX FUND
LOCAL FUND SHARES

ANNUAL REPORT
OCTOBER 31, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 121

NATIONWIDE(R) S&P 500 INDEX FUND
LOCAL FUND SHARES
ANNUAL REPORT
OCTOBER 31, 1998

TABLE OF CONTENTS

<TABLE>
<S> <C>
Independent Auditors' Report................................ 1
Statement of Investments.................................... 2

Statement of Assets and Liabilities......................... 9
Statement of Operations..................................... 10
Statement of Changes in Net Assets.......................... 11
Financial Highlights........................................ 12
Notes to Financial Statements............................... 13
</TABLE>
<PAGE> 122

INDEPENDENT AUDITORS' REPORT

The Shareholders and Board of Trustees of
Nationwide Investing Foundation III:

We have audited the accompanying statement of assets and liabilities of the
Nationwide Investing Foundation III -- Nationwide S&P 500 Index Fund (the Fund),
including the statement of investments, as of October 31, 1998, and the related
statement of operations, statement of changes in net assets and the financial
highlights for the period from July 24, 1998 (commencement of operations)
through October 31, 1998. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.

We conducted our audit 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 are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included verification of securities owned as of October 31, 1998, by
confirmation with the custodian. 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 our audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Nationwide Investing Foundation III -- Nationwide S&P 500 Index Fund at October
31, 1998, and the results of its operations, the changes in its net assets and
the financial highlights for the period from July 24, 1998 (commencement of
operations) through October 31, 1998, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Columbus, Ohio
November 20, 1998

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 1
<PAGE> 123

NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF INVESTMENTS -- OCTOBER 31, 1998

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- AFFILIATED (0.2%)
FINANCIAL -- BANKS
700 Mellon Bank Corp. $ 42,087
==========
TOTAL COMMON STOCK -- AFFILIATED
(cost $42,875)
COMMON STOCK -- UNAFFILIATED (99.5%)
AEROSPACE (1.1%)
100 Aeroquip-Vickers, Inc. 3,150
2,600 Boeing Co. (The) 97,500
300 General Dynamics Corp. 17,756
200 Goodrich (B.F.) Co. 7,200
500 Lockheed Martin Corp. 55,687
600 United Technologies Corp. 57,150
----------
238,443
----------
AIRLINES (0.5%)
500 AMR Corp.* 33,500
200 Delta Air Lines, Inc. 21,112
400 Federal Express Corp.* 21,025
750 Southwest Airlines 15,891
200 U.S. Airways Group, Inc.* 11,312
----------
102,840
----------
ALUMINUM (0.3%)
500 Alcan Aluminum Ltd. 12,656
500 Aluminum Co. of America 39,625
200 Reynolds Metals Co. 11,987
----------
64,268
----------
APPAREL (0.2%)
200 Fruit of the Loom, Inc.* 3,050
100 Liz Claiborne, Inc. 2,937
700 Nike, Inc. Class B 30,581
100 Reebok International Ltd.* 1,662
100 Russell Corp. 2,456
300 V F Corp. 12,544
----------
53,230
----------
BEVERAGES (2.6%)
6,200 Coca-Cola Co. 419,275
1,000 Coca-Cola Enterprises, Inc. 36,062
3,700 PepsiCo, Inc. 124,875
----------
580,212
----------
BEVERAGES -- OTHER (0.6%)
100 Adolph Coors Co. Class B 5,000
1,200 Anheuser-Busch Cos., Inc. 71,325
200 Brown-Forman Corp. Class B 13,587
400 Fortune Brands, Inc. 13,225
900 Seagram Co. Ltd. 29,587
----------
132,724
----------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
BUSINESS MACHINERY (6.4%)
1,100 3COM Corp.* $ 39,669
300 Apple Computer, Inc.* 11,137
300 Cabletron System, Inc.* 3,412
3,850 Cisco Systems, Inc.* 242,550
4,100 Compaq Computer Corp.* 129,662
100 Data General Corp.* 1,700
3,200 Dell Computer Corp.* 209,600
1,200 EMC Corp.* 77,250
400 Gateway 2000, Inc.* 22,325
2,600 Hewlett-Packard Co.* 156,487
300 IKON Office Solutions, Inc. 2,831
2,300 International Business Machines
Corp. 341,406
700 Pitney Bowes, Inc. 38,544
500 Seagate Technology* 13,187
400 Silicon Graphics, Inc.* 4,500
900 Sun Microsystems, Inc.* 52,425
800 Xerox Corp. 77,500
----------
1,424,185
----------
CAPITAL GOODS (5.7%)
800 Applied Materials, Inc.* 27,750
100 Briggs & Stratton 4,700
200 Case Corp. 4,400
900 Caterpillar, Inc. 40,500
150 Crane Co. 4,322
100 Cummins Engine, Inc. 3,412
800 Deere & Co. 28,300
500 Dover Corp. 15,875
200 Eaton Corp. 13,537
1,100 Emerson Electric Co. 72,600
8,100 General Electric Co. 708,750
400 Genuine Parts Co. 12,600
200 Grainger (W.W.), Inc. 9,212
100 Harnischfeger Industries, Inc. 944
600 Illinois Tool Works, Inc. 38,475
400 Ingersoll-Rand Co. 20,200
300 ITT Industries, Inc. 10,725
100 McDermott International, Inc. 2,931
100 Milacron, Inc. 1,937
100 Millipore Corp. 2,462
1,000 Minnesota Mining & Manufacturing
Co. 80,000
300 Pall Corp. 7,575
300 Parker-Hannifin Corp. 10,725
100 Perkin-Elmer Corp. (The) 8,431
100 Snap-on, Inc. 3,544
200 Stanley Works (The) 6,000
400 Textron, Inc. 29,750
300 Thermo Electron Corp.* 5,981
100 Timken Co. (The) 1,781
1,652 Tyco International Ltd. 102,321
----------
1,279,740
----------
CHEMICALS (2.0%)
600 Air Products & Chemicals, Inc. 22,650
1,500 Allied-Signal, Inc. 58,406
300 Avery Dennison Corp. 12,431
</TABLE>

2 NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT
<PAGE> 124
NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF INVESTMENTS -- OCTOBER 31, 1998 (CONTINUED)

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
CHEMICALS (CONTINUED)
600 Dow Chemical Co. $ 56,175
2,800 Du Pont (E.I.) De Nemours & Co. 161,000
200 Eastman Chemical Co. 11,750
300 Engelhard Corp. 6,300
100 FMC Corp.* 5,106
100 Great Lakes Chemical Corp. 4,163
200 Hercules, Inc. 6,663
300 Morton International, Inc. 7,463
100 Nalco Chemical Co. 3,094
800 Occidental Petroleum Corp. 15,900
400 PPG Industries, Inc. 22,875
400 Praxair, Inc. 16,100
600 Rohm & Haas Co. 20,250
200 Sigma-Aldrich Corp. 6,181
300 Union Carbide Corp. 11,550
200 W.R. Grace & Co.* 3,475
----------
451,532
----------
CONSTRUCTION & BUILDING PRODUCTS (0.3%)
100 Armstrong World Industries, Inc. 6,200
100 Centex Corp. 3,350
200 Fluor Corp. 7,762
100 Foster Wheeler Corp. 1,587
100 Kaufman & Broad Home Corp. 2,856
1,000 Masco Corp. 28,187
100 Owens Corning 3,631
400 Sherwin Williams Co. 10,075
----------
63,648
----------
CONSUMER DURABLE (0.1%)
200 Black & Decker Corp. 10,337
200 Maytag Corp. 9,887
200 Whirlpool Corp. 10,250
----------
30,474
----------
CONSUMER -- NON CYCLICAL (3.1%)
700 Avon Products, Inc. 27,781
300 Clorox Co. 32,775
700 Colgate-Palmolive Co. 61,862
300 Ecolab, Inc. 8,962
2,800 Gillette Co. (The) 125,825
300 International Flavor and
Fragrances 11,231
1,500 Kimberly Clark Corp. 72,375
100 National Service Industries, Inc. 3,587
400 Newell Co. 17,600
3,400 Procter & Gamble Co. 302,175
700 Ralston-Ralston Purina Group 23,362
300 Rubbermaid, Inc. 9,956
100 Tupperware Corp. 1,556
----------
699,047
----------
CONTAINERS (0.3%)
100 Ball Corp. 4,219
100 Bemis, Inc. 3,712
300 Crown Cork & Seal Co., Inc. 9,562
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
CONTAINERS (CONTINUED)
400 Owens-Illinois, Inc.* $ 12,225
200 Sealed Air Corp.* 7,087
200 Stone Container Corp.* 1,912
100 Temple-Inland, Inc. 4,856
400 Tenneco, Inc. 12,150
----------
55,723
----------
DRUGS (11.1%)
3,900 Abbott Laboratories 183,056
200 Allergan, Inc. 12,487
200 Alza Corp.* 9,575
3,300 American Home Products Corp. 160,875
600 Amgen, Inc. 47,137
2,500 Bristol-Meyers Squibb Co. 276,406
400 Cardinal Health, Inc. 37,825
2,800 Eli Lilly & Co. 226,625
3,400 Johnson & Johnson Co. 277,100
3,000 Merck & Co., Inc. 405,750
1,600 Monsanto Co. 65,000
3,300 Pfizer, Inc. 354,131
1,300 Pharmacia & Upjohn, Inc. 68,819
1,800 Schering-Plough Corp. 185,175
2,000 Warner-Lambert Co. 156,750
----------
2,466,711
----------
ELECTRONICS (3.7%)
300 Advanced Micro Devices, Inc.* 6,769
500 AMP, Inc. 20,531
200 Andrew Corp.* 3,275
300 Cooper Industries, Inc. 13,237
200 Harris Corp. 7,012
300 Honeywell, Inc. 23,962
4,200 Intel Corp. 374,587
200 KLA Instruments Corp.* 7,375
300 LSI Logic Corp.* 4,537
500 Micron Technolgy, Inc.* 19,000
1,600 Motorola, Inc. 83,200
400 National Semiconductor* 5,075
1,700 Northern Telecom Ltd. 72,781
200 Northrop Grumman Corp. 15,950
200 Raychem Corp. 6,112
800 Raytheon Co. Class B 46,450
500 Rockwell International Corp. 20,531
200 Scientific-Atlanta, Inc. 2,987
100 Tektronix, Inc. 1,787
500 Tellabs, Inc.* 27,500
1,000 Texas Instruments, Inc. 63,937
100 Thomas & Betts Corp. 4,469
----------
831,064
----------
FINANCIAL -- BANKS (6.7%)
2,934 Banc One Corp. 143,399
1,800 Bank of New York Co., Inc. 56,812
4,323 BankAmerica Corp. 248,302
700 BankBoston Corp. 25,769
</TABLE>

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 3
<PAGE> 125
NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF INVESTMENTS -- OCTOBER 31, 1998 (CONTINUED)

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
FINANCIAL -- BANKS (CONTINUED)
200 Bankers Trust Corp. $ 12,562
700 BB&T Corp. 24,981
2,100 Chase Manhattan Corp. 119,306
400 Comerica, Inc. 25,800
700 Fifth Third Bancorp 46,375
2,500 First Union Corp. 145,000
1,400 Fleet Financial Group, Inc. 55,912
500 Huntington Bancshares, Inc. 14,375
1,300 Keycorp 39,406
400 Mercantile Bancorp, Inc. 18,275
800 National City Corp. 51,450
300 Northern Trust Corp. 22,125
1,900 Norwest Corp. 70,656
800 PNC Bank Corp. 40,000
600 Regions Financial Corp. 22,200
300 Republic New York Corp. 12,544
400 State Street Corp. 24,950
400 Summit Bancorp 15,175
500 Suntrust Banks, Inc. 34,844
600 Synovus Financial Corp. 13,913
300 Union Planters Corp. 13,931
1,900 US Bancorp Class A 69,350
500 Wachovia Corp. 45,437
200 Wells Fargo & Co. 74,000
----------
1,486,849
----------
FINANCIAL -- MISCELLANEOUS (4.4%)
1,100 American Express Co. 97,212
900 Associates First Capital Corp. 63,450
300 Bear Stearns Cos., Inc. 10,706
200 Capital One Financial Corp. 20,350
700 Charles Schwab Corp. (The) 33,556
5,750 Citigroup, Inc. 270,609
600 Franklin Resources, Inc. 22,688
100 Golden West Financial Corp. 9,069
1,200 Household International 43,875
300 Lehman Brothers Holding 11,381
1,850 MBNA Corp. 42,203
900 Merrill Lynch & Co., Inc. 53,325
400 Morgan (J. P.) & Co., Inc. 37,700
1,500 Morgan Stanley Dean Witter,
Discover, & Co. 97,125
900 S&P 500 Depository Receipt* 99,113
400 Student Loan Market Association 16,025
1,504 Washington Mutual, Inc. 56,306
----------
984,693
----------
FOOD (2.5%)
1,575 Archer-Daniels-Midland Co. 26,283
700 BestFoods 38,150
1,100 Campbell Soup Co. 58,644
1,100 ConAgra, Inc. 33,481
400 General Mills 29,400
900 Heinz (H.J.) Co. 52,313
400 Hershey Foods Corp. 27,125
1,000 Kellogg Co. 33,000
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
FOOD (CONTINUED)
500 Pioneer Hi Bred International,
Inc. $ 14,000
300 Quaker Oats Co. 17,719
800 RJR Nabisco Holding Corp. 22,850
1,200 Sara Lee Corp. 71,625
1,600 Unilever N.V. 120,400
300 Wrigley (Wm.) Jr. Co. 24,281
----------
569,271
----------
FOOD -- RETAIL (0.6%)
600 Albertson's, Inc. 33,338
600 American Stores Co. 19,538
100 Great Atlantic & Pacific Tea Co.,
Inc. (The) 2,350
600 Kroger Co.* 33,300
500 Supervalu, Inc. 12,000
1,000 Sysco Corp. 26,938
400 Winn-Dixie Stores, Inc. 13,575
----------
141,039
----------
GOLD (0.2%)
800 Barrick Gold Corp. 17,100
500 Battle Mountain Gold Co. 2,719
400 Freeport-McMoran Copper & Gold,
Inc. 4,925
500 Homestake Mining 5,938
300 Newmont Mining Corp. 6,375
500 Placer Dome, Inc. 7,875
----------
44,932
----------
HEALTHCARE (1.5%)
100 Bard (C.R.), Inc. 4,269
100 Bausch & Lomb, Inc. 4,169
700 Baxter International, Inc. 41,956
600 Becton, Dickinson and Co. 25,275
300 Biomet, Inc. 10,181
500 Boston Scientific, Inc.* 27,219
1,700 Columbia/HCA Healthcare Corp. 35,700
400 Guidant Corp. 30,600
300 HCR Manor Care, Inc. 9,750
1,100 HealthSouth Corp.* 13,338
400 Humana, Inc.* 7,575
200 Mallinckrodt, Inc. 5,700
1,200 Medtronic, Inc. 78,000
200 St. Jude Medical, Inc.* 5,650
700 Tenet Healthcare Corp.* 19,556
500 United HealthCare Corp. 21,781
----------
340,719
----------
HOTELS -- RESTAURANTS (0.8%)
300 Darden Restaurants, Inc. 4,950
200 Harrah's Entertainment*, Inc. 2,825
700 Hilton Hotels Corp. 14,044
600 Marriott International, Inc.
Class A 16,125
1,700 McDonald's Corp. Class A 113,688
400 Mirage Resorts, Inc.* 6,775
</TABLE>

4 NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT
<PAGE> 126
NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF INVESTMENTS -- OCTOBER 31, 1998 (CONTINUED)

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
HOTELS -- RESTAURANTS (CONTINUED)
400 Tricon Global Restaurants, Inc.* $ 17,400
300 Wendy's International, Inc. 6,300
----------
182,107
----------
INSURANCE (2.7%)
2,100 Allstate Corp. 90,431
2,650 American International Group,
Inc. 225,913
400 AON Corp. 24,800
400 Chubb Corp. 24,600
400 Cincinnati Financial Corp. 14,925
200 General Re Corp. 43,938
600 Hartford Financial Services Group 31,875
300 Loews Corp. 28,181
200 MBIA, Inc. 12,225
300 MGIC Investment Corp. 11,700
200 Progressive Corp. 29,450
400 Provident Cos., Inc. 11,625
400 SAFECO Corp. 17,325
600 St. Paul Cos., Inc. 19,875
300 UNUM Corp. 13,331
----------
600,194
----------
INSURANCE -- LIFE (1.2%)
400 Aetna, Inc. 29,850
600 American General Corp. 41,100
500 CIGNA Corp. 36,469
800 Conseco, Inc. 27,750
300 Jefferson-Pilot Corp. 18,225
300 Lincoln National Corp. 22,763
200 Providian Corp. 15,875
500 SunAmerica, Inc. 35,250
400 Torchmark Corp. 17,500
200 Transamerica Corp. 20,800
----------
265,582
----------
LEISURE PRODUCTS (0.2%)
200 Brunswick Corp. 3,888
300 Hasbro, Inc. 10,519
900 Mattel, Inc. 32,288
----------
46,695
----------
MEDIA (2.7%)
1,900 CBS Corp. 53,081
600 Clear Channel Communications,
Inc.* 27,338
900 Comcast Corp. Class A 44,438
300 General Instrument Corp.* 7,706
200 King World Productions, Inc.* 5,250
1,600 MediaOne Group, Inc. 67,700
1,300 Tele-Communications, Inc. Class
A* 54,763
1,500 Time Warner, Inc. 139,219
300 Tribune Co. 17,288
900 Viacom, Inc. Class B* 53,888
5,000 Walt Disney Co. (The) 134,688
----------
605,359
----------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
METALS (0.1%)
100 Asarco, Inc. $ 2,144
200 Cyprus Amax Minerals Co. 2,488
400 Inco Ltd. 4,275
100 Phelps Dodge Corp. 5,763
----------
14,670
----------
MORTGAGE -- ASSET BACKED OBLIGATIONS (1.3%)
300 Countrywide Credit Industries,
Inc. 12,956
2,600 Fannie Mae 184,113
1,700 Federal Home Loan Mortgage Corp. 97,750
----------
294,819
----------
MOTOR VEHICLES (1.8%)
1,700 Chrysler Corp. 81,813
400 Dana Corp. 16,725
100 Fleetwood Enterprises, Inc. 3,225
3,000 Ford Motor Co. 162,750
1,600 General Motors Corp. 100,900
200 Johnson Controls, Inc. 11,250
200 Navistar International Corp.* 4,175
200 PACCAR, Inc. 8,725
300 TRW, Inc. 17,081
----------
406,644
----------
NATURAL GAS (0.6%)
200 Columbia Energy Group 11,575
200 Consolidated Natural Gas Co. 10,563
100 Eastern Enterprises 4,106
800 Enron Corp. 42,200
100 NICOR, Inc. 4,238
100 ONEOK, Inc. 3,425
100 People's Energy Corp. 3,688
500 Sempra Energy 13,000
1,100 Williams Cos. (The) 30,181
----------
122,976
----------
OIL -- DOMESTIC (0.6%)
300 Anadarko Petroleum Corp. 10,163
200 Apache Corp. 5,663
800 Atlantic Richfield Co. 55,100
400 Burlington Resources, Inc. 16,475
100 Kerr-Mcgee Corp. 3,988
100 Pennzoil Co. 3,588
600 Phillips Petroleum Co. 25,950
200 Sonat, Inc. 6,063
500 Union Pacific Resources Group,
Inc. 6,500
----------
133,490
----------
OIL -- INTERNATIONAL (3.7%)
1,600 Chevron Corp. 130,400
6,100 Exxon Corp. 434,625
2,000 Mobil Corp. 151,375
200 ORYX Energy Co.* 2,800
</TABLE>

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 5
<PAGE> 127
NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF INVESTMENTS -- OCTOBER 31, 1998 (CONTINUED)

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
OIL -- INTERNATIONAL (CONTINUED)
1,300 Texaco, Inc. $ 77,106
600 Unocal Corp. 20,363
----------
816,669
----------
OIL -- RESEARCH & DEVELOPMENT (2.1%)
200 Amerada Hess Corp. 11,050
2,400 Amoco Corp. 134,700
200 Ashland, Inc. 9,625
500 Coastal Corp. (The) 17,625
5,400 Royal Dutch Petroleum Co. 265,950
200 Sun Co., Inc. 6,863
700 USX -- Marathon Group 22,881
----------
468,694
----------
OIL -- SERVICES (0.6%)
670 Baker Hughes, Inc. 14,782
1,100 Halliburton Co. 39,531
100 Helmerich & Payne 2,381
200 Rowan Cos.* 2,913
1,400 Schlumberger Ltd. 73,500
----------
133,107
----------
PAPER & FOREST PRODUCTS (0.6%)
100 Boise Cascade Corp. 2,800
200 Champion International Corp. 6,388
600 Fort James Corp. 24,188
200 Georgia Pacific Corp. 10,350
800 International Paper Co. 37,150
200 Louisiana-Pacific Corp. 3,550
300 Mead Corp. 9,488
100 Potlatch Corp. 3,650
200 Union Camp Corp. 8,600
200 Westvaco Corp. 4,925
500 Weyerhauser Co. 23,406
200 Willamette Industries, Inc. 6,200
----------
140,695
----------
PHOTOGRAPHIC (0.3%)
800 Eastman Kodak Co. 62,000
100 Polaroid Corp. 2,656
----------
64,656
----------
POLLUTION CONTROL (0.4%)
400 Browning Ferris Industries 14,175
1,400 Waste Management, Inc. 63,175
----------
77,350
----------
PRINTING & PUBLISHING (0.7%)
200 American Greetings Corp. Class A 8,025
200 Dow Jones & Co., Inc. 9,163
700 Gannett Co., Inc. 43,313
200 Harcourt General, Inc. 9,738
100 Jostens, Inc. 2,256
200 Knight-Ridder, Inc. 10,188
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
PRINTING & PUBLISHING (CONTINUED)
300 McGraw-Hill Cos., Inc. $ 26,981
100 Meredith Corp. 3,700
200 Moore Corp. Ltd. 2,263
400 New York Times Co. Class A 11,300
300 R. R. Donnelley & Sons Co. 12,938
200 Times Mirror Co. (The) 11,088
----------
150,953
----------
RAILROADS (0.6%)
1,200 Burlington Northern Santa Fe
Corp. 37,050
500 CSX Corp. 19,625
1,000 Laidlaw, Inc. 9,438
1,100 Norfolk Southern Corp. 36,231
600 Union Pacific Corp. 28,575
----------
130,919
----------
REAL ESTATE (0.0%)
100 Pulte Corp. 2,575
----------
RETAIL (5.2%)
300 Autozone, Inc.* 7,894
300 Circuit City Stores -- Circuit
City Group 10,856
200 Consolidated Stores Corp.* 3,288
500 Costco Cos., Inc.* 28,375
1,100 CVS Corp. 50,256
1,100 Dayton Hudson Corp. 46,613
300 Dillard's, Inc. 9,319
375 Dollar General Corp.* 8,953
500 Federated Department Stores,
Inc.* 19,219
400 Fred Meyer, Inc.* 21,325
1,000 Gap, Inc. 60,125
3,700 Home Depot, Inc. 160,950
600 J. C. Penney Co., Inc. 28,500
1,100 Kmart Corp.* 15,538
400 Kohls Corp.* 19,125
500 Limited, Inc. (The) 12,813
100 Longs Drug Stores Corp. 3,906
900 Lowe's Cos. 30,319
600 May Department Stores Co. 36,600
300 Nordstrom, Inc. 8,194
100 Pep Boys -- Manny, Moe & Jack
(The) 1,563
600 Rite Aid Corp. 23,813
1,000 Sears Roebuck & Co. 44,938
700 Staples, Inc.* 22,838
300 Tandy Corp. 14,869
700 TJX Cos., Inc. 13,256
900 Toys 'R' Us, Inc.* 17,606
300 Venator Group, Inc.* 2,531
5,600 Wal-Mart Stores, Inc. 386,400
1,200 Walgreen Co. 58,425
----------
1,168,407
----------
</TABLE>

6 NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT
<PAGE> 128
NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF INVESTMENTS -- OCTOBER 31, 1998 (CONTINUED)

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
SERVICES (5.8%)
200 Adobe Systems, Inc. $ 7,425
100 Autodesk, Inc. 3,119
800 Automatic Data Processing, Inc. 62,250
500 BMC Software, Inc.* 24,031
2,200 Cendant Corp.* 25,163
200 Ceridian Corp.* 11,475
1,500 Computer Associates
International, Inc. 59,063
400 Computer Science Corp.* 21,100
200 Deluxe Corp. 6,475
400 Dun & Bradstreet Corp. 11,350
100 EG&G, Inc. 2,513
1,300 Electronic Data Systems Corp. 52,894
400 Equifax, Inc. 15,475
1,000 First Data Corp. 26,500
300 H&R Block, Inc. 13,444
1,100 HBO & Co. 28,875
400 IMS Health, Inc. 26,600
300 Interpublic Group Cos., Inc. 17,550
600 Marsh & McLennan Cos., Inc. 33,300
6,200 Microsoft Corp.* 656,425
800 Novell, Inc.* 11,900
400 Omnicom Group 19,775
2,500 Oracle Corp.* 73,906
600 Parametric Technology* 9,975
400 Paychex, Inc. 19,900
500 Peoplesoft, Inc.* 10,594
200 Ryder System, Inc. 4,925
600 Service Corp. International 21,375
100 Shared Medical Systems Corp. 4,988
600 Unisys Corp.* 15,975
----------
1,298,340
----------
STEEL (0.1%)
400 Allegheny Teledyne, Inc. 8,225
200 Armco, Inc.* 950
300 Bethlehem Steel Corp.* 2,700
200 Nucor Corp. 9,063
200 USX-U.S. Steel Group, Inc. 4,650
200 Worthington Industries, Inc. 2,713
----------
28,301
----------
TELECOMMUNICATIONS (9.2%)
1,400 Airtouch Communications Class A 78,400
700 Alltel Corp. 32,769
2,800 Ameritech Corp. 151,025
500 Ascend Communications, Inc.* 24,125
4,500 AT&T Corp. 280,125
3,900 Bell Atlantic Co. 207,188
2,500 Bellsouth Corp. 199,531
600 Corning, Inc. 21,788
400 Frontier Corp. 12,025
2,400 GTE Corp. 140,850
3,300 Lucent Technologies, Inc. 264,619
4,563 MCI WorldCom, Inc.* 252,128
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES SECURITY VALUE
- ------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS (CONTINUED)
600 Nextel Communication* $ 10,875
4,900 SBC Communications, Inc. 226,931
1,100 Sprint Corp. 84,425
1,300 U S West Communications Group 74,588
----------
2,061,392
----------
TIRE & RUBBER (0.1%)
200 Cooper Tire & Rubber Co. 3,325
400 Goodyear Tire & Rubber Co. 21,550
----------
24,875
----------
TOBACCO (1.5%)
6,100 Philip Morris Cos., Inc. 311,863
400 UST, Inc. 13,600
----------
325,463
----------
UTILITIES -- ELECTRIC (2.7%)
400 AES Corp.* 16,375
300 Ameren Corp. 11,981
500 American Electric Power Co., Inc. 24,469
400 Baltimore Gas and Electric Co. 12,550
400 Carolina Power & Light Co. 18,350
500 Central & Southwest Corp. 13,906
400 Cinergy Corp. 13,800
800 Consolidated Edison, Inc. 40,100
500 Dominion Resources, Inc. 23,094
400 DTE Energy Corp. 17,050
900 Duke Power Co. 58,219
800 Edison International 21,100
500 Entergy Corp. 14,375
500 FirstEnergy Corp. 15,000
500 FPL Group, Inc. 31,281
300 GPU, Inc. 12,938
900 Houston Industries, Inc. 27,956
400 Niagara Mohawk Power Corp.* 5,850
300 Northern States Power Co. 8,100
900 PacificCorp 17,156
600 PECO Energy Co. 23,212
1,100 PG&E Corp. 33,481
400 PP&L Resources, Inc. 10,850
600 Public Service Enterprise Group,
Inc. 22,800
1,800 Southern Co. 50,737
700 Texas Utilities Co. 30,625
500 Unicom Corp. 18,844
----------
594,199
----------
TOTAL COMMON STOCK --UNAFFILIATED 22,200,475
(cost $22,914,171) ==========
PREFERRED STOCK (0.0%)
CONSUMER NON DURABLE (0.0%)
100 Alberto Culver Co. Class B
(cost $2,833) 2,656
----------
</TABLE>

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 7
<PAGE> 129
NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF INVESTMENTS -- OCTOBER 31, 1998 (CONTINUED)

<TABLE>
<CAPTION>
- -------------------------------------------------------
PRINCIPAL SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (0.2%)
$51,000 Fifth Third Bank, 5.30%,
11/02/98, Collateralized by
$53,000 FNMA, Pool #406608,
6.75%, 07/01/24, market value
$53,000 (cost $51,000) $ 51,000
-----------
TOTAL INVESTMENTS $22,296,218
(cost $23,015,214) ===========
</TABLE>

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

Cost for federal income tax purposes: $23,018,053.

The abbreviation in the above statement stands for the following:

FNMA Federal National Mortgage Association

* Denotes a non-income producing security.

Portfolio holdings represent market value as a percentage of net assets.

See accompanying notes to the financial statements.

8 NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT
<PAGE> 130

NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF ASSETS AND LIABILITIES

OCTOBER 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS
Investments in securities, affiliated, at value (cost
$42,875) $ 42,087
Investments in securities, unaffiliated, at value (cost
$22,921,339) 22,203,131
Repurchase agreement (cost $51,000) 51,000
Cash 519
Receivable from advisor 16,272
Accrued interest and dividends receivable 22,218
Prepaid assets 10,890
Withholding tax reclaim receivable 368
-----------
Total assets 22,346,485
-----------
LIABILITIES
Accrued investment management fees 4,616
Accrued administrative fees 2,814
Accrued transfer agent fees 563
Accrued distribution fees 3,939
Other accrued expenses 9,168
-----------
Total liabilities 21,100
-----------
NET ASSETS $22,325,385
===========
NET ASSETS REPRESENTED BY:
Capital $23,034,706
Net unrealized appreciation (depreciation) (718,996)
Accumulated undistributed net realized gain (loss) (8,935)
Accumulated undistributed (distributions in excess of) net
investment income 18,610
-----------
NET ASSETS $22,325,385
===========
Shares outstanding (unlimited number of shares
authorized)(a) 2,311,331
===========
NET ASSET VALUE, offering and redemption price per share(a) $ 9.66
===========
</TABLE>

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

(a) Local Fund Shares

See accompanying notes to financial statements.

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 9
<PAGE> 131

NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF OPERATIONS

PERIOD FROM JULY 24, 1998 TO OCTOBER 31, 1998 (a)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends $ 87,596
Interest 19,312
---------
Total income 106,908
---------
EXPENSES:
Investment management fees 7,315
Distribution fees 3,939
Administrative fees 2,814
Transfer agent fees 563
Shareholders' reports 3,288
Professional services 3,713
Custodian fees 5,277
Trustees' fees and expenses 50
Other 9,178
---------
Total expenses before reimbursed expenses 36,137
Total reimbursed expenses (16,272)
---------
Net expenses 19,865
---------
NET INVESTMENT INCOME $ 87,043
=========
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments $ (8,935)
Net change in unrealized appreciation (depreciation) (718,996)
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (727,931)
---------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(640,888)
=========
</TABLE>

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

(a) For the period from July 24, 1998 (commencement of operations) through
October 31, 1998.

See accompanying notes to financial statements.

10 NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT
<PAGE> 132

NATIONWIDE(R) S&P 500 INDEX FUND

STATEMENT OF CHANGES IN NET ASSETS

PERIOD FROM JULY 24, 1998 TO OCTOBER 31, 1998(a)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 87,043
Net realized gain (loss) on investments (8,935)
Net change in unrealized appreciation (depreciation) of
investments (718,996)
-----------
Net decrease in net assets resulting from operations (640,888)
-----------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS OF NET INVESTMENT
INCOME TO SHAREHOLDERS(b) (68,433)
-----------
CAPITAL SHARE TRANSACTIONS:(b)
Net proceeds from sale of shares 23,141,368
Net asset value of shares issued to shareholders from
reinvestment of dividends 68,425
Cost of shares redeemed (275,087)
-----------
Increase (decrease) in net assets derived from
capital share transactions 22,934,706
-----------
NET INCREASE (DECREASE) IN NET ASSETS 22,225,385
NET ASSETS -- BEGINNING OF PERIOD 100,000
-----------
NET ASSETS -- END OF PERIOD $22,325,385
===========
Undistributed net realized gain (loss) on investments
included in net assets at end of period $ (8,935)
===========
Undistributed (distributions in excess of) net investment
income included in net assets at end of period $ 18,610
===========
SHARE ACTIVITY:(b)
Shares sold 2,324,247
Reinvestment of dividends 7,654
Shares redeemed (30,570)
-----------
Net increase (decrease) in number of shares 2,301,331
===========
</TABLE>

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

(a) For the period from July 24, 1998 (commencement of operations) through
October 31, 1998.

(b) Local Fund Shares.

See accompanying notes to financial statements.

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 11
<PAGE> 133

NATIONWIDE(R) S&P 500 INDEX FUND

FINANCIAL HIGHLIGHTS

PERIOD FROM JULY 24, 1998 TO OCTOBER 31, 1998(a)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
LOCAL
FUND SHARES
-----------
<S> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 10.00
Net investment income 0.04
Net realized gain (loss) and unrealized appreciation
(depreciation) (0.35)
-------
Total from investment operations (0.31)
Dividends from net investment income (0.03)
-------
Net increase (decrease) in net asset value (0.34)
-------
NET ASSET VALUE -- END OF PERIOD $ 9.66
=======
Total Return(c) (3.08)%
Net Assets, End of Period (000) $22,325
Ratio of expenses to average net assets(b) 0.35%
Ratio of expenses to average net assets*(b) 0.64%
Ratio of net investment income to average net assets(b) 1.55%
Ratio of net investment income to average net assets*(b) 1.26%
Portfolio turnover(c) 3.07%
</TABLE>

- ------------------------------------------------------
* Ratios calculated as if no expenses were reimbursed
(a) For the period from July 24, 1998 (commencement of operations) through
October 31, 1998.
(b) Annualized
(c) Not annualized

See accompanying notes to financial statements.

12 NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT
<PAGE> 134

NATIONWIDE(R) S&P 500 INDEX FUND

LOCAL FUND SHARES

NOTES TO FINANCIAL STATEMENTS

OCTOBER 31, 1998
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nationwide Investing Foundation III ("NIF III" or the "Trust") is an open-end
management investment company. NIF III was created under the laws of the State
of Ohio, by a Declaration of Trust dated October 30, 1997, and is registered
under the Investment Company Act of 1940, as amended. The Trust currently has
shares registered in fourteen separate portfolios or series, each with its own
investment objectives. The accompanying financial statements and financial
highlights relate only to the Nationwide S&P 500 Index Fund Local Fund Shares
(the "Fund"), a non-diversified portfolio. On December 23, 1997, the Fund was
capitalized through a sale of 10,000 Local Fund Shares to Nationwide Advisory
Services, Inc. in the amount of $100,000. The Fund commenced operations on July
24, 1998. On November 2, 1998, the Fund began to offer two additional classes of
shares, Class R and Class Y.

(a) SECURITY VALUATION

(1) Securities traded on a national securities exchange are valued at
the last quoted sale price as provided by an independent pricing agent.
Securities traded in the over-the-counter (OTC) market are valued at the
last quoted sale price, or if no sale price, the quoted bid price as
provided by an independent pricing agent. Securities for which reliable
market quotations are not available or for which an independent pricing
agent does not provide a value or provides a value that does not represent
fair value in the judgement of the Fund's investment adviser, are valued in
accordance with procedures authorized by the Board of Trustees.

(2) The value of a repurchase agreement generally equals the purchase
price paid by the Fund (cost) plus the interest accrued to date. The
seller, under the repurchase agreement, is required to maintain the market
value of the underlying collateral at not less than the value of the
repurchase agreement. Securities subject to repurchase agreements are held
by the Federal Reserve/Treasury book-entry system or by the Fund's
custodian or an approved sub-custodian.

(b) SECURITY TRANSACTIONS AND INVESTMENT INCOME

Security transactions are recorded on the trade date. Dividend income is
recorded on the ex-dividend date; interest income is recorded on an accrual
basis and includes, where applicable, the pro rata amortization of premium or
discount.

The Fund qualified as a regulated investment company under the Internal Revenue
Code during the period covered by the accompanying statements. No provision has
been made for federal income taxes as it is the intention to continue such
qualification and to distribute all taxable income to shareholders. To the
extent net realized gains are offset through the application of a capital loss
carryover, they will not be distributed to shareholders but will be retained by
the Fund. As of October 31, 1998, the Fund had a net capital loss carryover in
the amount of $6,096, which will expire within 8 years. Withholding taxes have
been paid or provided for in accordance with the applicable tax rates and rules.

(d) DIVIDENDS TO SHAREHOLDERS

Dividends are paid quarterly and are recorded on the ex-dividend date.

Distributable net realized capital gains are declared and distributed at least
annually.

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 13
<PAGE> 135
NATIONWIDE(R) S&P 500 INDEX FUND

LOCAL FUND SHARES

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

OCTOBER 31, 1998
- --------------------------------------------------------------------------------

Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are considered either
permanent or temporary in nature. In accordance with AICPA (American Institute
of Certified Public Accountants) Statement of Position 93-2, permanent
differences are reclassified within the capital accounts based on their nature
for federal income tax purposes; temporary differences do not require
reclassification. Dividends and distributions that exceed net investment income
and net realized gains for financial reporting purposes but not for tax purposes
are reported as dividends in excess of net investment income and net realized
gains. To the extent distributions exceed current and accumulated earnings and
profits for federal income tax purposes, they are reported as distributions of
paid-in- capital. These reclassifications have no effect upon the net asset
value of the Fund.

(e) EXPENSES

General expenses of the Trust, not directly attributable to a specific fund, are
allocated to the funds based upon each fund's relative average net assets or an
other appropriate basis, as approved by the Board of Trustees. Direct expenses
of the Fund are paid by the Fund.

(f) USE OF ESTIMATES

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

2. TRANSACTIONS WITH AFFILIATES

Investment advisory services are provided to the Fund by Nationwide Advisory
Services, Inc. (NAS), an affiliated company. NAS has selected The Dreyfus
Corporation (a wholly-owned subsidiary of Mellon Bank Corporation) to be the
subadvisor of the Fund. Under the terms of the investment advisory agreement,
NAS earns an annual management fee based on a percentage of the average daily
net assets of the Fund. From such fees, and pursuant to the sub-investment
advisory agreement, NAS pays subadvisory fees to the subadvisor.

Additional information regarding investment advisory fees for NAS and the
subadvisor is as follows for the period ended October 31, 1998:

<TABLE>
<CAPTION>
TOTAL
AVERAGE DAILY ADVISORY SUBADVISORY ADVISORY NAS SUBADVISOR
NET ASSETS FEE FEE FEES FEES FEES
- ------------------- -------- ----------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
$3,376 $3,939
Up to $250 million 0.06% 0.07% 0.13%
Next $250 million 0.07% 0.06% 0.13%
Next $500 million 0.08% 0.05% 0.13%
$1 billion and more 0.09% 0.04% 0.13%
</TABLE>

NAS has voluntarily agreed to reimburse expenses of the Fund in order to limit
the Fund's operating expenses to no more than 0.35% of the average daily net
assets. During the period ended October 31, 1998, NAS voluntarily reimbursed
expenses in the amount of $16,272.

14 NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT
<PAGE> 136
NATIONWIDE(R) S&P 500 INDEX FUND

LOCAL FUND SHARES

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

OCTOBER 31, 1998
- --------------------------------------------------------------------------------

NAS or an affiliated broker dealer may also receive fees on the Fund for
distribution services pursuant to a Rule 12b-1 Distribution Plan approved by the
Board of Trustees. These fees are based on average daily net assets of the Fund
at an annual rate of 0.07%. During the period ended October 31, 1998, the Fund
paid distribution fees of $3,939.

A subsidiary of NAS, Nationwide Investors Services, Inc. ("NISI"), acts as
Transfer and Dividend Disbursing Agent for the Fund and receives a fee for such
services. This fee is based on average daily net assets of the Fund at an annual
rate of 0.01%. During the period ended October 31, 1998, the Fund paid transfer
agent fees of $563.

Pursuant to the Fund Administration Agreement, NAS also receives fees from the
Fund for administrative services, calculated daily and paid monthly according to
the following schedule:

<TABLE>
<CAPTION>
ADMINISTRATION
AVERAGE DAILY NET ASSETS FEE FEES
------------------------ ---- --------------
<S> <C> <C>
Up to $1 billion...................................... 0.05% $2,814
Next $1 billion....................................... 0.04%
</TABLE>

3. BANK LOANS

The NIF III Trust has unsecured bank lines of credit of $50,000,000. Borrowings
under these arrangements bear interest at the Federal Funds rate plus .50%.
These interest costs are included in custodian fees in the Statements of
Operations. No compensating balances are required. No borrowings were made
during the period.

4. INVESTMENT TRANSACTIONS

Purchases and sales of securities for the Fund (excluding U.S. Government and
short-term securities) for the period ended October 31, 1998, are summarized
below. There were no purchases or sales of U.S. Government Obligations.

<TABLE>
<CAPTION>
SECURITIES
- -------------------------------
PURCHASES SALES
- ----------- --------
<S> <C>
$23,584,877 $620,662
</TABLE>

Realized gains and losses have been computed on the first-in, first-out basis.
Included in net unrealized depreciation at October 31, 1998, based on cost for
federal income tax purposes, are the following components:

<TABLE>
<CAPTION>
GROSS GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION (DEPRECIATION) (DEPRECIATION)
- ------------ -------------- --------------
<S> <C> <C>
$868,212 $(1,590,047) $(721,835)
</TABLE>

NATIONWIDE(R) S&P 500 INDEX FUND ANNUAL REPORT 15
<PAGE> 137
PART B:

STATEMENT OF ADDITIONAL INFORMATION JANUARY 5, 1999 (REVISED SEPTEMBER 1, 1999)

NATIONWIDE MUTUAL FUNDS
NATIONWIDE MONEY MARKET FUND (the "Fund") - Class R shares

This Statement of Additional Information is not a prospectus. It contains
information in addition to and more detailed than that set forth in the
prospectus for the Fund and should be read in conjunction with the prospectus
dated January 5, 1999 as supplemented September 1, 1999 for the Class R shares
of the Fund. The prospectus may be obtained from Nationwide Advisory Services,
Inc. ("NAS"), P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio 43216.

Terms not defined in this Statement of Additional Information have the
meanings assigned to them in the Prospectus.

TABLE OF CONTENTS

General Information and History 1
Investment Objectives and Policies 1
Investment Restrictions 7
Trustees and Officers of the Trust 8
Investment Advisory and Other Services 10
Brokerage Allocation 15
Calculation of Net Asset Value of the Fund 15
Calculating Fund Yield 16
Nonstandard Returns 16
Rankings and Ratings in Financial Publications 17
Additional General Tax Information 17
Major Shareholders 19
Financial Statements 19
Appendix 20

GENERAL INFORMATION AND HISTORY

INVESTMENT OBJECTIVES AND POLICIES

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES

The following information supplements the discussion of the Fund's investment
objectives and policies discussed in the Prospectus. The investment objective of
the Fund is fundamental and may not be changed without shareholder approval. The
investment policies and types of permitted investments described here may be
changed without approval by the shareholders. There is no guarantee that the
Fund's investment objective will be realized.

DEBT OBLIGATIONS. The Fund may invest in 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

<PAGE> 138

factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer, and general market liquidity ("market risk"). Lower-rated
securities are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates.

RATINGS AS INVESTMENT CRITERIA. High-grade debt obligations are
characterized as such based on their ratings by nationally recognized
statistical rating organizations ("NRSROs"). 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 risk of the
securities. These ratings are used by the Fund as initial criteria for the
selection of portfolio securities. Among the factors that will be considered by
Villanova Mutual Fund Capital Trust ("VMF") (the "Adviser") are the long-term
ability of the issuer to pay principal and interest and general economic trends.
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 the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the 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 the sale of such securities, but VMF will consider
such events in determining 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 NRSROs 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.

MONEY MARKET INSTRUMENTS. The Fund may invest in certain types of money market
instruments which may include the following types of instruments:

-- obligations with remaining maturities of 397 days or less issued or
guaranteed as to interest and principal by the U.S. Government, its
agencies, or instrumentalities, or any federally chartered corporation, and
obligations of the Canadian government and their provinces, their agencies
and instrumentalities';

-- repurchase agreements;

-- certificates of deposit, time deposits and bankers' acceptances issued
by domestic banks (including their branches located outside the United
States (Eurodollars) and subsidiaries located in Canada), domestic branches
of foreign banks (Yankees dollars), savings and loan associations and
similar institutions;

-- commercial paper, which are short-term unsecured promissory notes issued
by corporations in order to finance their current operations. Generally the
commercial paper will be rated within the top two rating categories by an
NRSRO, or if not rated, is issued and guaranteed as to payment of principal
and interest by companies which at the date of investment have outstanding
debt issue with a high quality rating;

2
<PAGE> 139

-- adjustable and variable rate instruments including callable notes;

-- short-term (maturing in 397 days or less) corporate obligations
rated within the top two categories by an NRSRO;

-- 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.

ASSET-BACKED SECURITIES - The Fund may invest in asset-backed securities. The
underlying assets of asset-backed securities 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 the asset-backed securities may be supported by
non-governmental credit enhancements which may include letters of credit,
reserve funds, overcollateralization, or guarantees by third parties.

WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Fund may purchase
securities on a "when-issued" or "delayed delivery" basis (i.e., payment or
delivery occurs beyond the normal settlement date at a stated price and yield).
When-issued transactions normally settle within 45 days. The payment obligation
and the interest rate, if applicable, that will be received on when-issued
securities are fixed at the time the Fund enters into the commitment to buy such
securities. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the yields obtained on or prices of
such securities may be higher or lower than the yields or prices available in
the market on the dates when the investments are actually delivered to the
buyers.

3
<PAGE> 140

When the Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, the Fund's 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 the 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 the 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. In addition, because the Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described above, such Fund's liquidity and the ability of VMF to
manage it might be affected in the event its commitments to purchase
"when-issued" securities ever exceeded 25% of the value of its total assets.
Under normal market conditions, however, the Fund's commitment to purchase
"when-issued" or "delayed-delivery" securities will not exceed 25% of the value
of its total assets. 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.

The Fund will engage in "when-issued" or "delayed delivery"
transactions only for the purpose of acquiring portfolio securities consistent
with the Fund's investment objectives and policies and not for investment
leverage.

The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) the Fund must receive from the
borrower at least 100% collateral of the type discussed in the preceding
paragraph; (2) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (3) the
Fund must be able to terminate the loan at any time; (4) the 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) the 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, the Trust's Board of Trustees must be able to terminate the loan
and regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modification. Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon the
Fund's ability to recover the loaned securities or dispose of the collateral for
the loan.

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<PAGE> 141

FOREIGN SECURITIES. The Fund may invest in Canadian and Provincial obligations.
Investors in the Fund should recognize that investing in foreign securities
involves certain special considerations which are not typically associated with
investing in domestic securities. Since investments in foreign companies will
frequently involve currencies of foreign countries, and since the 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. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on United States exchanges, although the 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 the Fund, may be subject to foreign government taxes and higher
custodian fees which could reduce the yield on such securities.

Certain foreign governments levy withholding taxes against interest
income. Although in some countries a portion of these taxes are recoverable, the
non-recovered portion of foreign withholding taxes will reduce the income
received from investments in such countries.

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 issuers.
However, Eurodollar and Yankee bank obligations held in the 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.

RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The Fund may not invest
more than 10% 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. At this time the Fund does not intend to invest more
than 5% of its net assets in illiquid securities. Repurchase agreements subject
to demand are deemed to have a maturity equal to the notice period.

5
<PAGE> 142

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. 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 the
Fund 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. The Fund 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.
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 under the Securities Act 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. It is anticipated that the
market for certain restricted securities such as institutional commercial paper
will expand further as a result of this regulation and use of automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.

Any such restricted securities will be considered to be illiquid for
purposes of the Fund's limitations on investments in illiquid securities unless,
pursuant to procedures adopted by the Board of Trustees of the Trust, VMF 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.

VMF will monitor the liquidity of restricted securities in the Fund. In
reaching liquidity decisions, VMF may consider the following factors: (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).

6
<PAGE> 143

BANK OBLIGATIONS. Bank obligations that may be purchased by the Fund include
certificates of deposit, banker's acceptances and fixed time deposits. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.

Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.

FLOATING AND VARIABLE RATE INSTRUMENTS. The Fund may invest in floating and
variable rate instruments. Certain of the floating or variable rate obligations
that may be purchased by the Fund may carry a demand feature that would permit
the holder to tender them back to the issuer of the instrument or to a third
party at par value prior to maturity. Some of the demand instruments purchased
by the Fund are not 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.

7
<PAGE> 144

Fund's custodian subject to a subcustodian agreement approved by the Fund
between that bank and the Fund's custodian.

INVESTMENT RESTRICTIONS

The following are fundamental investment restrictions of the Fund which cannot
be changed without the authorization of the majority of the outstanding shares
of the Fund for which a change is proposed.

THE 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. The Fund will be deemed
to be in compliance with this restriction so long as it is in
compliance with Rule 2a-7 under the 1940 Act, as such Rule may be
amended from time to time.

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

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

8
<PAGE> 145

Government or its agencies or instrumentalities and obligations issued
by state, county or municipal governments. The following industries are
considered separate industries for purposes of this investment
restriction: electric, natural gas distribution, natural gas pipeline,
combined electric and natural gas, and telephone utilities, captive
borrowing conduit, equipment finance, premium finance, leasing finance,
consumer finance and other finance.

The following are the non-fundamental operating policies of the Fund which may
be changed by the Board of Trustees of the Trust without shareholder approval:

The Fund may not:

- - Sell securities short, 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.

- - 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
10% of its net assets would be invested in securities that are
illiquid.

- - Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or (b) to the extent permitted by the 1940 Act or
any rules or regulations thereunder or pursuant to any exemptions
therefrom.

- - Pledge, mortgage or hypothecate any assets owned by the Fund in excess
of 33 1/3% of the Fund's total assets at the time of such pledging,
mortgaging or hypothecating.

TRUSTEES AND OFFICERS
OF THE TRUST

TRUSTEES AND OFFICERS

The principal occupation of the Trustees and Officers during the last five
years, their ages, their addresses and their affiliations are:

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<PAGE> 146

C. BRENT DEVORE, Trustee, Age 58
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.

THOMAS J. KERR, IV, Trustee*, Age 65
4890 Smoketalk Lane, Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.

DOUGLAS F. KRIDLER, Trustee, Age 43
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.

DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise.

DAVID C. WETMORE, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.

JAMES F. LAIRD, JR., Treasurer, Age 42
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.

CHRISTOPHER A. CRAY, Assistant Treasurer, Age 40
Three Nationwide Plaza, Columbus, Ohio
Mr. Cray is Treasurer of Villanova Mutual Fund Capital Trust, the adviser and
Nationwide Advisory Services, Inc., the Distributor. Prior to that he was
Director - Corporate Accounting of Nationwide Insurance Enterprise.

10
<PAGE> 147

ELIZABETH A. DAVIN, Secretary, Age 34
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.

+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.

Gasper, Bryant, Doody, DeVore, Duncan, Kerr, Kridler, Wetmore and Woodward are
also Trustees, and Laird, Cray and Davin are also officers of Nationwide
Separate Account Trust and Nationwide Asset Allocation Trust, registered
investment companies in the Nationwide fund complex.

All Trustees and Officers of the Trust own less than 1% of its outstanding
shares.

<TABLE>
<CAPTION>
COMPENSATION TABLE
PENSION
RETIREMENT
AGGREGATE BENEFITS ANNUAL TOTAL
COMPENSATION ACCRUED AS BENEFITS COMPENSATION
NAME OF PERSON, FROM PART OF FUND UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $ 10,000 --0-- --0-- $21,000
C. Brent DeVore, Trustee 10,000 --0-- --0-- 12,250
Sue A. Doody, Trustee 10,000 --0-- --0-- 21,000
Robert M Duncan, Trustee 10,000 --0-- --0-- 21,000
Thomas J. Kerr, IV, Trustee 10,000 --0-- --0-- 21,000
Douglas F. Kridler, Trustee 10,000 --0-- --0-- 21,000
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee 10,000 --0-- --0-- 10,000
David C. Wetmore, Trustee 10,000 --0-- --0-- 12,250
</TABLE>

**The Fund Complex includes three trusts comprised of thirty five investment
company funds or series.

INVESTMENT ADVISORY AND OTHER SERVICES

11
<PAGE> 148

Under the terms of the Investment Advisory Agreement dated May 9, 1998
as amended September 1, 1999, Villanova Mutual Fund Capital Trust ("VMF")
manages the investment of the assets of all of the funds in the Trust (the
"Funds"), except the Morley Capital Accumulation Fund, in accordance with the
policies and procedures established by the Trustees.

The Adviser pays the compensation of the Trustees and officers
affiliated with the Adviser. The Adviser also furnishes, at its own expense, all
necessary administrative services, office space, equipment, and clerical
personnel for servicing the investments of the Trust and maintaining its
investment advisory facilities, and executive and supervisory personnel for
managing the investments and effecting the portfolio transactions of the Trust.

The Investment Advisory Agreement also specifically provides that the
Adviser, including its directors, officers, and employees, 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
Trust, 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 the Agreement. The Agreement will continue in effect for an
initial period of two years and thereafter shall continue automatically for
successive annual periods provided such continuance is specifically approved at
least annually by the Trustees, or by vote of a majority of the outstanding
voting securities of the Trust, and, in either case, by a majority of the
Trustees who are not parties to the Agreement or interested persons of any such
party. The Agreement terminates automatically in the event of its "assignment",
as defined under the 1940 Act. It may be terminated as to a Fund without penalty
by vote of a majority of the outstanding voting securities of that Fund, or by
either party, on not less than 60 days written notice. The Agreement further
provides that the Adviser may render similar services to others.

The Trust pays the compensation of the Trustees who are not affiliated
with the Adviser and all expenses (other than those assumed by the Adviser),
including governmental fees, interest charges, taxes, membership dues in the
Investment Company Institute allocable to the Trust; fees under the Trust's Fund
Administration Agreement; fees and expenses of independent certified public
accountants, legal counsel, and any transfer agent, registrar, and dividend
disbursing agent of the Trust; expenses of preparing, printing, and mailing
shareholders' reports, notices, proxy statements, and reports to governmental
offices and commissions; expenses connected with the execution, recording, and
settlement of portfolio security transactions, insurance premiums, fees and
expenses of the custodian for all services to the Trust; and expenses of
calculating the net asset value of shares of the Trust, expenses of
shareholders' meetings, and expenses relating to the issuance, registration, and
qualification of shares of the Trust.

VMF, a Delaware business trust, is a wholly owned subsidiary of
Villanova Capital, Inc., 97% of the common stock of which is held by Nationwide
Financial Services, Inc. (NFS). NFS, a holding company, has two classes of
common stock outstanding with different voting rights enabling Nationwide
Corporation (the holder of all of the outstanding Class B common stock) to
control NFS. Nationwide Corporation, is also a holding company in the Nationwide
Insurance Enterprise.

12
<PAGE> 149

For services provided under the Investment Management Agreement, VMF
receives an annual fee paid monthly based on average daily net assets of each
Fund according to the following schedule:

13
<PAGE> 150

<TABLE>
<CAPTION>
Fund Assets Fee
---- ------ ---
<S> <C> <C>
Nationwide Mid-Cap Growth, Nationwide $0 up to $250 million 0.60%
Growth and Nationwide Fund $250 million up to $1 billion 0.575%
$1 billion up to $2 billion 0.55%
$2 billion up to $5 billion 0.525%
$5 Billion and more 0.50%

Nationwide Bond, Nationwide Tax-Free, $0 up to $250 million 0.50%
Nationwide Intermediate U.S. Government $250 million up to $1 billion 0.475%

Fund Assets Fee
---- ------ ---

Bond, and Nationwide Long-Term U.S. $1 billion up to $2 billion 0.45%
Government Bond Funds $2 billion up to $5 billion 0.425%
$5 Billion and more 0.40%

Nationwide Money Market Fund $0 up to $1 billion 0.40%
$1 billion up to $2 billion 0.38%
$2 billion up to $5 billion 0.36%
$5 Billion and more 0.34%

Nationwide S&P 500 Index Fund All assets 0.13%

Prestige Large Cap Value Up to $100 million 0.75%
$100 million or more 0.70%

Prestige Large Cap Growth Up to $150 million 0.80%
$150 million or more 0.70%

Prestige Balanced Up to $100 million 0.75%
$100 million or more 0.70%

Prestige Small Cap Up to $100 million 0.95%
$100 million or more 0.80%

Prestige International Up to $100 million 0.85%
$100 million or more 0.80%
</TABLE>

During the fiscal years ended October 31, 1998, 1997 and 1996, NAS received the
following fees from the Funds for investment advisory services:

<TABLE>
<CAPTION>
Acquired Years Ended October 31,
Fund Fund* 1998 1997 1996
---- ----- ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ 61,706 $ 63,883 $ 54,053
Growth Growth of NIF 4,894,110 3,750,599 3,212,196
Nationwide Fund Nationwide Fund of NIF 9,977,231 5,938,011 4,425,921
Bond Bond of NIF 647,809 629,068 663,545
Tax-Free Income Tax-Free Income of NIF II and
Municipal Bond of FHIT 1,505,626 1,810,070 1,855,962
</TABLE>

14
<PAGE> 151

<TABLE>
<S> <C> <C> <C> <C>
LT U.S. Govt. Government of FHIT 254,928 343,259 414,415
Intermediate U.S. Govt. U.S. Govt. of NIF II 266,473 256,016 255,149
Money Market** Money Market of NIF and
Cash Reserve of FHIT 3,857,898 3,519,727 2,969,392
</TABLE>

** Net of waivers prior to the May 9, 1998 reorganization of $221,174, $389,150
and $328,076 for the fiscal year ended October 31, 1998, 1997, and 1996,
respectively.

During the period from July 24, 1998 (date of commencement of operations)
through October 31, 1998, NAS waived advisory fees for the S&P 500 Index Fund in
the amount of $7,315. The Large Cap Value, Large Cap Growth, Balanced, Small Cap
and International funds did not begin operations until November 2, 1998.

DISTRIBUTOR

NAS serves as agent for the Fund in the distribution of its Shares
pursuant to an Underwriting Agreement dated as of May 9, 1998 (the "Underwriting
Agreement"). Unless otherwise terminated, the Underwriting Agreement will
continue in effect until May 9, 2000, and year to year thereafter for successive
annual periods, if, as to the Fund, such continuance is approved at least
annually by (i) the Trust's Board of Trustees or by the vote of a majority of
the outstanding shares of the Fund, and (ii) the vote of a majority of the
Trustees of the Trust who are not parties to the Underwriting Agreement or
interested persons (as defined in the 1940 Act) of any party to the Underwriting
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement may be terminated in the event of any
assignment, as defined in the 1940 Act.

DISTRIBUTION PLAN

The Fund has adopted a Distribution Plan (the "Plan") under Rule 12b-1
of the 1940 Act for the Class R shares which permits the Fund to compensate NAS
as the Fund's Distributor, for expenses associated with distribution of shares.
Although actual distribution expenses may be more or less, under the Plan the
Fund shall pay an annual fee in an amount not exceeding a maximum amount of .15%
of the average net assets of Class R shares of the Fund to NAS. NAS has agreed
with the Trust to waive the .15% 12b-1 fee for Class R shares of the Fund until
further notice to shareholders. Distribution expenses paid by NAS may include
the costs of marketing,

15
<PAGE> 152

printing and mailing prospectuses and sales literature to prospective investors,
advertising, and compensation to sales personnel and broker-dealers. There were
no fees paid by the Fund under the Plan during the fiscal year ended October 31,
1998, since the class had not yet been offered to the public.

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 Fund and who have no direct or indirect financial interest in the operation
of the Plan (the "Independent Trustees"). The Plan was approved by the Board of
Trustees for the Class R shares on November 6, 1998. The Plan may be terminated
as to the Fund by vote of a majority of the Independent Trustees, or by vote of
majority of the outstanding Class R shares of the Fund. Any change in the Plan
that would materially increase the distribution cost to the Class R shares
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
may be amended by the vote of the Trustees including a majority of 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 Class R shares of the
Fund. 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 must determine that there is a reasonable likelihood that the
Plan will benefit the Fund and its Class R Shareholders.

The Board of Trustees of the Trust believes the Plan is in the best
interests of the Class R shares of the Fund since it encourages Fund growth and
maintenance of Fund assets. As the Fund grows 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 the Fund's Class R Shares including, but not
limited to, those discussed above.

OTHER SERVICES FOR THE FUND

Under a separate Fund Administration Agreement dated May 9, 1998,
Villanova SA Capital Trust ("VSA") provides for various administrative and
accounting services, including daily valuation of the Fund's shares and
preparation of financial statements, tax returns and regulatory reports. For
these services, the Fund pays VSA an annual fee in the amount of 0.07% on assets
up to $250 million of average daily net assets, 0.05% on the next $750 million
and 0.04% on assets of $1 billion and more.

16
<PAGE> 153

Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
provided fund administration services to the Fund. Effective September 1, 1999,
the fund administration services previously performed for the Fund by NAS were
transferred to VSA, an affiliate of NAS and an indirect subsidiary of Nationwide
Financial Services, Inc. In addition, BISYS Fund Services Ohio, Inc. began
performing 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 the Fund.

Under the terms of an Administrative Services Plan, the Fund may enter
into Servicing Agreements with entities who agree to provide certain
administrative support services in connection with the Class R shares of the
Fund. Such administrative support services include but are not limited to the
following: establishing and maintaining contractholder accounts, processing
purchase and redemption transactions, arranging for bank wires, performing
contract sub-accounting, answering inquiries regarding the contracts and the
Fund, providing periodic statements showing the account balance for beneficial
owners or for plan participants or insurance company separate accounts,
transmitting proxy statements, periodic reports, updated prospectuses and other
communications to shareholders as necessary 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, pursuant to which Nationwide Investment
Services Corporation has agreed to provide certain administrative support
services in connection with Class R shares 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, including NAS, will receive a fee, computed at the annual
rate of up to 0.25% of the average daily net assets of the Class R shares held
by customers of Nationwide Life Insurance Company or such other entity.

Nationwide Investors Services, Inc. ("NISI"), Three Nationwide Plaza,
Columbus, OH 43215, is the Transfer and Dividend Disbursing Agent for the Fund.
NISI, a wholly-owned subsidiary of VSA will receive a fee for transfer agent
services at the annual rate of .01% of the average daily net assets attributable
to Class R shares of the Money Market Fund. Management believes the charges for
the services performed are comparable to fees charged by other companies
performing similar services.

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 Custody Agreement. Fifth Third performs no managerial or policy making
functions for the Funds.

KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the independent
auditors for the Trust.

BROKERAGE ALLOCATION

There is no commitment by VMF to place orders with any particular broker/dealer
or group of broker/dealers. Orders for the purchases and sales of portfolio
securities

17
<PAGE> 154

of the Fund are placed where, in the judgement of VMF, the best prices and
executions can be obtained. None of the Firms with whom orders are placed are
engaged in the sale of shares of the Fund. In allocating orders among brokers
for execution on an agency basis, in addition to price considerations, the
usefulness of the brokers' overall services is also considered. Services
provided by brokerage firms include efficient handling of orders, useful
analyses of corporations, industries and the economy, statistical reports and
other related services for which no charge is made by the broker above the
negotiated brokerage commissions. The Fund and VMF believe that these services
and information, which in many cases would be otherwise unavailable to VMF, are
of significant value to VMF, but it is not possible to place an exact dollar
value thereon. VMF does not believe that the receipt of such services and
information tends to reduce materially VMF's expense.

In the case of securities traded in the over-the-counter market, the Funds will
normally deal with the market makers for such securities unless better prices
can be obtained through brokers.

As of October 31, 1998, the Fund held investments in securities of its regular
broker-dealers as follows:

<TABLE>
<CAPTION>
Shares or
Security Principal Amount Value
-------- ---------------- -----
<S> <C> <C>
Bear Stearns $34,000,000 $33,846,053
Goldman Sachs $22,000,000 $21,962,763
Merrill Lynch $33,501,000 $33,372,446
Salomon Brothers $35,000,000 $34,908,652
J.P. Morgan $30,241,000 $30,126,387
</TABLE>

CALCULATION OF NET ASSET VALUE OF THE
FUND

The Fund's net asset value per share is calculated by adding the value
of all securities and other assets of the Fund, deducting its liabilities, and
dividing by the number of shares outstanding.

The value of portfolio securities is determined on the basis of the
amortized cost method of valuation in accordance with Rule 2a-7 of the 1940 Act.
This involves valuing a security at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument.

The Trustees have adopted procedures whereby the extent of deviation,
if any, of the current net asset value per share calculated using available
market quotations from the Fund's amortized cost price per share, will be
determined at such intervals as the Trustees deem appropriate and are reasonable
in light of current market conditions. In the event such deviation from the
Fund's amortized cost price per share exceeds 1/2 of 1 percent, the Trustees
will consider appropriate action which

18
<PAGE> 155

might include a revaluation of all or an appropriate portion of the Money Market
Fund's assets based upon current market factors.

The Trustees, in supervising the Fund's operations and delegating
special responsibilities involving portfolio management to VMF, have undertaken
as a particular responsibility within their overall duty of care owed to the
Fund's shareholders to assure to the extent reasonably practicable, taking into
account current market conditions affecting the Fund's investment objectives,
that the Fund's net asset value per share will not deviate from $1.

Pursuant to its objective of maintaining a stable net asset value per
share, the Fund will only purchase investments with a remaining maturity of 397
days or less and will maintain a dollar weighted average portfolio maturity of
90 days or less.

CALCULATING FUND YIELD

Any current Fund yield quotations, subject to Rule 482 under the
Securities Act, shall consist of a seven calendar day historical yield for each
class, carried at least to the nearest hundredth of a percent. The yield shall
be calculated by determining the change, excluding realized and unrealized gains
and losses, in the value of a hypothetical pre-existing account in each class
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 declared on both the original share and any such additional
shares. The Fund's effective yield represents an annualization of the current
seven day return with all dividends reinvested. The yields for each class will
differ due to different fees and expenses charged on the class. As of October
30, 1998, the seven day current and effective yields for the Prime Shares of the
Money Market Fund were 4.77% and 4.88%, respectively.

The Fund's yields 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.

Although the Fund determines its yield for each class on the basis of a
seven calendar day period, it may use a different time span on occasion.

NONSTANDARD RETURNS

19
<PAGE> 156

RANKINGS AND RATINGS IN FINANCIAL PUBLICATIONS

The Fund may report its performance relative to other mutual funds or
investments. The performance comparisons are made to: other mutual funds with
similar objectives; other mutual funds with different objectives; or to other
sectors of the economy. Other investments which the Fund may be compared to
include, but are not limited to: precious metals: real estate; stocks and bonds;
closed-end funds; market indexes; fixed-rate, insured CDs, bank money market
deposit accounts and passbook savings; and the Consumer Price Index.

Normally these rankings and ratings are published by independent
tracking services and publications of general interest including, but not
limited to: Lipper Analytical Services, Inc., CDA/Wiesenberger, Morningstar,
Donoghue's, Schabaker Investment Management, Kanon Bloch Carre & Co.; magazines
such as Money, Fortune, Forbes, Kiplinger's Personal Finance Magazine, Smart
Money, Mutual Funds, Worth, Financial World, Consumer Reports, Business Week,
Time, Newsweek, U.S. News and World Report; and other publications such as the
Wall Street Journal, Barron's, Columbus Dispatch, Investor's Business Daily, and
Standard & Poor's Outlook.

ADDITIONAL GENERAL TAX INFORMATION

Each of the fifteen Funds of the Trust is treated as a separate entity
for Federal income tax purposes and intends to qualify as a "regulated
investment company" under the Code, for so long as such qualification is in the
best interest of the Fund's shareholders. In order to qualify as a regulated
investment company, the Fund must, among other things: diversify its investments
within certain prescribed limits; and derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies. In addition, to utilize the tax provisions specially
applicable to regulated investment companies, the Fund must distribute to its
shareholders at least 90% of its investment company taxable income for the year.
In general, the Fund's investment company taxable income will be its taxable
income subject to certain adjustments and excluding the excess of any net
long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year.

20
<PAGE> 157

year were less than the required amount, the Fund would be subject to a
non-deductible excise tax equal to 4% of the deficiency.

Although the Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year the Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to federal tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions would
be taxable to shareholders to the extent of earnings and profits.

It is expected that the Fund will distribute annually to shareholders
all or substantially all of the Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to shareholders for federal income
tax purposes, even if paid in additional shares of the Fund and not in cash.

21
<PAGE> 158

Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Because all of the Fund's
net investment income is expected to be derived from earned interest and short
term capital gains, it is anticipated that no distributions from the Fund will
qualify for the 70% dividends received deduction.

Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities. Since less than 50% in value of
the Fund's total assets at the end of its fiscal year are expected to be
invested in securities of foreign corporations, the Fund will not be entitled
under the Code to pass through to its Shareholders their pro rata share of the
foreign taxes paid by that Fund. These taxes will be taken as a deduction by the
Fund.

Investment by the Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to Shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such portion in
order to maintain its qualification as a regulated investment company. In that
case, the Fund may have to dispose of securities which it might otherwise have
continued to hold in order to generate cash to satisfy these distribution
requirements.

Information set forth in the Prospectuses and this Statement of
Additional Information which relates to Federal taxation is only a summary of
some of the important Federal tax considerations generally affecting purchasers
of shares of the Funds. No attempt has been made to present a detailed
explanation of the Federal income tax treatment of the Fund or its shareholders
and this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of shares of the Fund are urged to consult
their tax advisers with specific reference to their own tax situation. In
addition, the tax discussion in the prospectus and this Statement of Additional
Information is based on tax laws and regulations which are in effect on the date
of the prospectus and this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.

Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.

MAJOR SHAREHOLDERS

As of January 4, 1999, Nationwide Advisory Services, Inc. directly or indirectly
owned, controlled or held power to vote 100% of the Class R shares of the Money

22
<PAGE> 159

Market Fund. As of January 4, 1999, Nationwide Life Insurance Company and its
affiliates directly or indirectly owned, controlled, or held power to vote 49.7%
of the Prime Shares of the Fund.

FINANCIAL STATEMENTS

Since the Money Market Fund did not offer class R shares prior to January 4,
1999, there are no financial results for the class.

The Report of Independent Auditors and Financial Statements of the Funds, which
include the Prime Shares of the Money Market Fund, for the period ended October
31, 1998 are incorporated by reference to the Annual Report. Copies of the
Annual Report are available without charge upon request by writing the Trust or
by calling 1-800-848-0920.

23
<PAGE> 160

APPENDIX A

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.

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-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'.

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.

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:

1. Amortization schedule - the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note.

2. Source of payment - the more the issue depends on the market for its
refinancing, the more likely it is to be considered a note.

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.

24
<PAGE> 161

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 Not Prime do not fall within any of the prime rating
categories.

MOODY'S NOTE RATINGS

MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.

MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.

MIG 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.

25
<PAGE> 162

FITCH/IBCA, INC. 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.

F1+ Exceptionally strong credit quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.

F1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated 'F1+'.

F2 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 'F1+' and 'F1'
ratings.

F3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could
cause these securities to be rated below investment grade.

B Speculative. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.

C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon
a sustained, favorable business and economic environment.

D Default. Issues assigned this rating are in actual or
imminent payment default.

DUFF & PHELPS SHORT-TERM DEBT RATINGS

Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.

Rating Scale Definition
- ------------------------
High Grade
----------

26
<PAGE> 163

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.

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 bas is.

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.

27
<PAGE> 164
PART B:

PRESTIGE ADVISOR SERIES

STATEMENT OF ADDITIONAL INFORMATION NOVEMBER 2, 1999
(REVISED SEPTEMBER 1, 1999)

Prestige Large Cap Value Fund
Prestige Large Cap Growth Fund
Prestige Balanced Fund
Prestige Small Cap Fund
Prestige International Fund

(collectively, the "Funds" and individually, a "Fund")

This Statement of Additional Information is not a prospectus. It contains
information in addition to and more detailed than that set forth in the
Prospectus for the Funds and should be read in conjunction with the Prospectus
dated November 2, 1998. The Prospectus may be obtained by writing Nationwide
Advisory Services, Inc. ("NAS") at Three Nationwide Plaza, P.O. Box 1492,
Columbus, Ohio 43216-1492 or by calling 1-800-848-0920.

Terms not defined in this Statement of Additional Information have the meanings
assigned to them in the Prospectus.

TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
General Information and History B-1
Additional Information on Portfolio Instruments and Investment Policies B-1
Investment Restrictions B-24
Trustees and Officers of the Trust B-25
Investment Advisory and Other Services B-28
Brokerage Allocation B-34
Calculating Yield and Total Return B-36
Nonstandard Returns B-36
Additional Information B-37
Additional General Tax Information B-38
Major Shareholders B-41
Appendix A-1
</TABLE>

<PAGE> 165

GENERAL INFORMATION AND HISTORY

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES

The following information supplements the discussion of the Funds' investment
policies discussed in the Prospectus. The investment objectives of each Fund are
fundamental and may not be changed without shareholder approval. The investment
policies and types of permitted investments described here may be changed
without approval by the shareholders unless otherwise noted. There is no
guarantee that any of the Funds' investment objectives will be realized.

RATINGS AS INVESTMENT CRITERIA. High-grade, investment grade, and below
investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs"). 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 risk of the securities. These ratings are used by the Funds as
initial criteria for the selection of portfolio securities. Among the factors
that will be considered by the Subadvisers are the long-term ability of the
issuer to pay principal and interest and general economic trends. 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
the 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 the sale of such securities, but the Subadvisers will
consider such events in determining whether the Fund they advise should continue
to hold the securities. In addition, to the extent that the ratings change as a
result of changes in such NRSROs or their rating systems, or due to a corporate
reorganization, the Funds will attempt to use comparable ratings as standards
for its investments in accordance with their investment objective and policies.

B-1
<PAGE> 166

MONEY MARKET OBLIGATIONS. Each of the Funds may invest in certain types of
money market obligations, which may include the following types of
instruments:

-- obligations with remaining maturities of 13 months or less issued
or guaranteed as to interest and principal by the U.S. Government,
its agencies, or instrumentalities, or any federally chartered
corporation; securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities that differ in their interest rates, maturities and times
of issuance. Some obligations issued or guaranteed by U.S.
Government agencies and instrumentalities are supported by the full
faith and credit of the U.S. Treasury; others by the right of the
issuer to borrow from the Treasury; others by discretionary authority
of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others only by the credit of the agency or
instrumentality. These securities bear fixed, floating or variable
rates of interest. While the U.S. Government provides financial
support to such U.S. Government-sponsored agencies and
instrumentalities, no assurance can be given that it will always do
so, because it is not required to do so by law;

-- short-term foreign government securities (with respect to the
International Fund) representing securities issued or guaranteed by a
foreign government or its agencies or instrumentalities;

-- repurchase agreements;

-- certificates of deposit, time deposits and bankers' acceptances and
other short-term obligations issued by domestic banks (including their
branches located outside the United States (Eurodollars) and
subsidiaries located in Canada), domestic and foreign branches of
foreign banks (Yankees dollars), savings and loan associations and
similar institutions;

-- commercial paper, which are short-term unsecured promissory notes
issued by corporations in order to finance their current operations.
The commercial paper of U.S. issuers or foreign issuers acquired by
the International Fund will consist only of direct obligations.
Generally the commercial paper will be rated within the top two rating
categories by an NRSRO, or if not rated, will have been issued and
guaranteed as to payment of principal and interest by companies which
at the date of investment have outstanding debt issue with a high
quality rating or will have been determined by its Subadviser to be of
comparable quality to those rated obligations that such Fund may
purchase;

-- adjustable and variable rate instruments;

-- short-term (with remaining maturities of 397 days or less)
corporate obligations rated within the top two categories by an
NRSRO;

-- bank loan participation agreements (except with respect to the
International Fund) representing obligations of corporations and banks
having a high quality short-term

B-2
<PAGE> 167
rating, at the date of investment, and under which a 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.

STRIPPED TREASURY SECURITIES. The Balanced Fund may invest in U.S. Treasury
securities that have been stripped of their unmatured interest coupons (which
typically provide for interest payments semi-annually); interest coupons that
have been stripped from such U.S. Treasury securities; and receipts and
certificates for such stripped debt obligations and stripped coupons
(collectively, "Stripped Treasury Securities"). Stripped Treasury Securities
will include coupons that have been stripped from U.S. Treasury bonds which may
be held through the Federal Reserve Bank's book-entry system called "Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") or through
a program entitled "Coupon Under Book-Entry Safekeeping" ("CUBES"). Stripped
Treasury Securities are sold at a deep discount because the buyer receives only
the right to receive a future fixed payment (representing principal or interest)
on the securities and does not receive any rights to periodic interest payments
on the security.

PARTICIPATION INTERESTS. The International Fund may invest in corporate
obligations denominated in U.S. or foreign currencies that are originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting of
commercial banks, thrift institutions, insurance companies, financial companies
or other financial institutions one or more of which administers the security on
behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities
to third parties called "Participants." The International Fund may invest in
such securities either by participating as a Co-Lender at origination or by
acquiring an interest in the security from a Co-Lender or a Participant
(collectively, "participation interests"). Co-Lenders and Participants
interposed between the International Fund and the corporate borrower (the
"Borrower"), together with Agent Banks, are referred to herein as "Intermediate
Participants." The International Fund may also purchase a participation interest
in a portion of the rights of an Intermediate Participant, which would not
establish any direct relationship between the Trust, on behalf of the
International Fund, and the Borrower. In such cases, the International Fund
would be required to rely on the Intermediate Participant that sold the
participation interest not only for the enforcement of the International Fund's
rights against the Borrower, but also for the receipt and processing of payments
due to the International Fund under the security. Because it may be necessary to
assert through an Intermediate Participant such rights as may exist against the
Borrower, if the Borrower fails to pay principal and interest when due, the
International Fund may be subject to delays, expenses and risks that are greater
than those that would be involved if the International Fund were to enforce its
rights directly against the Borrower. Moreover, under the terms of a
participation interest, the International Fund may be regarded as a creditor of
the Intermediate Participant (rather than of the Borrower), so that the
International Fund also may be subject to the risk that the Intermediate
Participant may become insolvent. Similar risks may arise with respect to the
Agent Bank if, for example, assets held by the Agent Bank for the benefit of the
International Fund were determined by the appropriate regulatory authority or
court to be subject to the claims of the Agent Bank's creditors. In such case,
the International Fund might incur certain costs and delays in realizing payment
in connection with the participation interest or suffer a loss of principal
and/or interest. Further, in the event of the bankruptcy or insolvency of the
Borrower, the obligation of the Borrower to repay the loan may

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be subject to certain defenses that can be asserted by such Borrower as a result
of improper conduct by the Agent Bank or Intermediate Participant.

MORTGAGE- AND ASSET-BACKED SECURITIES. The Balanced Fund and Small Cap Fund may
each purchase mortgage-backed securities and asset-backed securities, including
securities issued by private lenders. Private lenders or government-related
entities may create mortgage loan pools offering mortgage-backed securities
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-backed securities are developed and offered
to investors, a Fund, consistent with its investment objectives and policies,
may consider making investments in such new types of securities. The market for
privately issued mortgage and asset-backed securities is smaller and less liquid
than the market for government sponsored mortgaged-backed securities.

There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related 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-related securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States. Fannie Maes are guaranteed as to timely payment of
the principal and interest by FNMA. Mortgage-related 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. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of 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.

STRIPPED MORTGAGE-BACKED SECURITIES. The Balanced Fund and Small Cap Fund may
each invest in stripped mortgage-backed securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS 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 entities of the foregoing. SMBS are usually structured with two classes
that receive different proportions of the interest and principal distributions
on an underlying pool of mortgage assets. A common type of SMBS will have one
class receiving

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some of the interest and most of the principal from the mortgage assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Fund's yield to
maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rating categories.

Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, certain of these securities may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities.

The market value of such securities generally is more sensitive to changes in
prepayment and interest rates than is the case with traditional mortgage- and
asset-backed securities, and in some cases the market value may be extremely
volatile.

INTEREST ONLY AND PRINCIPAL ONLY SECURITIES -- Stripped mortgage-backed
securities are securities representing interest in a pool of mortgages the cash
flow from which has been separated into interest and principal components. "IOs"
(interest only securities) receive the interest portion of the cash flow while
"POs" (principal only securities) receive the principal portion. Stripped
mortgage-backed securities may be issued by U.S. Government agencies or by
private lenders. As interest rates rise and fall, the value of IOs tends to move
in the same direction as interest rates. The value of POs, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. POs perform best when prepayments on the underlying mortgages rise since
this increases the rate at which the investment is returned and the yield to
maturity on the PO. When payments on mortgages underlying a PO are slow, the
life of the PO is lengthened and the yield to maturity is reduced.

The Balanced Fund may 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 Balanced Fund may fail to recoup fully its initial investment in
these securities even if the securities are rated in the highest rating category
by a 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

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obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped. No more
than 10% of the Balanced Fund's total assets will be invested in IOs and in POs.
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, the Balanced Fund may have difficulty in selling such
securities.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the Funds may
enter into repurchase agreements with certain banks or non-bank dealers. In
connection with the purchase of a repurchase agreement 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 a Fund.
Repurchase agreements may be entered into with respect to securities of the type
in which a Fund may invest or government securities regardless of their
remaining maturities. A Fund will require that additional securities be
deposited with its custodian 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 the securities, 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.

The Balanced Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with its investment restrictions. A
reverse repurchase agreement requires a Fund to sell portfolio securities to a
financial institution, such as a bank or broker-dealer, and agree to repurchase
the securities at a mutually agreed-upon date and price. A Fund intends to enter
into a reverse repurchase agreement only to be able to meet redemptions without
having to sell securities during unfavorable market conditions. When a Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid
securities consistent with its investment restrictions having a value equal to
the repurchase price (including accrued interest). The Fund will continually
monitor the account to ensure that such equivalent value is maintained at all
times. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Fund may decline below the price at which the Fund is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by a Fund under the 1940 Act.

MORTGAGE DOLLAR ROLL TRANSACTIONS. The Balanced Fund may enter into mortgage
dollar roll transactions. Under a mortgage "dollar roll," the Balanced Fund
sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Balanced Fund forgoes principal and interest paid on the mortgage-backed
securities. The Balanced Fund is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. Mortgage dollar

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rolls involve the risk that the market value of the securities the Balanced Fund
is obligated to repurchase under the agreement may decline below the repurchase
price. In the event the buyer of securities under a mortgage dollar roll files
for bankruptcy or becomes insolvent, the Balanced Fund's use of proceeds of the
dollar roll may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Balanced Fund's obligation to
repurchase the mortgage dollar rolls.

WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each of the Funds may
purchase securities on a "when-issued" or "delayed delivery" basis (i.e.,
payment or delivery occurs beyond the normal settlement date at a stated price
and yield). A Fund will do so, however, only for the purpose of acquiring
portfolio securities consistent with its investment objectives and policies and
not for investment leverage. When-issued transactions normally settle within 45
days. The payment obligation and the interest rate, if applicable, that will be
received on when-issued securities are fixed at the time a Fund enters into the
commitment to buy such securities. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
yields obtained on or prices of such securities may be higher or lower than the
yields or prices available in the market on the dates when the investments are
actually delivered to the buyers.

When a Fund agrees to purchase when-issued or delayed-delivery securities, to
the extent required by the SEC, the Fund's 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. If the custodian does so, the 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 the 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. In addition, because the Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described above, the Fund's liquidity and the ability of the Fund's
Subadviser to manage the Fund might be affected if the Fund's commitments to
purchase "when-issued" securities ever exceeded 25% of the value of the Fund's
total assets. Under normal market conditions, however, a Fund's commitment to
purchase "when-issued" or "delayed-delivery" securities will not exceed 25% of
the value of its total assets (this percentage limitation, however, does not
apply to the International Fund; it may purchase "when-issued" or
"delayed-delivery" securities without limit). When a 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 cause the Fund to incur a loss or miss
an opportunity to obtain a price considered to be advantageous.

LENDING PORTFOLIO SECURITIES. Each of the Funds may lend its portfolio
securities to brokers, dealers and other financial institutions, provided that
the Fund receives cash collateral with a value that is at all times equal to at
least 100% of the current market value of the securities the Fund has loaned.
The amount of securities lent by a Fund may not exceed 33 1/3% of the value of
such Fund's total assets. By lending its portfolio securities, a Fund can
increase its income through the investment of the cash collateral. For the
purposes of this policy, a Fund will consider U.S. Government securities or
letters of credit issued by banks whose securities meet

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the standards for investment by the Fund to be the equivalent of cash. From time
to time, a 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 a
Fund lends its portfolio securities: (1) the Fund must receive cash collateral
from the borrower with a value that is at least equal to 100% of the current
market value of the securities lent by the Fund; (2) the borrower must provide
the Fund with additional collateral whenever the market value of the securities
loaned by the Fund becomes greater than the value of the collateral; (3) the
Fund must be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and must receive the benefit of
any increase in the market value of the securities it has loaned; (5) the Fund
may pay only reasonable custodian fees in connection with the loan; and (6)
although any voting rights on the loaned securities are permitted to pass to the
borrower, the Trust'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 Fund's investment in the securities occurs. These conditions may be subject
to future modification. Loan agreements involve certain risks in the event of
default or insolvency of the other party including possible delays or
restrictions upon a Fund's ability to recover the loaned securities or dispose
of the collateral for the loan.

FOREIGN SECURITIES. Each of the Funds may invest, directly or indirectly
through the use of depository receipts, in foreign securities. However, the
Large Cap Value Fund will invest in foreign securities only if the securities
are traded in the U.S. and the issuers comply with U.S. accounting standards

Investing in foreign securities involves certain special considerations which
are not typically associated with investing in domestic securities. Because
investments in foreign companies will frequently involve currencies of foreign
countries, and because a Fund may hold securities and funds in foreign
currencies, a Fund may be affected favorably or unfavorably by changes in
currency rates and 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. Securities of some foreign companies may also be less
liquid and more volatile than securities of comparable domestic companies.
Because non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices that are comparable to
the standards that apply to domestic issuers, there may be less publicly
available information about certain foreign securities than about domestic
securities. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. 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 may also be
subject to

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foreign government taxes, higher custodian fees and dividend collection fees
which could reduce the yield on such securities.

Certain foreign governments levy withholding taxes against dividend and interest
income. Although in some countries a portion of these taxes are recoverable, the
non-recovered portion of foreign withholding taxes will reduce the income
received from investments in such countries. However, these foreign withholding
taxes are not expected to have a significant impact on those Funds for which the
investment objective is to seek long-term capital appreciation and any income
should be considered incidental.

DEPOSITORY RECEIPTS. Each of the Funds may invest in foreign securities
indirectly by purchasing depository receipts, including American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global Depository
Receipts ("GDRs") (the Large Cap Growth Fund will not purchase EDRs but may
purchase ADRs and GDRs) or 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, while EDRs (also referred to as
Continental Depository Receipts ("CDRs") and GDRs, in bearer form, may be
denominated in other currencies and are designed for use in European securities
markets or in other markets outside of the United States. 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 issued outside of the United States, typically 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, EDRs and GDRs are deemed to have the same classification as the underlying
securities they represent. Thus, for example, an ADR, EDR or GDR that represents
ownership of common stock will be treated as common stock.

A Fund may invest in depository receipts through "sponsored" or "unsponsored"
facilities. While ADRs, EDRs and GDRs 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, EDR and GDR 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, EDRs and GDRs 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, EDR and GDR 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, EDRs and GDRs tend to be
less liquid than sponsored ADRs, EDRs and GDRs.

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Sponsored ADR, EDR and GDR 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,
EDR and GDR 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, EDR and GDR 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. The Large Cap Growth Fund, Small Cap Fund,
Balanced Fund and International Fund may each invest in Eurodollar bank
obligations, which 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 issuers. However, Eurodollar and
Yankee bank obligations held in a Fund will undergo the same credit analysis as
domestic issues in which a Fund invests, and will have at least the same
financial strength as the domestic issuers approved for the Fund.

FOREIGN CURRENCY TRANSACTIONS. The Balanced Fund and the International Fund may
engage in foreign currency transactions. Currency exchange rates may fluctuate
significantly over short periods of time. These rates are generally determined
by the forces of supply and demand in the foreign exchange markets and the
relative merits of investments in different countries, actual or perceived
changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention of U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the United States or abroad.

Such a Fund may enter into a foreign currency transaction for a variety of
purposes, including the following: to fix in U.S. Dollars, between trade and
settlement date, the value of a security that the Balanced Fund or the
International Fund has agreed to buy or sell; to hedge the U.S. dollar value of
securities that the Balanced Fund or the International Fund already owns,
particularly if they expects a decrease in the value of the currency in which
the foreign security is denominated; or to gain exposure to the foreign currency
in an attempt to realize gains.

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Foreign currency transactions may involve, for example, the Balanced Fund's or
International Fund's purchase of foreign currencies for U.S. dollars or the
maintenance of short positions in foreign currencies, which would involve the
Balanced Fund's or the International Fund's agreeing to exchange an amount of a
currency it did not currently own for another currency at a future date in
anticipation of a decline in the value of the currency sold relative to the
currency the Balanced Fund or International Fund contracted to receive in the
exchange. The Balanced Fund's and the International Fund's success in these
transactions will depend principally on its Subadviser's ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar.

CONVERTIBLE SECURITIES. Each of the Funds may invest in convertible securities
to the extent described in the Prospectus. Convertible securities are bonds,
debentures, notes, preferred stocks, or other securities that may be converted
into or exchanged for a specified amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. 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. 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, with investment value declining as interest rates increase
and increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value. The conversion value of a convertible security is determined by the
market price of the underlying common stock. 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.

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, the 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.

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WARRANTS. Each of the Funds may acquire warrants. Warrants are securities that
give 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 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.

RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. Each of the Funds may
invest up to 15% of its net assets in illiquid securities. However, the Large
Cap Value Fund does not currently intend to invest in illiquid securities. Such
securities include 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. 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. 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 a Fund 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. A Fund 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 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 under the Securities Act 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. It is anticipated that the
market for certain restricted securities such as institutional commercial paper
will expand further as a result of this regulation and use of automated systems
for the trading, clearance and

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settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.

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 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, a Fund's level of illiquidity may increase.

The Balanced Fund may buy or sell over-the-counter ("OTC") options and, in
connection therewith, segregate assets or cover its obligations with respect to
OTC options written by the Balanced Fund. The Small Cap Fund may buy OTC options
but will not write OTC options. The assets used as cover for OTC options written
by a Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.

The Subadvisers will monitor the liquidity of restricted securities in the Fund
they advise. In reaching liquidity decisions, the Subadvisers may consider the
following factors: (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).

BORROWING. Each of the Funds may borrow money, subject to the Funds' fundamental
investment restriction described below. 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 that allows them
to 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 the Fund's
remaining shareholders.

DERIVATIVE INSTRUMENTS. Each of the Funds may invest in a variety of derivative
instruments, including options, futures contracts (sometimes referred to as
"futures"), options on futures contracts, stock index options and forward
currency contracts to hedge a Fund's portfolio or for risk management (the Funds
may invest in futures contracts and options on futures contracts for hedging
purposes without limit). Derivative instruments are financial instruments whose
value and performance are based on the value and performance of another
security, financial instrument or index. 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").

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SPECIAL RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments
involves special considerations and risks as described below. Risks pertaining
to particular instruments are described in the sections that follow.

(1) Successful use of most of these instruments depends upon a
Subadviser's ability to predict movements of the overall securities
and currency markets, which requires different skills than predicting
changes in the prices of individual securities. There can be no
assurance that any particular strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of
investments being hedged. For example, if the value of an instrument
used in a short hedge (such as writing a call option, buying a put
option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be
fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such
as speculative or other pressures on the markets in which these
instruments are traded. The effectiveness of hedges using instruments
on indices will depend on the degree of correlation between price
movements in the index and price movements in the investments being
hedged, as well as how similar the index is to the portion of the
Fund's assets being hedged in terms of securities composition.

(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable
price movements in the investments being hedged. However, hedging
strategies can also reduce opportunity for gain by offsetting the
positive effect of favorable price movements in the hedged
investments. For example, if a Fund entered into a short hedge
because a 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, the 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. A 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 a
Fund.

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For a discussion of the federal income tax treatment of a Fund's derivative
instruments, see "Additional General Tax Information".

OPTIONS. The Balanced 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 Small Cap Fund may purchase such options and enter into
closing transactions but otherwise will not write such options. The Large Cap
Growth Fund may purchase and write call options and enter into closing
transactions only with respect to future contracts. The International Fund may
purchase call and put option contracts and may write (i.e., sell) covered call
and put option contracts.

A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract. Option contracts may be written with terms which would permit
the holder of the option to purchase or sell the underlying security only upon
the expiration date of the option. The initial purchase or sale of an option
contract is an "opening transaction". In order to close out an option position,
a Fund may enter into a "closing transaction", the sale or purchase, as the case
may be, of an option contract on the same security with the same exercise price
and expiration date as the option contract originally opened. 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 the 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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A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the 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, the 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 a 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.

The ability to establish and close out positions in exchange-listed options
depends on the existence of a liquid market. Only exchange-traded options for
which there appears to be a liquid secondary market will be purchased or
written. 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 OTC options will be entered into 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.

Transactions using OTC options expose a Fund to certain risks. To the extent
required by SEC guidelines, a Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
other options, or futures or (2) cash and liquid obligations with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. A Fund will also set aside cash and/or
appropriate liquid assets in a segregated custodial account if required to do so
by the SEC and CFTC regulations. Assets used as cover or held in a segregated
account cannot be sold while the position in the corresponding option or futures
contract is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of a 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.

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.

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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.
Index options (or options on securities indices) are similar in many respects to
options on securities except that an index option gives the holder the right to
receive, upon exercise, cash instead of securities, if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
Price movements in securities in which a Fund owns or intends to purchase
probably will not correlate perfectly with movements in the level of an index
and, therefore, the Fund bears the risk of a loss on an index option that is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities. A Fund will be
required to segregate assets and/or provide an initial margin to cover index
options that would require it to pay cash upon exercise.

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.

FUTURES CONTRACTS. Each of the Funds may enter into the following types of
futures contracts and may purchase and write (sell) related options: the Large
Cap Growth Fund and Large Cap Value Fund may enter into futures contracts on
indices; the Small Cap Fund may enter into futures contracts on options and
indices; the Balanced Fund and the International Fund are not limited with
respect to the futures contracts that they may enter into and may, for example,
enter into interest rate, index, and currency futures. 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 its Subadviser believes it
is more advantageous to the Fund than purchasing a futures contract.

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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 markets and currencies or to manage duration, such
Fund may be able to manage or increase 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, the 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 or a Futures Commissions Merchant, 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 the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin

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payment, and initial margin requirements might be increased generally in the
future by regulatory action.

Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents a
daily settlement of a Fund's obligations to or from a futures broker. When a
Fund purchases an option on a future, the premium paid plus transaction costs is
all that is at risk. In contrast, when a Fund purchases or sells a futures
contract or writes a call or put option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous. Purchasers and sellers of futures positions and options on
futures can enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Positions in futures and options on futures may be closed only on an exchange or
board of trade on which they were entered into (or through a linked exchange).
Although the Funds intend to enter into futures transactions only on exchanges
or boards of trade where there appears to be an active market, there can be no
assurance that such a market will exist for a particular contract at a
particular time.

Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.

If a Fund were unable to liquidate a futures or option on a futures contract
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses, because it would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.

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.

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FORWARD CURRENCY CONTRACTS. Each of the Funds 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 currency 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, a Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.

SHORT SALES. Each of the Funds may engage in short sales of securities. In a
short sale, 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.

SECURITIES OF OTHER NON-AFFILIATED INVESTMENT COMPANIES. 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. Each of the Funds may also invest in shares
of other non-affiliated investment companies registered under the 1940 Act.
Investing through such vehicles may involve frequent or layered fees or expenses
and may also be subject to limitation under the 1940 Act. Under the 1940 Act, a
Fund may invest up to 10% of its assets in shares of investment companies and up
to 5% of its assets in any one investment company as long as the investment does
not represent more than 3% of the voting stock of the acquired investment
company.

BANK OBLIGATIONS. As stated in the Prospectus, each of the Funds may purchase
bank obligations, including certificates of deposit, banker's acceptances and
fixed time deposits. Bank

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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. A certificate of deposit is a short-term negotiable certificate
issued by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.

FLOATING AND VARIABLE RATE INSTRUMENTS. The Balanced Fund, Small Cap Fund, and
International Fund may invest in floating and variable rate instruments. The
Large Cap Growth Fund may also invest in such securities but will not invest in
inverse floating rate securities. Variable and floating rate securities provide
for a periodic adjustment in the interest rate paid on the obligations. The
terms of such obligations must provide that interest rates are adjusted
periodically based upon an interest rate adjustment index as provided in the
respective obligations. The adjustment intervals may be regular, and range from
daily up to annually, or may be event based, such as based on a change in the
prime rate. Because of the interest rate reset feature, floaters provide
investors with a certain degree of protection against rises in interest rates,
although an investor will participate in any declines in interest rates as well.
Certain of the floating or variable rate obligations may carry a demand feature
that would permit the holder to tender them back to the issuer of the instrument
or to a third party at par value prior to maturity. Some of the demand
instruments are not 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, a 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.

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.

The Balanced Fund may invest in inverse floating rate debt instruments ("inverse
floaters"). The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floating rate security may exhibit greater price volatility
than a fixed rate obligation of similar credit quality.

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ZERO COUPON SECURITIES, PIK BONDS AND DEFERRED PAYMENT SECURITIES - Each of the
Funds except the Large Cap Value Fund and the International Fund may invest in
zero coupon securities. The Balanced Fund may also invest in payment-in-kind
("PIK") bonds and deferred payment securities. Zero coupon securities are debt
securities that pay zero cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the expected return on
their investment will be. Certain zero coupon securities also are sold at
substantial discounts from their maturity value and provide for the commencement
of regular interest payments at a deferred date. 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.

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 the 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, the 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.

ADDITIONAL INFORMATION CONCERNING THE DURATION OF THE BOND PORTION OF THE
BALANCED FUND'S PORTFOLIO. The bond portion of the Balanced Fund's portfolio
will maintain a duration which, on a weighted average basis and under normal
market conditions, will generally be within one year of the average for the U.S.
investment-grade bond universe (currently about five years). There is no limit,
however, as to the maturity of any one security that the Balanced Fund may
purchase.

Duration is a measure of the average life of a fixed-income security.
Incorporating a security's yield, coupon interest payments, final maturity and
call features into one measure, duration 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.

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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.

Under some circumstances, 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 to 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, J.P. Morgan 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 the bond portion of the Balanced Fund will at all times achieve
its targeted portfolio duration.

The change in market value of U.S. Government fixed-income securities is largely
a function of changes in the prevailing level of interest rates. When interest
rates are falling, a portfolio with a shorter duration generally will not
generate as high a level of total return as a portfolio with a longer duration.
When interest rates are flat, 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.

PORTFOLIO TURNOVER. Each of the Funds will attempt to purchase securities with
the intent of holding them for investment but may purchase and sell portfolio
securities whenever Villanova Mutual Fund Capital Trust ("VMF") (the "Adviser")
or the Subadviser to such Fund believes it to be in the best interests of the
Fund. The Funds will not consider portfolio turnover rate a limiting factor in
making investment decisions consistent with their investment objective and
policies.

The annual portfolio turnover rate for each of the Funds (including both the
equity and debt portions of the Balanced Fund's portfolio) is not expected to
exceed 100% of such Fund's portfolio. Higher turnover rates (i.e. 100% or more)
will generally result in higher transaction costs to the Fund, as well as higher
brokerage expenses and higher levels of capital gains. The portfolio turnover
rates of each Fund may vary greatly from year to year and within a particular
year.

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<PAGE> 188

INVESTMENT RESTRICTIONS

Each of the Funds:

May not (except for the International Fund) purchase securities of any
one issuer, other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, if, immediately after
such purchase, more than 5% of the Fund's total assets would be
invested in such issuer or the Fund would hold more than 10% of the
outstanding voting securities of the issuer, except that 25% or less of
the Fund's total assets may be invested without regard to such
limitations. There is no limit to the percentage of assets that may be
invested in U.S. Treasury bills, notes, or other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.

May not borrow money or issue senior securities, except that each Fund
may enter into reverse repurchase agreements and mortgage dollar roll
transactions 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 act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed an underwriter within the
meaning of the Securities Act in connection with the purchase and sale
of portfolio securities.

May not purchase or sell real estate, 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).

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

May not lend any security or make any other loan except that each Fund
may, in accordance with its investment objectives and policies, (i)
lend portfolio securities, (ii) purchase 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.

B-24
<PAGE> 189

May not purchase the securities of any issuer if, as a result, 25% or
more (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 and
obligations issued by state, county or municipal governments. The
following industries are considered separate industries for purposes of
this investment restriction: electric, natural gas distribution,
natural gas pipeline, combined electric and natural gas, and telephone
utilities, captive borrowing conduit, equipment finance, premium
finance, leasing finance, consumer finance and other finance.

The following are the non-fundamental operating policies of the Funds, which may
be changed by the Board of Trustees of the Trust without shareholder approval:

Each of the Funds may not:

Sell securities short, 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.

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 securities if, as a result, more than
15% of its net assets would be invested in securities that are
illiquid.

Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or (b) to the extent permitted by the 1940 Act or
any rules or regulations thereunder or pursuant to any exemptions
therefrom.

Pledge, mortgage or hypothecate any assets owned by the Fund in excess
of 33 1/3% of the Fund's total assets at the time of such pledging,
mortgaging or hypothecating.

TRUSTEES AND OFFICERS OF THE TRUST

The principal occupation of the Trustees and Officers during the last five
years, their ages and their affiliations are:

B-25
<PAGE> 190

JOHN C. BRYANT, Trustee*, Age - 62, 11 Oak St., Suite 306, Cincinnati, Ohio
45219 Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a
partnership of business, government, schools and social service agencies to
address the educational needs of students. He was formerly Professor of
Education, Wilmington College.

C. BRENT DEVORE, Trustee, Age -- 58, Otterbein College, North Walnut and West
College Avenue, Westerville, Ohio 43081. Dr. DeVore is President of Otterbein
College.

SUE A. DOODY, Trustee, Age -- 64, 169 East Beck Street, Columbus, Ohio 43026.
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is an active
member of the Greater Columbus Area Chamber of Commerce Board of Trustees.

ROBERT M. DUNCAN, Trustee*, Age -- 71, 1397 Haddon Road, Columbus, Ohio 43209.
Mr. Duncan is a member of the Ohio Elections Commission. He was formerly
Secretary to the Board of Trustees of The Ohio State University. Prior to that,
he was Vice President and General Counsel of The Ohio State University

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 E. State Street, Columbus, Ohio
43212. Mr. Kridler is President of the Columbus Association of Performing Arts.

DIMON R. MCFERSON, Trustee*+, Age -- 61, One Nationwide Plaza, Columbus, Ohio
43215. Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise.

NANCY C. THOMAS, Trustee+, Age -- 64, 10835 Georgetown Road, NE, Louisville,
Ohio 44641. Ms. Thomas is a farm owner and operator. She is also a Director of
the Nationwide Insurance Companies and associated companies.

DAVID C. WETMORE, Trustee, Age -- 50, 11495 Sunset Hills Rd - Suite #210,
Reston, Virginia 20190. Mr. Wetmore is the Managing Director of The Updata
Capital, a venture capital firm.

JAMES F. LAIRD, JR., Treasurer, Three Nationwide Plaza, Columbus, Ohio 43215.
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.

CHRISTOPHER A. CRAY, Assistant Treasurer, Three Nationwide Plaza, Columbus, Ohio
43215. Mr. Cray is Treasurer of Villanova Mutual Fund Capital Trust, the adviser
and Nationwide Advisory Services, Inc., the Distributor. Prior to that he was
Director - Corporate Accounting of Nationwide Insurance Enterprise.

ELIZABETH A. DAVIN, Secretary, Three Nationwide Plaza, Columbus, Ohio 43215. Ms.
Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal counsel.

B-26
<PAGE> 191

+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.

All Trustees and Officers of the Trust own less than 1% of its outstanding
shares.

The Trustees receive fees and reimbursement for expenses of attending board
meetings from the Trust. VMF reimburses the Trust for fees and expenses paid to
Trustees who are interested persons of the Trust. The Compensation Table below
sets forth the total compensation to be paid to the Trustees of the Trust,
before reimbursement, for the fiscal period ended October 31, 1998. In addition,
the table sets forth the total compensation to be paid to the Trustees from all
funds in the Nationwide Fund Complex, included the predecessor investment
companies to the Trust, for the fiscal year ended October 31, 1998. Trust
officers receive no compensation from the Trust in their capacity as officers.

COMPENSATION TABLE
<TABLE>
<CAPTION>

PENSION
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS PART ANNUAL FROM THE
COMPENSATION FROM OF FUND BENEFITS UPON FUND
NAME OF PERSON, POSITION THE TRUST EXPENSES RETIREMENT COMPLEX
COMPLEX**
<S> <C> <C> <C> <C> <C>

John C. Bryant, Trustee $10,000 --0-- --0-- $21,000
C. Brent DeVore, Trustee $10,000 --0-- --0-- $12,250
Sue A. Doody, Trustee $10,000 --0-- --0-- $21,000
Robert M. Duncan, Trustee $10,000 --0-- --0-- $21,000

Thomas J. Kerr, IV, Trustee
$10,000 --0-- --0-- $21,000
Douglas F. Kridler, Trustee $10,000 --0-- --0-- $21,000
Dimon R. McFerson, Trustee
--0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee $10,000 --0-- --0-- $10,000

David C. Wetmore, Trustee $10,000 --0-- --0-- $12,250
</TABLE>

**The Fund Complex includes Trusts comprised of thirty-five investment company
portfolios.

B-27
<PAGE> 192

INVESTMENT ADVISORY AND OTHER SERVICES

Under the terms of the Investment Advisory Agreement dated May 9, 1998, as
amended as of November 2, 1998 and September 1, 1999, Villanova Mutual Fund
Capital Trust ("VMF"), in accordance with the policies and procedures
established by the Trustees, manages the day-to-day investment of the assets of
each of the funds in the Nationwide Family of Funds except the Morley Capital
Accumulation Fund. With respect to the Funds, VMF provides investment management
evaluation services in initially selecting and monitoring on an ongoing basis
the performance of the Subadvisers, who each manage the investment portfolio of
a particular Fund.

The Investment Advisory Agreement also specifically provides that the Adviser,
including its directors, officers, and employees, 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
Trust, 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 the Agreement. The Agreement will continue in effect for an
initial period of two years and thereafter shall continue automatically for
successive annual periods provided such continuance is specifically approved at
least annually by the Trustees, or by vote of a majority of the outstanding
voting securities of the Trust, and, in either case, by a majority of the
Trustees who are not parties to the Agreement or interested persons of any such
party. The Agreement terminates automatically in the event of its "assignment",
as defined under the 1940 Act. It may be terminated as to a Fund without penalty
by vote of a majority of the outstanding voting securities of that Fund, or by
either party, on not less than 60 days written notice. The Agreement further
provides that the Adviser may render similar services to others.

VMF, a Delaware business trust, is a wholly owned subsidiary of Villanova
Capital, Inc., 97% of the common stock of which is owned by Nationwide Financial
Services, Inc. (NFS). NFS, a holding company, has two classes of common stock
outstanding with different voting rights

B-28
<PAGE> 193

enabling Nationwide Corporation to control NFS. Nationwide Corporation, is also
a holding company in the Nationwide Insurance Enterprise.

Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS") served as
the investment adviser to the Funds. Effective September 1, 1999, the investment
advisory services previously performed for the Funds by NAS were transferred to
VMF, an affiliate of NAS and an indirect subsidiary of Nationwide Financial
Services, Inc. After the transfer, there was no change in the fees charged for
investment advisory services to each of the Funds.

For services provided under the Investment Management Agreement, VMF receives an
annual fee paid monthly based on average daily net assets of each fund in the
Nationwide Family of Funds according to the following schedule:

FUND ASSETS FEE
<S> <C> <C>

Nationwide Mid Cap Growth Fund, $0 up to $250 million 0.60%
Nationwide Growth Fund, and $250 million up to $1 billion 0.575%
Nationwide Fund $1 billion up to $2 billion 0.55%
$2 billion up to $5 billion 0.525%
$5 Billion and more 0.50%

Nationwide Bond Fund, $0 up to $250 million 0.50%
Nationwide Tax-Free Income Fund, $250 million up to $1 billion 0.475%
Nationwide Long-Term U.S. Government $1 billion up to $2 billion 0.45%
Bond Fund, and Nationwide $2 billion up to $5 billion 0.425%
Intermediate U.S. Government Bond Fund $5 Billion and more 0.40%

Nationwide Money Market Fund $0 up to $1 billion 0.40%
$1 billion up to $2 billion 0.38%
$2 billion up to $5 billion 0.36%
$5 billion and more 0.34%

Nationwide S&P 500 Index Fund all assets 0.13%

Large Cap Value up to $100 million 0.75%
$100 million or more 0.70%

Large Cap Growth up to $150 million 0.80%
$150 million or more 0.70%

Balanced up to $100 million 0.75%
$100 million or more 0.70%

Small Cap up to $100 million 0.95%
$100 million or more 0.80%

International up to $200 million 0.85%
$200 million or more 0.80%
</TABLE>

B-29
<PAGE> 194

During the fiscal years ended October 31, 1998, 1997 and 1996, NAS received the
following fees for investment advisory services*:

FISCAL YEARS ENDED OCTOBER 31,

NATIONWIDE FUND
1998 1997 1996
<S> <C> <C> <C>

** Net of waivers of $221,174, $389,150 and $328,076 for 1998, 1997 and 1996,
respectively.

The Subadvisers for the Funds are as follows:

FUND SUBADVISER
<S> <C>

Large Cap Value Brinson Partners, Inc. ("Brinson Partners")

Large Cap Growth Goldman Sachs Asset Management ("GSAM")

Balanced J.P. Morgan Investment Management, Inc. (J.P. Morgan")

Small Cap INVESCO Management & Research, Inc. ("IMR")

International Lazard Asset Management ("Lazard")
</TABLE>

B-30
<PAGE> 195

Brinson Partners, a Delaware corporation and an investment management firm, is
an indirect wholly-owned subsidiary of UBS AG, an internationally diversified
organization headquartered in Zurich, Switzerland, with operations in many
aspects of the financial services industry. GSAM is a separate operating
division of Goldman Sachs & Co., an investment banking firm whose headquarters
are in New York, New York. J.P. Morgan is a directly 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 investment management services and
acts as investment adviser to corporate and institutional clients. IMR is part
of a global investment organization, AMVESCAP plc. AMVESCAP plc is a
publicly-traded holding company that, through its subsidiaries, engages in the
business of investment management on an international basis. Lazard is a New
York-based division of Lazard Freres & Co. LLC, a limited liability company
registered as an investment adviser and providing investment management services
to client discretionary accounts.

Subject to the supervision of the VMF and the Trustees, each of the Subadvisers
manages the assets of the Fund listed above in accordance with the Fund's
investment objectives and policies. Each Subadviser makes investment decisions
for the Fund and in connection with such investment decisions places purchase
and sell orders for securities. For the investment management services they
provide to the Funds, the Subadvisers receive annual fees from VMF, calculated
at an annual rate based on the average daily net assets of the Funds, in the
following amounts:

FUND ASSETS FEE

<S> <C> <C>
Large Cap Value Fund up to $100 million 0.35%
$100 million or more 0.30%

Large Cap Growth Fund up to $150 million 0.40%
$150 million or more 0.30%

Balanced Fund up to $100 million 0.35%
$100 million or more 0.30%

Small Cap Fund up to $100 million 0.55%
$100 million or more 0.40%

International Fund up to $200 million 0.45%
$200 million or more 0.40%
</TABLE>

DISTRIBUTOR

NAS serves as agent for each of the Funds in the distribution of its Shares
pursuant to a Underwriting Agreement dated as of May 9, 1998, as amended as of
November 2, 1998, (the "Underwriting Agreement"). Unless otherwise terminated,
the Underwriting Agreement will continue in effect until May 9, 2000, and year
to year thereafter for successive annual periods, if, as to each Fund, such
continuance is approved at least annually by (i) the Trust's Board of Trustees
or by the vote of a majority of the outstanding shares of that Fund, and (ii)
the vote of

B-31
<PAGE> 196

a majority of the Trustees of the Trust who are not parties to the Underwriting
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Underwriting Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Underwriting Agreement may be terminated in the
event of any assignment, as defined in the 1940 Act.

In its capacity as Distributor, NAS solicits orders for the sale of Shares,
advertises and pays the costs of advertising, office space and the personnel
involved in such activities. NAS receives no compensation under the Underwriting
Agreement with the Trust, but may retain all or a portion of the sales charge
imposed upon sales of Shares of each of the Funds.

DISTRIBUTION PLAN

The Funds have adopted a Distribution Plan (the "Plan") under Rule 12b-1 of the
1940 Act. The Plan permits the Funds to compensate NAS, as the Funds'
Distributor, for expenses associated with the distribution of shares of the
Funds. Although actual distribution expenses may be more or less, under the Plan
the Funds shall pay NAS an annual fee in an amount that will not exceed 0.25% of
the average daily net assets of Class A shares and 1.00% of the average daily
net assets of Class B shares. Distribution expenses paid by NAS may include the
costs of marketing, printing and mailing prospectuses and sales literature to
prospective investors, advertising, and compensation to sales personnel and
broker-dealers.

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 a Fund
and who have no direct or indirect financial interest in the operation of the
Plan (the "Independent Trustees"). The Plan was approved by the Board of
Trustees with respect to the Funds on September 1, 1998. The Plan may be
terminated as to the Funds by vote of a majority of the Independent Trustees, or
by vote of majority of the outstanding Shares of that Fund. Any change in the
Plan that would materially increase the distribution cost to the Funds 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 may 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 Funds.
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,

B-32
<PAGE> 197

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.

OTHER SERVICES FOR ALL THE FUNDS

Under the terms of a Fund Administration Agreement, Villanova SA Capital Trust
("VSA"), a wholly owned subsidiary of Villanova Capital, Inc. also provides for
various administrative and accounting services, including daily valuation of the
Funds' shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, each Fund pays VMF an annual fee based
on each Fund's average daily net assets in the amount of 0.10% up to $250
million in assets, 0.06% on the next $750 million of assets and 0.04% on assets
of $1 billion and more, subject to a minimum of $75,000 per Fund per year.

Under the terms of an Administrative Services Plan, NAS has agreed to provide
certain administrative support services in connection with the Class A and Class
Y shares of 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 bank wires,
performing shareholder sub-accounting, answering inquiries regarding the Funds,
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.

Nationwide Investors Services, Inc. ("NISI"), a wholly owned subsidiary of VSA,
serves as transfer agent and dividend disbursing agent for the Trust. For these
services, NISI receives an annual fee from each of the Funds at the following
rate: $18 per Fund account for Class A and B shares, and 0.01% of each Fund's
average daily net assets for Class Y shares.

Legal Counsel. Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus, OH
43215, serves as the Trust's legal counsel.

B-33
<PAGE> 198

KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the independent
auditors for the Trust.

BROKERAGE ALLOCATION

VMF (or a Subadviser) is responsible for decisions to buy and sell securities
and other investments for the Funds, 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
over-the-counter markets, there is generally no commission, but the price
includes a spread between the dealer's purchase and sale price. This spread is
the dealer's profit. In underwritten offerings, the price includes a disclosed,
fixed commission or discount. Most short term obligations are normally traded on
a "principal" rather than agency basis. This may be done through a dealer (e.g.,
a 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., execution at the most favorable prices and in the most
effective manner possible. VMF or a Subadviser always attempts to achieve best
price - best execution, and both VMF and the Subadvisers have complete freedom
as to the markets in and the broker-dealers through which they seek this result.
Subject to the requirement of seeking best execution, securities may be bought
from or sold to broker-dealers who have furnished statistical, research, and
other information or services to VMF or a Subadviser. In placing orders with
such broker-dealers, VMF or a Subadviser will, where possible, take into account
the comparative usefulness of such information. Such information is useful to
VMF or a Subadviser even though its dollar value may be indeterminable, and its
receipt or availability generally does not reduce VMF' or a Subadviser's normal
research activities or expenses.

Fund portfolio transactions may be effected with broker-dealers who have
assisted investors in the purchase of variable annuity contracts or variable
insurance policies issued by Nationwide Life Insurance Company or Nationwide
Life & Annuity Insurance Company. 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 or a Subadviser.
Although such concurrent authorizations potentially could be either advantageous
or disadvantageous to a Fund, they are effected only when VMF or a Subadviser
believes that to do so is in the interest of the Fund. When such concurrent
authorizations occur, the executions will be allocated in an equitable manner.

B-34
<PAGE> 199

The Trustees periodically review VMF's and each Subadviser's performance of
their responsibilities in connection with the placement of portfolio
transactions on behalf of the Funds and review the commissions paid by the Funds
over representative periods of time to determine if they are reasonable in
relation to the benefits to the Funds.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. 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.

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, pursuant to the requirements of Section 28(e) of the Securities
Exchange Act of 1934, that such commission is reasonable in relation to the
value of the brokerage and/or research services provided. Such research services
may include, among other things, analyses and reports concerning issuers,
industries, securities, economic factors and trends, and portfolio strategy. Any
such research and other information provided by brokers to a Subadviser is
considered to be in addition to and not in lieu of services required to be
performed by the Subadviser under its subadvisory agreement with VMF. The fees
paid to each of the Subadvisers pursuant to its subadvisory agreement with VMF
are not reduced by reason of its receiving any brokerage and research services.
The research services provided by broker-dealers can be useful to a Subadviser
in serving its other clients or clients of the Subadviser's affiliates. Subject
to the policy of the Subadvisers to obtain best execution at the most favorable
prices through responsible broker-dealers, a Subadviser also may consider the
broker-dealer's sale of shares of any fund for which the Subadviser serves as
investment adviser, subadviser or administrator.

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.

Each of the Funds contemplate that, consistent with the policy of obtaining best
results, brokerage transactions may be conducted through "affiliated brokers or
dealers," as defined in the 1940 Act. Under the 1940 Act, commissions paid by a
Fund to an "affiliated broker or 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 the judgment of
VMF or the appropriate Subadviser, 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 or
dealer on comparable transactions for the broker's or dealer's most favored
unaffiliated customers, except for accounts for which the affiliated broker or
dealer acts as a clearing broker for another brokerage firm and customers of an
affiliated

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broker or dealer that, in the opinion of a majority of the independent trustees,
are not comparable to the Fund. The Funds do not deem it practicable or in their
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.

CALCULATING YIELD AND TOTAL RETURN

All performance advertisements shall include average annual (compound) 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 (compound) total return represents 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 minus the maximum
sales charge, for a specified period of time, by the amount of the initial
payment, assuming reinvestment of all dividends and distributions. In
calculating the standard total returns for Class A shares, the current maximum
applicable sales charge is deducted from the initial investment. For Class B
shares, the payment of the applicable CDSC is applied to the investment result
for the period shown. The one, five, and ten-year periods are calculated based
on periods that end on the last day of the calendar quarter preceding the date
on which an advertisement is submitted for publication.

Standardized yield and total return quotations will be compared separately for
Class A, B and Y shares. Because of differences in the fees and/or expenses
borne by Class A, B and Y shares of the Funds, the net yields and total returns
on Class A, B and Y shares can be expected, at any given time, to differ from
class to class for the same period.

NONSTANDARD RETURNS

The Funds may also choose to show nonstandard returns including total return,
and simple average total return. Nonstandard returns may or may not reflect
reinvestment of all dividends and capital gains; in addition, sales charge
assumptions will vary. Sales charge percentages decrease as amounts invested
increase as outlined in the prospectus; therefore, returns increase as sales
charges decrease.

Total return represents the cumulative percentage change in the value of an
investment over time, calculated by subtracting the initial investment from the
redeemable value and dividing the result by the amount of the initial
investment. The simple average total return is calculated by dividing total
return by the number of years in the period, and unlike average annual
(compound) total return, does not reflect compounding.

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The Balanced Fund 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, assuming reinvestment of all dividends and
distributions. This yield formula uses the average number of shares entitled to
receive dividends, provides for semi-annual compounding of interest, and
includes a modified market value method for determining amortization. The yield
will fluctuate, and there is no assurance that the yield quoted on any given
occasion will remain in effect for any period of time.

ADDITIONAL INFORMATION

DESCRIPTION OF SHARES. The Trust presently offers fifteen series of shares of
beneficial interest, without par value. Five of these series are the Funds. The
shares of each of the funds in the Nationwide Family of Funds except the
Nationwide Money Market Fund are offered in three separate classes. A
shareholder has an interest only in the assets of the shares of the Fund that he
or she own. Shares of a particular class are equal in all respects to the other
shares of that class. In the event of the liquidation of a fund in the
Nationwide Family of Funds, shares of the same class will share pro rata in the
distribution of the net assets of such Fund with all other shares of that class.
The Nationwide Money Market Fund offers shares without class designation; its
shareholders have an equal proportionate interest in the shares of that Fund.
All shares are without par value and, when issued and paid for, are fully paid
and nonassessable by the Trust. Shares of the Funds may be exchanged or
converted as described above but will have no other preference, conversion,
exchange or preemptive rights.

VOTING RIGHTS. Shareholders of each class of shares have one vote for each share
held and a proportionate fractional vote for any fractional share held. An
annual or special meeting of shareholders to conduct necessary business is not
required by the Declaration of Trust, the 1940 Act or other authority except,
under certain circumstances, to amend the Declaration of Trust, the Investment
Advisory Agreement, fundamental investment objectives, investment policies,
investment restrictions, to elect and remove Trustees, to reorganize the Trust
or any series or class thereof and to act upon certain other business matters.
In regard to termination, sale of assets, the change of investment objectives,
policies and restrictions or the approval of an Investment Advisory Agreement,
the right to vote is limited to the holders of shares of the particular fund
affected by the proposal. In addition, holders of Class A shares or Class B
shares will vote as a class and not with holders of any other class with respect
to the approval of the Distribution Plan.

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ADDITIONAL GENERAL TAX INFORMATION

Each of the Funds is treated as a separate entity for Federal income tax
purposes and intends to qualify as a "regulated investment company" under the
Code, for so long as such qualification is in the best interest of that Fund's
shareholders. In order to qualify as a regulated investment company, a Fund
must, among other things: diversify its investments within certain prescribed
limits; derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income derived with
respect to its business of investing in such stock, securities, or currencies.
In addition, to utilize the tax provisions specially applicable to regulated
investment companies, a Fund must distribute to its shareholders at least 90% of
its investment company taxable income for the year. In general, the Fund's
investment company taxable income will be its taxable income subject to certain
adjustments and excluding the excess of any net mid-term or net long-term
capital gain for the taxable year over the net short-term capital loss, if any,
for such year.

A non-deductible 4% excise tax is imposed on regulated investment companies that
do not distribute in each calendar year (regardless of whether they otherwise
have a non-calendar taxable year) an amount equal to 98% of their ordinary
income for the calendar year plus 98% of their capital gain net income for the
one-year period ending on October 31 of such calendar year. The balance of such
income must be distributed during the next calendar year. If distributions
during a calendar year were less than the required amount, the Fund would be
subject to a non-deductible excise tax equal to 4% of the deficiency.

Although each Fund expects to qualify as a "regulated investment company" and to
be relieved of all or substantially all federal income taxes, depending upon the
extent of its activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located, or in
which it is otherwise deemed to be conducting business, a Fund may be subject to
the tax laws of such states or localities. In addition, if for any taxable year
a Fund does not qualify for the special tax treatment afforded regulated
investment companies, all of its taxable income will be subject to federal tax
at regular corporate rates (without any deduction for distributions to its
shareholders). In such event, dividend distributions would be taxable to
shareholders to the extent of earnings and profits, and would be eligible for
the dividends received deduction for corporations.

It is expected that each Fund will distribute annually to shareholders all or
substantially all of that Fund's net ordinary income and net realized capital
gains and that such distributed net ordinary income and distributed net realized
capital gains will be taxable income to shareholders for federal income tax
purposes, even if paid in additional shares of that Fund and not in cash.

Distribution by a Fund of the excess of net long-term capital gain over net
short-term capital loss, if any, is taxable to shareholders as long-term capital
gain, respectively, in the year in which it is received, regardless of how long
the shareholder has held the shares. Such distributions are not eligible for the
dividends-received deduction.

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Federal taxable income of individuals is subject to graduated tax rates of 15%,
28%, 31%, 36% and 39.6%. Further, the effective marginal tax rate may be in
excess of 39.6%, because adjustments reduce or eliminate the benefit of the
personal exemption and itemized deductions for individuals with gross income in
excess of certain threshold amounts.

Long-term capital gains of individuals are subject to a maximum tax rate of 20%
(10% for individuals in the 15% ordinary income tax bracket). Capital losses may
be used to offset capital gains. In addition, individuals may deduct up to
$3,000 of net capital loss each year to offset ordinary income. Excess net
capital loss may be carried forward and deducted in future years. The holding
period for long-term capital gains is more than one year.

Federal taxable income of corporations in excess of $75,000 up to $10 million is
subject to a 34% tax rate; however, because the benefit of lower tax rates on a
corporation's taxable income of less than $75,000 is phased out for corporations
with income in excess of $100,000 but lower than $335,000, a maximum marginal
tax rate of 39% may result. Federal taxable income of corporations in excess of
$10 million is subject to a tax rate of 35%. Further, a corporation's federal
taxable income in excess of $15 million is subject to an additional tax equal to
3% of taxable income over $15 million, but not more than $100,000.

Capital gains of corporations are subject to tax at the same rates applicable to
ordinary income. Capital losses may be used only to offset capital gains and
excess net capital loss may be carried back three years and forward five years.

Foreign taxes may be imposed on a Fund by foreign countries with respect to its
income from foreign securities. Tax conventions between certain countries and
the United States may reduce or eliminate such taxes. It is impossible to
determine the effective rate of foreign tax in advance since the amount of each
Fund's assets to be invested in various countries is not known.

If less than 50% in value of any Fund's total assets at the end of its fiscal
year are invested in stocks or securities of foreign corporations, such Fund
will not be entitled under the Code to pass through to its Shareholders their
pro rata share of the foreign taxes paid by that Fund. These taxes will be taken
as a deduction by the Fund. Under Section 1256 of the Code, gain or loss
realized by a Fund from certain financial futures and options transactions will
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Gain or loss will arise upon exercise or lapse of such futures and
options as well as from closing transactions. In addition, any such futures and
options remaining unexercised at the end of a Fund's taxable year will be
treated as sold for their then fair market value, resulting in additional gain
or loss to such Fund characterized in the manner described above.

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If more than 50% of the value of a Fund's total assets at the close of its
taxable year consists of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to its shareholders the amount of foreign
income taxes paid by the Fund. Pursuant to such election, shareholders would be
required (i) to include in gross income, even though not actually received,
their respective pro rata share of the foreign taxes paid by the Fund, (ii) to
treat their income from the Fund as being from foreign sources to the extent
that the Fund's income is from foreign sources, and (iii) to either deduct their
pro rata share of foreign taxes in computing their taxable income or use it as a
foreign tax credit against federal income (but not both). No deduction for
foreign taxes could be claimed by a shareholder who does not itemize deductions.

It is anticipated that the International Fund will be operated so as to meet the
requirements of the Code to "pass through" to its shareholders credits for
foreign taxes paid, although there can be no assurance that these requirements
will be met. Each shareholder will be notified within 45 days after the close of
the International Fund's taxable year whether the foreign taxes paid by the
International Fund will "pass through" for that year and, if so, the amount of
each shareholder's pro rata share of (i) the foreign taxes paid, and (ii) the
International Fund's gross income from foreign sources. Of course, shareholders
who are not liable for federal income taxes, such as retirement plans qualified
under Section 401 of the Code, will not be affected by any such "pass through"
of foreign tax credits.

If a Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the operation of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. In addition, gain realized from the
sale, other disposition, or marking-to-market of PFIC securities may be treated
as ordinary income under Section 1291 or Section 1296 of the Code.

Offsetting positions held by a Fund involving certain futures contracts or
options transactions may be considered, for tax purposes, to constitute
"straddles." Straddles are defined to include "offsetting positions" in actively
traded personal property. The tax treatment of straddles is governed by Sections
1092 and 1258 of the Code, which, in certain circumstances, overrides or
modifies the provisions of Section 1256. As such, all or a portion of any short
or long-term capital gain from certain straddle and/or conversion transactions
may be recharacterized as ordinary income.

If a Fund were treated as entering into straddles by reason of its engaging in
futures or options transactions, such straddles would be characterized as "mixed
straddles" if the futures or options comprising a part of such straddles were
governed by Section 1256 of the Code. A Fund may make one or more elections with
respect to mixed straddles. If no election is made, to the extent the straddle
rules apply to positions established by a Fund, losses realized by such Fund
will be deferred to the extent of unrealized gain in any offsetting positions.
Moreover, as a result of the straddle and conversion transaction rules,
short-term capital losses on straddle positions may be recharacterized as
long-term capital losses and long-term capital gains may be recharacterized as
short-term capital gain or ordinary income.

Investment by a Fund in securities issued at a discount or providing for
deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the

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amount, timing and character of distributions to Shareholders. For example, a
Fund could be required to take into account annually a portion of the discount
(or deemed discount) at which such securities were issued and to distribute such
portion in order to maintain its qualification as a regulated investment
company. In that case, that Fund may have to dispose of securities which it
might otherwise have continued to hold in order to generate cash to satisfy
these distribution requirements.

Each Fund may be required by federal law to withhold and remit to the U.S.
Treasury 31% of taxable dividends, if any, and capital gain distributions to any
Shareholder, and the proceeds of redemption or the values of any exchanges of
Shares of the Fund, if such Shareholder (1) fails to furnish the Fund with a
correct taxpayer identification number, (2) under-reports dividend or interest
income, or (3) fails to certify to the Fund that he or she is not subject to
such withholding. An individual's taxpayer identification number is his or her
Social Security number.

Information set forth in the Prospectus and this Statement of Additional
Information which relates to Federal taxation is only a summary of some of the
important Federal tax considerations generally affecting purchasers of shares of
the Funds. No attempt has been made to present a detailed explanation of the
Federal income tax treatment of the Funds or their shareholders and this
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of shares of a Fund are urged to consult their
tax advisers with specific reference to their own tax situation. In addition,
the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax laws and regulations which are in effect on the date
of the prospectuses and this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.

Information as to the federal income tax status of all distributions will be
mailed annually to each shareholder.

MAJOR SHAREHOLDERS

As of October 31, 1998, there were no outstanding shares of the Funds.
Immediately prior to the public offering of shares of the Funds, NAS owned all
of the issued and outstanding shares of each Fund. It is anticipated that upon
the public offering of shares of the Funds, NAS' holdings will be reduced below
5% of the outstanding shares of each Fund.

As of October 31, 1998, the Trustees and Officers of the Trust as a group owned
beneficially less than 1% of the shares of the Trust.

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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.

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MOODY'S LONG-TERM DEBT RATINGS

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

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

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

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

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

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STATE AND MUNICIPAL NOTES

Excerpts from Moody's Investors Service, Inc., description of state and
municipal note ratings:

MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.

FITCH INVESTORS SERVICE, INC. BOND RATINGS

Fitch 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.

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.

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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.

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 probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.

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CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.

CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C Bonds are in imminent default in payment of interest or principal.

DDD Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative,

DD and should be valued on the basis of their ultimate recovery value in
liquidation or reorganization of &D 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.

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

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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 considered
sufficient BBB for prudent investment. Considerable
variability in risk during BBB- economic cycles.

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

B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or
company fortunes. Potential exists for
frequent Changes in the rating within this
category or into a higher or lower rating
grade.

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

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

DP Preferred stock with dividend arrearages.

SHORT-TERM RATINGS

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.

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:

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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:

1. Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.

2. Source of payment - the more the issue depends on the market for
its refinancing, the more likely it is to be considered a note.

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+)
designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.

SP-3 Speculative capacity to pay principal and interest.

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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.

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.

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SG This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.

FITCH'S SHORT-TERM RATINGS

Fitch's 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.

F-S Weak credit quality. 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.

D Default. Issues assigned this rating are in actual or imminent
payment default.

LOC The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.

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.

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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 Very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection
factors. Risk factors are minor.

D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.

GOOD GRADE
----------

D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.

SATISFACTORY GRADE
------------------

D-3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment
is expected.

NON-INVESTMENT GRADE
--------------------

D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.

DEFAULT
-------

D-5 Issuer failed to meet scheduled principal and/or
interest payments.

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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.

IBCA SHORT-TERM RATINGS

IBCA short-term ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
short-term ratings relate to debt which has a maturity of less than one year.

IBCA issues ratings and reports on the largest U.S. and international bank
holding companies, as well as major investment banks. IBCA's short-term rating
system utilizes a dual system--Individual Ratings and Legal Ratings. The
Individual Rating addresses 1) the current strength of consolidated banking
companies and their principal bank subsidiaries. A consolidated bank holding
company/bank with an "A" rating has a strong balance sheet, and a favorable
credit profile without significant problems. A "B" rating indicates sound credit
profile without significant problems. Performance is generally in line with or
better than that of its peers. The legal rating addresses the question of
whether an institution would receive support if it ran into difficulties. Issues
rated "A-1" are obligations supported by a very strong capacity for timely
repayment. Issues rated "A-2" have a very strong capacity for timely repayment
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.

A1+ Obligations supported by the highest capacity for
timely repayment and possess a particularly strong
credit feature.

A1 Obligations supported by the highest capacity
for timely repayment.

A2 Obligations supported by a good capacity for
timely repayment.

A3 Obligations supported by a satisfactory
capacity for timely repayment.

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B. Obligations for which there is an uncertainty
as to the capacity to ensure timely repayment.

C Obligations for which there is a high risk of
default or which are currently in default.

D Obligations which are currently in default.

BOND RATINGS

Bonds rated AA or AAA by D&P are deemed to be high quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.

Bonds rated AA or AAA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong.

Moody's three highest bond ratings are: Aaa - judged to be the best quality -
carry the smallest degree of investment risk; Aa - judged to be high quality by
all standards; A possess favorable attributes and are considered "upper medium"
grade obligations.

S&P's three highest bond ratings are: AAA - highest grade obligations - possess
the ultimate degree of protection and indicates an extremely strong capacity to
pay principal and interest; AA - also qualify as high grade obligations, and in
the majority of instances differ only in small degrees from issues rated AAA; A
- - strong ability to pay interest and repay principal although more susceptible
to change in circumstances.

Bonds rated AA or AAA by IBCA indicates a very strong capacity for timely
repayment of debt. Margins of protection may not be as large as for AAA issues.

Bonds rated AA or AAA by Thomson indicates ability to repay principal and
interest on a timely basis. Bonds rated AA may have limited incremental risk
versus AAA issues.

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