CAPSTONE GROWTH FUND INC, N14AE24, 1995-04-14

CAPSTONE GROWTH FUND INC
N14AE24, 1995-04-14

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FILE NO. ____________

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-14

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /

Pre-Effective Amendment No. _____ / /

Post-Effective Amendment No. _______ / /

Capstone Growth Fund, Inc.
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(Exact Name of Registrant as Specified in Charter)

5847 San Felipe, Suite 4100, Houston, Texas 77057
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(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (713) 260-9000

EDWARD L. JAROSKI
CAPSTONE ASSET MANAGEMENT COMPANY
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
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(Name and Address of Agent for Service)

Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.

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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

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No filing fee is required because an indefinite number of shares have
previously been regisered pursuant to Rule 24f-2 under the Invesment Company
Act of 1940. Pursuant to Rule 429, this Registration Statement relates to
shares previously registered on Form N-1A (File No. 2-83397).

It is proposed that this filing shall become effective on May 12, 1995 pursuant
to Rule 488.
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CAPSTONE GROWTH FUND, INC.

CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(A)

ITEMS REQUIRED BY FORM N-14

PART A

<TABLE>
<CAPTION>
Item
Number Item Caption Caption in Prospectus
- ------ ------------ ---------------------
<S> <C> <C>
1. Beginning of Registration Cover Page of Registration
Statement and Outside Statement; Prospectus Cover Page
Front Cover Page of Prospectus

2. Beginning and Outside Back Table of Contents
Cover Page of Prospectus

3. Synopsis Information and Fees and Expenses; Synopsis; Risks of
Risk Factors Investing in the Funds; Comparison of Investment Objectives and
Policies

4. Information About the Transaction Synopsis; The Proposed Transaction

5. Information About the Registrant Prospectus Cover Page; Fees and Expenses; Synopsis; Risks of
Investing in the Funds; Organization and History of the Funds;
Comparison of Investment Objectives and Policies; Comparative
Information on Stockholders' Rights; Other Business; Voting
Information

6. Information About the Company Prospectus Cover Page; Fees and
Being Acquired Expenses; Synopsis; Risks of Investing in the Funds; Organization
and History of the Funds; Comparison of Investment Objectives and
Policies; Comparative Information on Stockholders' Rights; Other
Business; Voting Information

7. Voting Information Prospectus Cover Page; Notice of Special Meeting of Stockholders;
Synopsis; Voting Information
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
8. Interest of Certain Persons Voting Information; Financial Statements
and Experts; Legal Matters

9. Additional Information Required Inapplicable
for Reoffering by Persons Deemed
to be Underwriters
</TABLE>

PART B

<TABLE>
<CAPTION>
Item
Number Item Caption Caption in Prospectus
- ------ ------------ ---------------------
<S> <C> <C>
10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. Additional Information About Additional Information About Growth
the Registrant

13. Additional Information About Additional Information About Balanced
the Company Being Acquired

14. Financial Statements Financial Statements
</TABLE>

PART C

<TABLE>
<CAPTION>
Item
Number Item Caption Caption in Prospectus
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<S> <C> <C>
15. Indemnification Indemnification

16. Exhibits Exhibits

17. Undertakings Undertakings
</TABLE>
<PAGE> 4
CAPSTONE BALANCED FUND 5847 San Felipe, Suite 4100
a Series of Capstone Series, Inc. Houston, Texas 77057
1-800-262-6631

NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
MAY 30, 1995

A Special Meeting of Stockholders ("Meeting") of Capstone Balanced Fund
("Balanced"), the sole series of Capstone Series, Inc. ("CSI"), will be held
at 5847 San Felipe, Suite 4100, Houston, Texas on May 30, 1995, 1995 at 2:00
P.M., Houston time.

The purpose of the Meeting is to consider the following proposals:

Proposal 1 The approval or disapproval of Agreement and Plan of
Reorganization providing for (a) the transfer of all of the
assets of Balanced to Capstone Growth Fund, Inc. ("Growth") in
exchange for shares of Growth ("Shares") and the assumption by
Growth of certain identified liabilities of Balanced; (b) the
distribution of the Shares to stockholders of Balanced in
complete liquidation of Balanced as a separate series of CSI;
and (c) the termination of Balanced as a separate series of
CSI under Maryland law. Such approval will be deemed also to
approve a waiver, for purposes of the transaction described in
such Agreement, of Balanced's fundamental investment
restriction limiting, with respect to 75% of its assets,
investments in securities of a single other issuer to 5%.

Proposal 2 The transaction of such other business as may properly be
brought before the meeting.

Stockholders of record as of the close of business on March 28, 1995 are
entitled to notice of, and to vote at, this meeting or any adjournment thereof.

STOCKHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY THE BOARD OF
DIRECTORS OF BALANCED. THIS IS IMPORTANT TO ENSURE A QUORUM AT THE MEETING.
PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY (1) SUBMITTING
TO BALANCED (a) A WRITTEN NOTICE OF REVOCATION OR (b) A SUBSEQENTLY EXECUTED
PROXY OR (2) BY ATTENDING THE MEETING AND VOTING IN PERSON.

Iris R. Clay
[date] Secretary
<PAGE> 5
PROXY STATEMENT/PROSPECTUS

DATED___________, 1995

RELATING TO THE ASSETS OF

CAPSTONE BALANCE FUND
(A SERIES OF CAPSTONE SERIES, INC.)
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631

TO AND IN EXCHANGE FOR SHARES OF

CAPSTONE GROWTH FUND, INC.
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631

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PROXY STATEMENT/PROSPECTUS
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This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Capstone Series, Inc.
("CSI") on behalf of its sole series, Capstone Balanced Fund ("Balanced") in
connection with the Special Meeting of Stockholders ("Meeting") to be held at
2:00 P.M. CST, Houston time on May 30, 1995 at 5847 San Felipe, Suite 4100,
Houston, Texas. At the Meeting, stockholders will be asked to consider and
approve a proposed transaction ("Transaction") in which all the assets of
Balanced would be transferred to Capstone Growth Fund, Inc. ("Growth") in
exchange for shares of Growth ("Shares") and the assumption by Growth of
certain identified liabilities of Balanced. (Balanced and Growth are
collectively referred to herein as "Funds.") The Shares would then be
distributed to the stockholders of Balanced in complete liquidation of Balanced
as a separate series of CSI, and Balanced would be terminated under Maryland
law as a separate series of CSI and its status as a series of CSI would be
discontinued with the Securities and Exchange Commission. As a result of the
Transaction, stockholders of Balanced would become stockholders of Growth. The
Shares received by each stockholder of Balanced in connection with the
Transaction would be equal in value to the value of his or her shares of
Balanced immediately prior to the Transaction.

Growth is a registered, diversified open-end investment company organized
as a Maryland corporation. Growth's investment objective is to seek long-term
capital appreciation. Unlike Balanced, Growth does not seek, as part of its
investment objective, to produce income. See

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"Comparison of Investment Objectives, Policies, Risks and Restrictions," below
for more information.

This Proxy Statement/Prospectus sets forth concisely the information that a
stockholder of Balanced should know before voting on the Transaction and should
be retained for future reference. Certain documents listed below, which have
been filed with the Securities and Exchange Commission("SEC"), are incorporated
by reference into this Proxy Statment/Prospectus.

1. A Statement of Additional Information dated _______________
___________________, 1995, containing additional information
about the Transaction and the parties thereto has been filed
with the Securities and Exchange Commission. A copy of that
Statement of Additional Information is available upon request
and without charge by writing to Growth at the address listed
above or by calling 1-800-262-6631.

2. A more detailed discussion of the investment objectives,
policies, restrictions and risks of investing in Balanced is
contained in its prospectus and statement of additional
information, both dated January 13, 1995 (available by calling
1-800-262-6631).

3. The Growth prospectus (a copy of which is attached hereto as
Exhibit A) and statement of additional information, both dated
January 17, 1995, contain more detailed information about
Growth.

This Proxy Statement/Prospectus constitutes the proxy statement of Balanced
for the Meeting and the prospectus of Growth for the Shares that have been
registered with the Securities and Exchange Commission and are to be issued in
connection with the Transaction. This Proxy Statement/Prospectus is expected
to be sent to stockholders on or about [date] , 1995.

THE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

2
<PAGE> 7
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Current Investment Objectives and Policies of the Funds . . . . . . . . . . . . . . . . 6
Dividend Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Adviser and Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distribution, Purchase, Exchange and Redemption Procedures . . . . . . . . . . . . . . . 7
Risks of Investing in the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Organization and History of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Proposed Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Reasons for the Proposed Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Terms of the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Description of Growth Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Share Ownership of Balanced and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Comparison of Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . 14
Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Primary Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Management's Discussion of Factors Affecting Growth's Performance
During its Most Recent Fiscal Year and Looking Forward . . . . . . . . . . . . . . . . . 15
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Industry Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Diversification/Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Borrowing/Pledging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Investments in Other Investment Companies . . . . . . . . . . . . . . . . . . . . . . 18
Oil, Gas, Mineral Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Comparative Information on Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . . . . . 18
Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Voting Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Financial Statements and Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Submission of Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>

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<PAGE> 8

FEES AND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES - BALANCED AND GROWTH

Maximum Sales Load Imposed on Purchases 4.75% on initial investment,
(as a percentage of offering price) zero on reinvested dividends

Exchange Fee 0%

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES Pro Forma
(as a percentage of average net assets) After
Balanced Growth Transaction(1)
-------- ------ -----------
<S> <C> <C> <C>
Management and Administration Fees 0.75% 0.68% 0.69%
12b-1 Fees* 0.09% 0.35% 0.35%
Other Expenses 1.39% 0.26% 0.27%
Total Fund Operating Expenses 2.23% 1.29% 1.31%
</TABLE>

EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced $69 $114 $161 $292

Growth $60 $ 86 $115 $196

Pro Forma after Transaction $60 $ 87 $116 $198
</TABLE>

_______________________
* Under rules of the national Association of Securities Dealers, Inc.
(the "NASD"), a 12b-1 fee may be treated as a sales charge for certain
purposes under those rules. Because the 12b-1 fee is an annual fee
charged against the assets of a Fund, long-term stockholders may be
indirectly pay more in total sales charges than the economic
equivalent of the maximum front-end sales charge permitted by rules of
the NASD (see "Distributor").

(1) Source: March 31, 1995 Pro Forma Financials (Unaudited)

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The purpose of the foregoing table is to assist investors in
understanding the various costs and expenses borne, directly or indirectly, by
investors in the Funds before and afater the proposed Transaction. The
information disclosed in the table under the heading "Shareholder Transaction
Expenses" is based on the maximum sales load now in effect for each of the
Funds. See "Purchasing Shares" and "Redemption and Repurchase of Shares" in
each Fund's prospectus for more complete descriptions of those expenses,
including a description of available reductions in the sales charge. The
information under the heading "Annual Fund Operating Expenses" is based on
expenses actually incurred by Balanced and Growth during their most recent
fiscal years ended September 30, 1994 and October 31, 1994, respectively. The
Pro Forma figures, which are unaudited, represent estimated annual operating
expenses of Growth for the fiscal year ending October 31, 1995 and assume that
the Transaction contemplated herein is approved by stockholders.

A separate charge by the Adviser for accounting, pricing and
bookkeeping services is included in "Other Expenses." The example which
immediately follows the table is based on assets of Balanced and Growth as of
September 30, 1994 and October 31, 1994, respectively. The example assumes (1)
the reinvestment of all dividends and distributions and (2) that the percentage
of Total Fund Operating Expenses remains constant at the level shown in the
table above. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown in
the example or in the table.

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SYNOPSIS
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The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus and is qualified by reference to the more
complete information contained herein and in the attached Exhibits.
Stockholders should read this entire Proxy Statement/Prospectus carefully.

THE TRANSACTION

BACKGROUND. On March 22, 1995, the Boards of Directors of Growth and
of CSI, on behalf of Balanced, including in each case the Directors who are not
"interested persons" of Growth or CSI and Balanced, respectively, within the
meaning of Section 2(a)(19) of the Investment Company Act of 1940 ("1940 Act")
("Independent Directors"), unanimously approved an Agreement and Plan of
Reorganization ("Agreement") between CSI, on behalf of Balanced, and Growth.

The Agreement provides for (a) the transfer of all the assets of
Balanced to Growth in exchange solely for shares of Growth (Shares") and the
assumption by Growth of certain identified liabilities of Balanced and (b) the
distribution of the Shares to Balanced stockholders in complete liquidation of
Balanced as a separate series of CSI. As a result of this transaction
("Transaction"), Balanced stockholders will become stockholders of Growth,

5
<PAGE> 10
receiving full and fractional Shares of Growth equal in value to their Balanced
shares. No sales charge will be imposed in connection with the Transaction.
Following the Transaction, Balanced would be terminated as a separate series of
CSI under state law and its status as a series of CSI would be discontinued
with the Securities and Exchange Commission. EACH FUND WILL BEAR ITS COSTS
RELATED TO THIS TRANSACTION TO THE EXTENT THE AGGREGATE COSTS EXCEED $6,000.
COSTS UP TO $6,000 WILL BE BORNE BY CAMCO.

As set forth in more detail below under "Reasons for the Transaction,"
the Board of Directors of Balanced believes that the Transaction will benefit
Balanced stockholders by providing them with an investment in a larger fund
which has better prospects for long-term survival, more flexibility in
portfolio management, and greater ability to control costs, as well as greater
potential for capital appreciation. Each Board of Directors, including in each
case a majority of the Independent Directors, concluded that the Transaction
would be advisable and in the best interests of the Funds and their respective
stockholders and that the interests of existing stockholders of each Fund would
not be diluted as a result of the Transaction. The Board of Directors of
Balanced additionally determined to submit the Agreement for approval by
stockholders of Balanced at a Special Meeting of Stockholders to be held May
30, 1995 ("Meeting"). See "Information Relating to Voting Matters." The Board
of Directors of Balanced recommends approval of the Agreement. A copy of the
Agreement is attached hereto as Exhibit B.

Approval of the Transaction with respect to Balanced requires the vote
of the holders of a majority of the outstanding shares of Balanced. Approval
of the Transaction will be deemed also to approve a waiver, for purposes of the
transaction described in such Agreement, of Balanced's fundamental investment
restriction limiting, with respect to 75% of its assets, investments in
securities of a single other issuer to 5%.

TAX CONSIDERATIONS. The consummation of the Transaction is subject to
the receipt of an opinion of Dechert Price & Rhoads, counsel to Balanced and
Growth, in form reasonably satisfactory to each Fund, substantially to the
effect that the Transaction will qualify as a tax-free reorganization for
federal income tax purposes.

THE FUNDS

CURRENT INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS. The
investment objective of Balanced is to seek long-term capital appreciation and
income. It pursues this objective by investing in both equity and fixed income
securities. Under normal market conditions, at least 25% of its assets are
invested in equity securities and at least 25% in fixed income securities.
Originally organized in 1969, Balanced's current name and investment objective
were effected October 3, 1994.

The investment objective of Growth is to seek long-term capital
appreciation. It invests primarily in common stocks, although it may also
invest in preferred stocks,

6
<PAGE> 11
convertible preferred stocks and other instruments. Growth, which commenced
operations in 1952, adopted its present name and investment objective effective
September 6, 1994.

For information on the previous investment objectives of each of the
Funds, see "Organization and History of the Funds."

Each Fund is permitted to invest in non-U.S. securities and to engage
in certain options and futures ("derivatives") transactions for hedging
purposes. There can be no assurance that either Fund will meet its investment
objective.

For more information comparing the Funds' investment objectives and
policies, see "Comparison of Investment Objectives, Policies, Risks and
Restrictions," below.

DIVIDEND POLICIES. Each Fund pays dividends from net investment
income and distributions from capital gains at least annually.

INVESTMENT ADVISER AND ADVISORY FEES. Capstone Asset Management
Company ("CAMCO") serves as investment adviser to each of the Funds. CAMCO
provides advisory and/or administrative services for other investment companies
in the Capstone Group, and provides advisory services to pension and profit
sharing accounts, corporations and individuals. Total assets under management
are approximately $1.2 billion. Each Fund pays fees to CAMCO for its
investment advisory services based on a percentage of the Fund's average annual
net assets declining from 0.75% of the first $50 million of such assets to
0.40% on assets in excess of $500 million.

Each Fund also pays CAMCO amounts to reimburse CAMCO for certain costs
of accounting and recordkeeping. During their fiscal years ended September 30,
1994 and October 31, 1994, respectively, Balanced and Growth each paid CAMCO
$24,000 for such services.

DISTRIBUTION, PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES. Shares of
the Funds may be purchased on any business day, through authorized dealers or
directly from Capstone Asset Planning Company ("CAPCO"), the Funds'
distributor. Share prices are based on their net asset value next determined
after the purchase order is received, plus a sales charge declining from 4.75%
on purchases under $100,000 to 0.00% on purchases of at least $5,000,000. The
sales charge may be reduced or waived for certain types of transactions.

Fund shares may be exchanged for shares of other Funds in the Capstone
Group. The price of shares to be acquired in the exchange is the asset value
of shares of the acquired fund next determined after the exchange order is
received, plus a sales charge equal to the excess, if any, of the sales charge
due for purchase of the acquired shares less any sales charges paid or deemed
applicable to the shares being exchanged.

7
<PAGE> 12
Fund shares may be redeemed on any business day at their net asset
value next determined after the redemption order is received.

CAPCO, an affiliate of CAMCO, receives payments from each Fund
pursuant to a Service and Distribution Plan. Each such Plan permits the Fund
to reimburse CAPCO for distribution-related costs in amounts up to 0.35% of the
Fund's annual net assets subject to certain regulatory limits. CAPCO also
retains portions of the front-end sales charges paid by investors purchasing
shares of the Funds.

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RISKS OF INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------

An investment in Growth has risks that differ from those of an
investment in Balanced.

Growth invests primarily in equity securities, with the objective of
capital appreciation. It does not seek income. Balance, by contrast, invests
at least 25% of its assets (under normal market conditions) in fixed income
securities. This income, when reinvested in additional portfolio securities,
can help to reduce negative fluctuations in share price. Additionally,
Balanced's investments in fixed income securities permit Balanced to diversify
its risks across a broader range of types of securities. Under circumstances
when prices of equity securities and fixed income securities do not move in
parallel, the price changes (negative or positive) in the equity portion of
Balanced's portfolio may be offset by price changes in the fixed income portion
of Balanced's portfolio. Thus, while Balanced's fixed income holdings may help
reduce share price loss when equity market prices are generally falling, they
may also limit the extent to which Balanced share prices will rise when equity
markets generally are rising. It should be noted, however, that this offset
effect does not always occur in the securities markets, and the extent of any
such offset effect on Balanced's share price will depend on its particular
portfolio holdings.

Equity security investments typically entail greater risks than fixed
income security investments. However, fixed income investments do have certain
risks. Among other things, the current value of fixed income securities is
affected by changes in interest rates - the effect is negative when interest
rates rise and positive when rates fall. The value of a fixed income security
is also affected by the credit rating of the issuer or other guarantor of the
security, and by any changes in this rating. To the extent Growth invests in
fixed income securities, those securities must be rated at least A by Standard
and Poor's Corporation ("S&P") or by Moody's Investors Service, Inc.
("Moody's"). By contrast, Balanced may invest in fixed income securities rated
BBB by Moody's or Baa by S&P. Securities in these rating categories have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to weaken the obligor's capacity to make
principal and interest payments on the securities than would be the case with
more highly rated securities. The different types of fixed income securities
in which Balanced may invest - including mortgage and other asset-

8
<PAGE> 13
backed securities - involve different types of risk which are described in
more detail in the Balanced prospectus.

Each Fund has comparable authority to invest in foreign securities and
to engage in certain hedging transactions. These activities involve special
risks. Investments in foreign securities involve higher brokerage and custody
fees and currency conversion costs. They also involve exposure to: currency
fluctuations; thinner and more volatile trading markets; lower levels of
government regulation; less information about securities, markets and issuers;
difficulties in enforcing obligations; different accounting standards; and
risks of negative government action such as nationalization, expropriation,
imposition of additional taxes, currency blockages or restrictions on transfer.
Each Fund may enter into forward foreign currency exchange contracts to protect
against negative effects of currency fluctuations. These contracts, however,
involve costs and can limit the extent to which a Fund will benefit from
positive fluctuations in currency values.

Each Fund is permitted to engage in transactions in options and
futures ("derivatives"), to a limited extent and for hedging purposes. Among
the risks of derivatives investments are that: developments in relevant markets
will be contrary to what was anticipated by the Adviser; the hedging instrument
may not correlate well with the portfolio or instrument being hedged; the
Adviser's anticipation of the effects of the selected hedging instrument may
not be accurate; it may not be possible for a Fund to close out a particular
hedging transaction when it wishes to do so.

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ORGANIZATION AND HISTORY OF THE FUNDS
- --------------------------------------------------------------------------------

Balanced is the sole series of CSI, a Maryland series corporation
organized on May 11, 1992. The current name and investment objective of
Balanced were effected October 3, 1994. Prior to that date, Balanced was
called Capstone Fund of the Southwest. Originally organized as a Delaware
corporation in 1969, the investment objective of Capstone Fund of the Southwest
was to seek long-term capital appreciation by investing primarily in companies
located in the Southwestern region of the United States. It invested primarily
in common stocks.

Growth is a Maryland corporation organized May 11, 1992. Initially
organized as a New Jersey corporation in 1952, Growth adopted its present name
and investment objective effective September 6, 1994. Prior to that time, its
investment objective was to seek long-term capital appreciation and current
income. It invested primarily in dividend paying common stocks that its
investment adviser believed also had potential for above-average capital
appreciation. Its other investments included convertible securities, bonds,
preferred stocks and other securities.

9
<PAGE> 14
- --------------------------------------------------------------------------------
THE PROPOSED TRANSACTION
- --------------------------------------------------------------------------------

REASONS FOR THE PROSPOSED TRANSACTION. The Boards of Directors of
Balanced and Growth approved the Agreement for the proposed Transaction and the
Board of Directors of Balanced determined to recommend that Balanced's
shareholders approve the Agreement for the following reasons.

Balanced's assets have dropped from $15,863,417 on September 30, 1993
(when it was operated as Capstone Fund of the Southwest) to $5,454,108 on
September 30, 1994. Much of this reduction was due to a single redemption by a
large institutional investor. Following that redemption, the Fund's expense
ratio increased from 2.12% of its average annual net assets for the fiscal year
ended September 30, 1993 to 2.23% for the fiscal year ended September 30, 1994.
The Adviser and the Fund's Board of Directors had hoped that a change in the
Fund's investment objective would, among other things, appeal to a broader
market and, thus, lead to an increase in the Fund's asset size. (As noted
earlier, the Fund's previous investment objective was to seek long-term capital
appreciation by investing primarily in companies located in the Southwestern
region of the United States. The Fund now seeks long- term capital
appreciation and income. Its investments include fixed income securities as
well as equities, and it no longer has a Southwest regional focus.) The Fund's
assets, however, have not increased as anticipated and the Fund's expense ratio
continues to be high. Using unaudited figures as of February 28, 1995, the
Fund's ratio of expenses to average annual net assets was 3.65% and its total
net assets were $3,334,716.

The Adviser and the Board of Directors believe that the Fund's
shareholders would benefit from being shareholders of a larger fund. This
would be a result of the Transaction. The following table shows the
capitalization of Balanced and Growth as of March 31, 1995, and on a pro forma
basis as of that date, giving effect to the proposed Transaction.

CAPITALIZATION
AS OF MARCH 31, 1995

<TABLE>
<CAPTION>
Pro Forma
Balanced Growth Combined
-------- ------ --------
<S> <C> <C> <C>
Net Assets $3,252.9 $78,409.7 $81,662.6
(in thousands)

Net Asset Value Per Share $3.64 $13.48 $13.48

Shares Outstanding 894,688 5,815,327 6,058,056
</TABLE>

_______________
Source: March 31, 1995 Pro Forma Financials (Unaudited)

10
<PAGE> 15
At the larger asset size following the Transaction, the Adviser would
have more flexibility to manage the Fund's portfolio and the Fund would have
more opportunities to benefit from economies of scale. It is reasonable to
expect that the expense ratio of the combined Funds will be lower (assuming
current asset levels are not reduced) than that of Balanced.

Balanced's Board of Directors also believes that the investment
objective of Growth - to seek long-term capital appreciation - should be
attractive to Balanced shareholders. As is the case with Balanced's current
investment objective, the investment objective of Growth offers Balanced
shareholders greater opportunities for diversification of risk than was
available from an investment in Capstone Fund of the Southwest. Moreover, the
objective of Growth is similar to that of Capstone Fund of the Southwest prior
to October 3, 1994, in that it pursues long-term capital appreciation, but
without a focus on companies located in the Southwest. Balanced's Board of
Directors, including a majority of its Independent Directors, has concluded
that the larger asset size of Growth plus an investment objective that should
be generally attractive to Balanced investors make the proposed Transaction one
that will be in the best interests of Balanced and its shareholders. The Board
of Directors of Growth, including a majority of the Independent Directors of
Growth, has similarly determined that the Transaction is in the best interests
of Growth and its shareholders. Both Boards of Directors, including a majority
of the Independent Directors of each, have also determined that interests of
existing shareholders of each Fund will not be diluted as a result of the
Transaction. Each Board of Directors, as well as a majority of its Independent
Directors, have therefore approved the Agreement, and the Board of Directors of
Balanced, and a majority of its Independent Directors, have determined to
recommend that Balanced's shareholders approve the Agreement.

TERMS OF THE AGREEMENT. The following summary is qualified in its
entirety by reference to the Agreement (Exhibit B hereto). The Agreement
provides that Growth will acquire substantially all of the assets of Balanced
in exchange for shares of Growth and the assumption by Growth of certain
liabilities of Balanced as of the close of business on May 31, 1995, or such
later date as the parties may agree ("Closing Date"). Prior to the Closing
Date, Balanced will endeavor to discharge all of its known liabilities and
obligations, and Growth will not assume any liabilities or obligations of
Balanced other than those reflected in an unaudited statement of assets and
liabilities of Balanced prepared as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. New York time, on the Closing
Date. The number of full and fractional shares of Growth to be delivered to
Balanced and distributed by Balanced to its shareholders will be determined on
the basis of the relative net asset values per share of Growth and Balanced
computed as of the close of regular trading on the NYSE on the Closing Date.
The net asset value per share of each Fund will be determined by dividing its
assets, less liabilities, by the total number of its outstanding shares
immediately prior to effecting the Transaction. The values of the portfolio
securities of each Fund will be determined using the valuation procedures set
forth in Growth's then current prospectus or statement of additional
information.

11
<PAGE> 16
At or prior to the Closing Date, each Fund shall have declared a
dividend or dividends which, together with all previous dividends, shall have
the effect of distributing to each Fund's shareholders all taxable income for
the taxable year ending on or prior to the Closing Date (computed without
regard to any deduction of dividends paid) and all of its net capital gains
realized in the taxable year ending on or prior to the Closing Date (after
reductions for any capital loss carryforward).

As soon after the Closing Date as conveniently practicable, Balanced
will, as liquidation, distribute to its shareholders of record as of the
Closing Date full and fractional Growth Shares received in the Transaction in
an amount equal in value to the full and fractional shares of Balanced held by
each shareholder of record as of the Closing Date. This distribution will be
effected by the establishment on the records of Growth's transfer agent of an
account in the name of each Balanced shareholder of record as of the Closing
Date and the recording in each such account of the Growth Shares distributed to
each such shareholder in connection with the Transaction. After such
distribution and the winding up of its affairs, Balanced will be terminated as
a separate series of CSI under the 1940 Act and Maryland law.

Consummation of the Transaction is subject to the conditions set forth
in the Agreement. Notwithstanding approval by Balanced's shareholders, the
Agreement may be terminated at any time prior to the Closing Date (1) by mutual
agreement of CSI, on behalf of Balanced, and Growth, or (2) upon a material
breach by either party to the Agreement of any representation, warranty, or
agreement contained therein.

BALANCED AND GROWTH SHALL EACH BE LIABLE FOR ITS EXPENSES IN
CONNECTION WITH THE TRANSACTION IN EXCESS OF $6,000, WHICH SHALL BE BORNE BY
CAMCO.

Approval of the Agreement will require the affirmative vote of the
holders of at least a majority of Balanced's outstanding shares entitled to
vote on this matter. If the Agreement is not approved by Balanced's
shareholders, CSI's Board of Directors will consider other possible courses of
action.

DESCRIPTION OF GROWTH SHARES. Shares of Growth, including Shares to
be issued to Balanced shareholders in connection with the Transaction, are
represented by credits to shareholder accounts. No certificates representing
Growth shares are issued unless a written request is submitted to Growth's
transfer agent. Growth's authorized capital consists solely of shares of
common stock having a par value of $0.001. No separate classes or series are
authorized or outstanding. All shares have equal voting and liquidation rights
and have one vote per share. Voting rights are non-cumulative. All shares
have equal dividend rights, are fully paid, nonassessable and freely
transferable, and have no conversion, pre-emptive or subscription rights.
Fractional shares have the same rights, pro rata, as full shares.

FEDERAL INCOME TAX CONSEQUENCES. The exchange of Balanced assets for
Growth Shares is intended to qualify for Federal income tax purposes as a
tax-free reorganization

12
<PAGE> 17
under Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"). As a condition to the closing of the Transactions, Balanced and
Growth will receive an opinion of Dechert Price & Rhoads to the effect that,
for federal income tax purposes:

(a) The transfer of all or substantially all of the assets of
Balanced in exchange for Growth Shares and the assumption by Growth of
certain identified liabilities of Balanced will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the
Code and Growth and Balanced are each a "party to a reorganization"
within the meaning of Section 368(b) of the Code;

(b) No gain or loss will be recognized by Growth upon the receipt
of the assets of Balanced solely in exchange for Growth Shares and the
assumption by Growth of certain identified liabilities of Balanced;

(c) No gain or loss will be recognized by Balanced upon the
transfer of Balanced's assets to Growth in exchange for Growth Shares
and the assumption by Growth of certain identified liabilities of
Balanced or upon the distribution (whether actual or constructive) of
Growth Shares to shareholders of Balanced in exchange for their
Balanced shares;

(d) No gain or loss will be recognized by shareholders of Balanced
upon the exchange of their Balanced shares for Growth Shares and the
assumption by Growth of certain identified liabilities of Balanced;

(e) The aggregate tax basis for the Growth Shares received by each
of the Balanced shareholders pursuant to the Transaction will be the
same as the aggregate tax basis of the Balanced shares held by such
shareholder immediately prior to the Transaction, and the holding
period of the Growth Shares to be received by each Balanced
shareholder will include the period during which the Balanced shares
exchanged therefor were held by such shareholder (provided that the
Balanced shares were held as capital assets on the date of the
Transaction); and

(f) The tax basis of the assets of Balanced acquired by Growth
will be the same as the tax basis of such assets to Balanced
immediately prior to the Transaction, and the holding period of the
assets of Balanced in the hands of Growth will include the period
during which those assets were held by Balanced.

Balanced shareholders should consult their tax advisers regarding the
effect, if any, of the proposed Transaction in light of their individual
circumstances. Since the foregoing discussion related only to the Federal
income tax consequences of the Transaction, Balanced shareholders should also
consult their tax advisers as to state and local tax consequences, if any, of
the Transaction.

13
<PAGE> 18
SHARE OWNERSHIP OF BALANCED AND GROWTH. As of March 28, 1995, the
record date for voting on the Transaction, there were _____________
outstanding shares of Balanced and ______________ outstanding shares of Growth.
As of that date, the officers and Directors of Balanced beneficially owned as a
group __________ % of the outstanding shares of Balanced. To the best
knowledge of the Directors of CSI, as of that date no other shareholder or
"group" (as that term is used in Section 13(d) of the Securities Exchange Act
of 1934) beneficially owned more than 5% of Balanced. As of that date, the
officers and Directors of Growth beneficially owned as a group __________ % of
the outstanding shares of Growth. To the best knowledge of the Directors of
Growth, as of that date no other shareholder or "group" (as that term is used
in Section 13(d) of the Securities Exchange Act of 1934) beneficially owned
more than 5% of Growth.

- --------------------------------------------------------------------------------
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

The following comparison of the investment objectives, policies and
restrictions of Balanced and Growth is based upon, and qualified in its
entirety by, the descriptions and discussion of those subjects contained in the
respective prospectuses of each Fund. The Growth prospectus is attached hereto
as Exhibit A.

INVESTMENT OBJECTIVES. Growth's investment objective is to seek
long-term capital appreciation and it invests primarily in common stock. The
investment objective of Balanced is to seek long-term capital appreciation and
income. Balanced, under normal market conditions, invests at least 25% of its
assets in equity securities (including common stock, securities convertible
into common stock, and preferred stock) and at least 25% in fixed income
securities. Thus, each Fund seeks long-term capital appreciation, but Balanced
tempers its pursuit of long-term capital appreciation by also seeking to
produce income. Although there can be no assurance that either Fund will
achieve its investment objective, under normal circumstances Growth would be
expected, over the long term, to experience greater appreciation in the value
of its shares than Balanced, due to appreciation in the value of its portfolio
securities, while Balanced would produce income but experience less
appreciation than Growth in the value of its individual shares. The investment
objective of each Fund is fundamental and cannot be changed without approval by
vote of a majority of that Fund's outstanding shares (as defined in the 1940
Act).

PRIMARY INVESTMENTS. Growth invests primarily in common stocks of
rapidly growing companies that have demonstrated the ability to gain market
share and achieve and maintain consistent profitability. Growth may also
invest in preferred and convertible preferred stocks. Growth has authority to
invest up to 35% of its assets in fixed income securities and may invest
without limit in such securities for temporary defensive purposes during
abnormal market conditions. Growth's fixed income investments, at the time of
investment, must be rated at least A by S&P or Moody's or deemed of comparable
quality by

14
<PAGE> 19
CAMCO and may include U.S. Government securities, corporate notes and bonds,
commercial paper, bankers' acceptances, and certificates of deposit.

Balanced's equity investments may include common stocks, securities
convertible into common stocks, and preferred stocks. These securities are
selected for their potential capital appreciation, dividend income and
potential for increased earnings. The Fund's fixed income investments may
include U.S. Government securities, corporate notes and bonds (including
floating and variable rate demand and master demand notes), mortgage- and other
asset-backed securities, convertible and preferred securities, and money market
instruments such as commercial paper, bankers' acceptances and certificates of
deposit. Its fixed income investments must be rated at least BBB by S&P or Baa
by Moody's, or deemed of comparable quality by CAMCO.

Each Fund may also (a) invest without limit in securities of foreign
issuers; (b) enter into forward foreign currency exchange contracts to hedge a
transaction or the Fund's portfolio against adverse fluctuations in exchange
rates; (c) make limited investments in other investment companies; and (d)
engage in options and futures transactions (often referred to as "derivatives")
for hedging purposes. These derivative investments are subject to
substantially identical limits with respect to each Fund, although the types of
derivative transactions appropriate for each Fund would differ due to
differences in their portfolio investments and investment objectives.

MANAGEMENT'S DISCUSSION OF FACTORS AFFECTING GROWTH'S PERFORMANCE
DURING ITS MOST RECENT FISCAL YEAR AND LOOKING FORWARD. The course of the
equity market over the 12 months ended October 31, 1994 was determined by a
persistent rise in interest rates and persistent strength in the economy. The
first sign that interest rates would be headed up came in September of 1993 as
the utility stocks began to fall. Long-term interest rates began to rise at
the same time. Then in the first quarter of 1994, the Federal Reserve, for the
first time in several years, raised short-term interest rates. Almost
immediately, the stock market began its severest correction since 1990. While
all segments of the market declined, small growth stocks dropped more than
broad averages like the S&P 500. The small technology stocks were especially
hard hit, some falling nearly 50% between January and June 1994. Housing and
related issues also suffered a severe contraction.

The economic recovery which began in the last half of 1993 was built on
declining interest rates and liquidity provided by the Federal Reserve. The
economically sensitive cyclical and industrial stocks which began to show
strength in 1993 also saw their rally short-circuited by the Federal Reserve's
action in raising rates. However, the economic recovery has shown surprising
strength; each quarter's GDP number in 1994 has been better than expected.
This persistent strength underlies the various rallies we have seen in the
stock market in the second half of 1994. Many but not all technology sectors
have recovered and the large consumer non-durable stocks (food, drugs, consumer
products) have put in good relative performance.

15
<PAGE> 20
As we reach the end of 1994 and look into 1995, we think that investors
will focus on much more defensive issues, those less affected by swings in
economic activity. The Federal Reserve raised short term interest rates six
times in 1994. Money supply growth has become very sluggish. Both conditions
seem to make a broad market advance difficult. Defensive issues may well move
back to the forefront; the stable consumer growth and energy sectors appear
attractive at this time. We also look for the stock market to become more
rotational over the next year: some sectors will do well for a time and then
fade while another sector will advance. We are also looking for signs that the
Federal Reserve has finished tightening; we would view this as an opportunity
to move into the capital goods area and some economically sensitive sectors.

We realize that the Growth Fund had a difficult year; technology and
specialty retail were areas which especially hurt total return. But the hard
lessons of this past fiscal year have been integrated into the portfolio
management process. Growth now has a more diversified portfolio which has been
adjusted to a higher interest rate environment. This means that CAMCO is
reviewing stocks with above average growth potential but which are trading at
reasonable valuations rather than at disproportionately high P/E ratios.
Rising interest rates sustained over time make it difficult for companies to
achieve and sustain exceptionally high growth rates; therefore, stocks with
extremely high P/E ratios are quite vulnerable to price declines. CAMCO thinks
this strategy of growth at reasonable prices is the most appropriate for Growth
until interest rates have peaked and the Federal Reserve allows liquidity and
money supply to accelerate again.

[PERFORMANCE GRAPH]

GROWTH S&P
FUND S&P 500 GROWTH

10/31/84 $ 9,526 $10,000 $10,000
10/31/85 $10,619 $11,934 $11,624
10/31/86 $13,184 $15,890 $15,312
10/31/87 $14,075 $16,898 $16,569
10/31/88 $15,796 $19,405 $18,255
10/31/89 $20,294 $24,503 $23,690
10/31/90 $18,560 $22,661 $22,906
10/31/91 $24,792 $30,253 $31,192
10/31/92 $26,236 $33,257 $34,793
10/31/93 $28,085 $38,208 $36,817
10/31/94 $27,899 $39,686 $38,834
</TABLE>

Fund's Average Annual Total Return:

<TABLE>

<S> <C>
1 Yr. (5.38%)
5 Yr. 5.53%
10 Yr. 10.81%

</TABLE>

1 The Fund's performance reflects deduction of the initial sales charge and
assumes reinvestment of all income dividends and capital gains
distributions.
2 The Standard & Poor's 500 Composite Stock Index is a widely recognized
unmanaged index of common stock prices. Performance figures include the
change in value of the stocks in the index and reinvestment of dividends.
3 The Standard & Poor's Growth Index is an unmanaged index which includes
stocks in the S&P 500 Index with higher than average ratios of market
price to book value. Performance figures include the change in value of
the stocks in the index and reinvestment of dividends.

16
<PAGE> 21
INVESTMENT RESTRICTIONS. Each Fund has specific investment restrictions.
Those of Growth are "fundamental" - i.e., they cannot be changed without
approval by vote of a majority of the Fund's outstanding shares; several of
Balanced's restrictions are fundamental but those indicated below by asterisk
("*") are not, and may be changed without shareholder approval.

Industry Concentration - neither Fund can invest more than 25% of its
assets in a single industry.

Diversification/Control - Growth will invest no more than 5% of its
assets in the securities of a single issuer, except U.S. Government
securities. Balanced has a similar policy (without the U.S. Government
security exception), although 25% of its assets may be used from time to
time to make investments exceeding 5% in particular issuers.

Growth may not purchase securities that would cause it to own more than
10% of any security class of an issuer; Balanced may not own more than
10% of the voting securities of any one issuer.

Neither Fund may invest in companies for the purpose of controlling
management.* Growth also may not purchase or retain securities of a
company of which Growth's officers and directors each owning more than
1/2 of 1% collectively own over 5%.

Underwriting Neither Fund may underwrite securities of other issuers or
invest more than 10% of its assets in securities that cannot be freely
resold without registration under the Securities Act of 1933.

Borrowing/Pledging Growth may borrow only for temporary or extraordinary
or emergency purposes, normally only to meet redemption requests. Its
borrowings are limited to the lesser of 5% of assets less liabilities not
represented by senior securities or 10% of gross assets taken at cost.
Balanced may borrow to make additional investments ("leverage") as well
as for temporary or emergency purposes. Balanced may borrow amounts up
to 25% of the value of its total assets provided there is at least 300%
asset coverage immediately after the borrowing.

Neither Fund may pledge over 15% of gross assets taken at cost. Balanced
excepts pledges related to options and futures contracts. As a matter of
operating policy, Growth limits pledges to 10% of the offering price of
its shares except as permitted for options and futures transactions.

Loans Neither Fund may make loans except through investment in publicly
distributed bonds and other debt obligations. Growth may also purchase
privately distributed debt obligations of public companies.

17
<PAGE> 22
Commodities Neither Fund may invest in commodities or commodity
contracts except stock index futures contracts and related options to the
extent that, (a) immediately thereafter, the sum of its initial margin
deposits on such open contracts and premiums paid for options on such
futures contracts does not exceed 5% of the market value of the Fund's
total assets and (b) its outstanding obligations under such contracts and
options do not exceed 20% of the Fund's total assets.

Real Estate Neither Fund may invest in real estate, although Balanced
can purchase real estate for its own use in connection with its business,
and Growth can purchase readily marketable interests in real estate.

Investments in Other Investment Companies Balanced's investments in
other investment companies are limited to 5% of its assets and open
market purchases.* This policy is being waived by Balanced's Board of
Directors for purposes of the Transaction. Growth may invest up to 10%
of its assets in other investment companies, with no limit in connection
with a merger, consolidation, acquisition or reorganization.

Oil, Gas, Mineral Programs Each Fund limits these investments.
Balanced's restriction relates to leases*, while Growth's specifically
permits investment in issuers that own or invest in such programs.

Other Balanced has non-fundamental restrictions preventing option
writing (except for closing transactions), uncovered short sales, and
limiting warrants to 5% of total assets with no more than 2% in warrants
that are not listed on the NYSE or American Stock Exchange.

Growth may not issue warrants or options to acquire its shares.

- --------------------------------------------------------------------------------
COMPARATIVE INFORMATION ON STOCKHOLDERS' RIGHTS
- --------------------------------------------------------------------------------

CSI, including Balanced, and Growth are open-end investment companies
registered under the 1940 Act and continuously offer their shares to the public
at an offering price based on their current net asset value. Balanced is the
sole series of shares currently offered by CSI. Growth does not offer separate
series of shares. The operations of Growth, and of CSI and Balanced are
governed, under their respective Boards of Directors, by their Articles of
Incorporation and By-Laws, as well as by applicable federal and state law.
Shareholders of either Fund therefore have substantially similar rights.

Neither Fund holds regular annual meetings, although stockholders owning
at least 10% of either Fund's outstanding shares can require a meeting to be
held regarding matters not previously voted on at a meeting, provided the
requesting shareholders bear the cost of

18
<PAGE> 23
preparing and mailing the notice. When a meeting is held by a Fund,
shareholders of that Fund are entitled to one vote or fraction for each share
or fraction held.

Shareholders of neither Fund bear any personal liablity for corporate
acts and obligations of the particular Fund. Liability of each Fund's
Directors to the Fund or its stockholders for money damages is limited, and
each Fund will indemnify its Directors and officers, to the fullest extent
permitted by Maryland General Corporation Law and the 1940 Act. Other Fund
employees and agents will be indemnified to the extent authorized by the Board
of Directors and permitted by law.

Shareholders of each Fund may inspect and copy certain Fund documents
during normal business hours.

- --------------------------------------------------------------------------------
FURTHER INFORMATION
- --------------------------------------------------------------------------------

The foregoing discussion of shareholder rights is only a summary of
rights of Fund shareholders under Maryland law, the 1940 Act, and each Fund's
Articles of Incorporation and By-Laws. Shareholders are referred to those
sources for more complete information. Each Fund is also required to file
certain reports, proxy material, corporate documents and other information with
the SEC. This material can be inspected and copies obtained at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at SEC regional offices, including its Fort Worth
District Office, 801 Cherry Street, 19th Floor, Fort Worth, Texas 76102.
Copies of this material can also be obtained from the Public Reference Branch,
Office of Consumer Affairs and Information Services, SEC, Washington, D.C.
20549 at prescribed rates.

- --------------------------------------------------------------------------------
OTHER BUSINESS
- --------------------------------------------------------------------------------

The Directors of CSI do not intend to present any other business at the
Meeting. If, however, any other matters are properly brought before the
Meeting, the persons named in the accompanying form of proxy will vote thereon
in accordance with their judgment.

- --------------------------------------------------------------------------------
VOTING INFORMATION
- --------------------------------------------------------------------------------

This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Directors of CSI to be used at the
Special Meeting of Shareholders of Balanced to be held at 2:00 P.M. CST on May
30, 1995 at 5847 San Felipe, Suite 4100, Houston, Texas 77057 and at any
adjournment thereof. This Prospectus/Proxy Statement,

19
<PAGE> 24
along with a Notice of the Meeting and a proxy card, is first being mailed to
shareholders of Balanced on or about [date] . Only shareholders of record
as of the close of business on the Record Date March 28, 1995 will be entitled
to notice of, and to vote at, the Meeting or any adjournment thereof. The
holders of a majority of the shares of Balanced outstanding at the close of
business on the Record Date present in person or represented by proxy will
constitute a quorum for the Meeting. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR approval of
the Agreement and FOR any other matters deemed appropriate. For purposes of
determining the presence of a quorum for transacting business at the meeting,
abstentions and broker "non-votes" (proxies from brokers or nominees indicating
that such persons have not received instructions from the beneficial owner or
other persons entitled to vote shares on a particular matter with respect to
which the brokers or nominees do not have discretionary power) will be treated
as shares that are present but which have not been voted FOR a proposal. A
proxy may be revoked at any time on or before the Meeting by written notice to
the Secretary of Balanced, by execution of a later dated form of proxy, or by
attendance at the Meeting and voting in person. Unless revoked, all valid
proxies will be voted in accordance with the specifications therein or, in the
absence of such specifications, for approval of the Agreement and the
Transaction contemplated thereby.

Approval of the Agreement will require the affirmative vote of the
holders of at least a majority of the outstanding shares of Balanced entitled
to vote on the matter. Shareholder of Balanced are entitled to one vote for
each share held and one proportional fractional vote for each fractional share
held.

Proxies are solicited by mail. Additional solicitations may be made by
Directors, officers and employees, personally or by telephone or telegram.
Proxy cards and material also will be distributed through brokers, custodians,
nominees and other like parties to beneficial owners of stock.

TO THE EXTENT NOT ASSUMED BY CAMCO, AS DESCRIBED HEREIN, COSTS OF
SOLICITING PROXIES WILL BE BORNE OR REIMBURSED BY BALANCED.

THE BOARD OF DIRECTORS OF BALANCED, INCLUDING THE INDEPENDENT DIRECTORS,
UNANIMOUSLY RECOMMEND APPROVAL OF THE AGREEMENT, AND ANY UNMARKED PROXIES
WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE
AGREEMENT.

- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS AND EXPERTS
- --------------------------------------------------------------------------------

The audited financial statements of Balanced as of September 30, 1994 and
of Growth as of October 31, 1994, respectively, and the respective statements
of operations for the fiscal

20
<PAGE> 25
periods then ended and changes in net assets for each of the two years in the
period then ended and financial highlights, have been incorporated by reference
into this Prospectus/Proxy Statement in reliance on the reports of Tait, Weller
& Baker, independent certified public accountants for the Funds, given on the
authority of such firm as an expert in accounting and auditing.

- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------

Certain legal matters concerning the issuance of shares of Growth will be
passed upon by Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C.
20005.

- --------------------------------------------------------------------------------
SUBMISSION OF STOCKHOLDER PROPOSALS
- --------------------------------------------------------------------------------

Because Balanced is not required to hold annual meetings, a date for
submission of shareholder proposals cannot presently be specified.

21
<PAGE> 26
EXHIBIT A

CAPSTONE GROWTH FUND, INC.
(FORMERLY CAPSTONE U.S. TREND FUND, INC.)

5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631

January 17, 1995

PROSPECTUS

Capstone Growth Fund, Inc. (the "Fund") is a diversified, open-end
management investment company. The Fund's investment objective is to seek
long-term capital appreciation. The Fund invests primarily in common stocks,
although the Fund can also invest in preferred and convertible preferred stocks,
as well as other instruments. The Fund would expect to invest primarily in
securities of U.S. issuers, but there is no limit on the extent to which it can
invest in securities of foreign issuers.

This Prospectus sets forth certain information about Capstone Growth Fund,
Inc. that a prospective investor should know before investing. Investors should
read and retain this Prospectus for future reference.

A STATEMENT OF ADDITIONAL INFORMATION about Capstone Growth Fund, Inc.
dated January 17, 1995 has been filed with the Securities and Exchange
Commission and contains further information about the Fund. A copy of the
Statement of Additional Information may be obtained without charge by calling or
writing the Fund at the telephone number or address listed above. The Statement
of Additional Information is incorporated herein by reference.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 27

CAPSTONE GROWTH FUND, INC.

<TABLE>
<S> <C>
Investment Adviser: Shareholder Servicing Agent:
Capstone Asset Management Company Fund/Plan Services, Inc.
5847 San Felipe, Suite 4100 P.O. Box 874
Houston, Texas 77057 2 W. Elm Street
Conshohocken, Pennsylvania 19428
</TABLE>

Distributor:
Capstone Asset Planning Company
5847 San Felipe, Suite 4100
Houston, Texas 77057

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 3
Fund Expenses........................................................ 5
Financial Highlights................................................. 7
Investment Objective and Policies.................................... 8
Investments and Investment Practices................................. 8
Investment Restrictions.............................................. 10
Performance Information.............................................. 11
Management of the Fund............................................... 12
Purchasing Shares.................................................... 15
Distributions and Taxes.............................................. 19
Redemption and Repurchase of Shares.................................. 20
Determination of Net Asset Value..................................... 22
Stockholder Services................................................. 23
General Information.................................................. 25
Appendix A........................................................... 27
</TABLE>

No dealer, salesman, or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund or its Distributor. This Prospectus does
not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund or the
Distributor to make such offer or solicitation in such jurisdiction.

2
<PAGE> 28

CAPSTONE GROWTH FUND, INC.

PROSPECTUS SUMMARY

Type of Company................. The Fund is an open-end diversified
management investment company. (see page 25)

Investment Objective............ The Fund seeks long-term capital
appreciation. There is no assurance that this
objective will be achieved. (see page 8)

Investment Policies............. The Fund will invest primarily in common
stocks, although the Fund can also invest in
preferred and convertible preferred stocks
and certain other instruments. The Fund would
expect to invest primarily in securities of
U.S. issuers, but there is no limit on the
extent to which it can invest in securities
of foreign issuers. The Fund may also engage
in certain hedging transactions. (see page 8)

Risk Factors.................... For hedging purposes, the Fund may invest up
to 2% of its total net assets in stock
options and options on stock indexes and up
to 5% of the market value of its assets in
margin deposits on stock index futures and
options on stock index futures. The Fund may
also enter into forward foreign currency
exchange contracts as a hedge in connection
with its foreign investments. These
investments entail special risks. The Fund's
investments in foreign securities involve
different risks than investments in
securities of U.S. issuers. See "Investments
and Investment Practices." Additionally,
there can be no assurance that the Fund will
achieve its investment objective and
investors should be aware that the value of
the Fund's shares will fluctuate, which may
cause a loss in principal value. (see page 8)

Investment Adviser.............. Capstone Asset Management Company (the
"Adviser") is the Fund's Investment Adviser.
The Adviser provides advisory and/or
administrative services to the other mutual
funds in the Capstone Group. (see page 12)

Expenses of the Fund............ For the last fiscal year, the Fund's total
operating expenses, including investment
advisory fees, were 1.28% of its average net
assets. (see page 14)

Dividends and Distributions..... The Fund pays any dividends from net
investment income and distributions from
capital gains at least annually. (see page
19)

3
<PAGE> 29

Offering Price and Sales
Charge.......................... The public offering price is equal to the net
asset value plus a sales charge equal to
4.75% of the public offering price (4.99% of
the amount invested), reduced on investments
of $100,000 or more. The Fund pays certain
expenses pursuant to a Rule 12b-1
distribution plan. (see page 15)

Minimum Purchase................ The minimum initial investment is $200,
except for continuous investment plans, and
there is no minimum for subsequent purchases.
(see page 15)

Redemption...................... Shares of the Fund can be redeemed at the
next determined net asset value, without
charge. (see page 20)

Distributor..................... The Distributor is Capstone Asset Planning
Company.

4
<PAGE> 30

FUND EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases 4.75% on initial investment
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested 0%
Dividends (as a percentage of offering
price)
Deferred Sales Load (as a percentage of 0%
original purchase price or redemption of
proceeds, as applicable)
Redemption Fee (as a percentage of amount 0%
redeemed, if applicable)
Exchange Fee 0%
A 4.75% maximum sales load applies to
exchanges of shares that have not been
outstanding at least 15 days
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.68%
12b-1 Fees* 0.35%
Other Expenses 0.26%
Total Fund Operating Expenses 1.29%
</TABLE>

EXAMPLE

<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $ 60 $86 $ 115 $ 196
</TABLE>

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

* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of a Fund, long-term stockholders may indirectly pay more in total
sales charges than the economic equivalent of the maximum front-end sales
charge permitted by rules of the NASD (see "Distributor").

5
<PAGE> 31

description of the fees paid to the Adviser. The information disclosed in the
table for "12b-1 Fees" has been restated to reflect the maximum distribution
expense that may be incurred by the Fund. The actual amount paid by the Fund
during the fiscal year ended October 31, 1994 was 0.34% of its average net
assets. The information disclosed in the table for "Other Expenses" is based on
expenses actually incurred by the Fund during its last fiscal year ended October
31, 1994. The example which immediately follows the table should not be
considered a representation of past or future expenses. Actual Fund expenses may
be greater or lesser than those shown in the example or in the table.

6
<PAGE> 32

CAPSTONE GROWTH FUND, INC.

FINANCIAL HIGHLIGHTS

The following table sets forth the per share operating performance data for
a share of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated. This information has been
derived from information provided in the Fund's financial statements which have
been examined by Tait, Weller & Baker, independent certified public accountants.
The Fund's Annual Report contains additional performance information and is
available free of charge upon request by calling the Fund at 800-262-6631.

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at
beginning of
year.............. $ 14.43 $ 14.00 $ 14.65 $ 11.88 $ 14.76 $ 12.12 $ 11.40 $ 14.71 $ 12.35 $ 12.45
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from
investment
operations:
Net investment
income............ 0.11 0.17 0.20 0.30 0.37 0.37 0.31 0.28 0.32 0.24
Net realized and
unrealized gain
(loss) on
investments....... (0.23) 0.80 0.56 3.42 (1.48) 2.92 1.01 0.49 2.59 1.05
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations........ (0.12) 0.97 0.76 3.72 (1.11) 3.29 1.32 0.77 2.91 1.29
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less Distributions:
From net investment
income............ 0.13 0.22 0.24 0.37 0.40 0.36 0.31 0.32 0.23 0.27
From net realized
gain on
investments....... 0.95 0.32 1.17 0.58 1.37 0.29 0.29 3.76 0.32 1.12
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
distributions..... 1.08 0.54 1.41 0.95 1.77 0.65 0.60 4.08 0.55 1.39
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value at
end of year....... $ 13.23 $ 14.43 $ 14.00 $ 14.65 $ 11.88 $ 14.76 $ 12.12 $ 11.40 $ 14.71 $ 12.35
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN*....... (0.67)% 7.05% 5.83% 33.58% (8.55)% 28.47% 12.23% 6.76% 24.15% 11.48%
RATIOS/SUPPLEMENTAL
DATA
Net assets at the
end of year (in
thousands)........ $ 80,941 $ 96,465 $ 97,076 $ 95,606 $ 76,780 $ 86,243 $ 88,658 $ 89,729 $ 83,685 $ 70,062
Ratio of operating
expenses to
average net
assets............ 1.28% 1.24% 1.10% 0.97% 0.94% 0.95% 1.01% 0.94% 1.01% 1.11%
Ratio of net
investment income
to average net
assets............ 0.78% 0.19% 1.43% 2.21% 2.77% 2.76% 2.76% 2.14% 2.21% 1.92%
Portfolio turnover
rate.............. 12% 45% 22% 38% 48% 50% 62% 56% 214% 45%
</TABLE>

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

* Calculated without a sales charge

7
<PAGE> 33

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek long-term capital appreciation.
This investment objective is a fundamental policy of the Fund and cannot be
changed without stockholder approval. There can be no assurance the Fund's
objective will be achieved. In pursuit of its investment objective of long-term
capital appreciation, the Fund invests primarily in common stocks of rapidly
growing companies that have demonstrated the ability to gain market share and
achieve and maintain consistent profitability. The Fund may also invest in
preferred and convertible preferred stocks. Although the Fund's investments are
expected to be primarily in securities of U.S. issuers, it may invest without
limit in securities of foreign issuers. For temporary defensive purposes, the
Fund may invest to an unlimited extent in securities of the U.S. Government, its
agencies and instrumentalities. The Fund may also invest, to a limited extent,
in securities of other investment companies.

Although the Fund anticipates normally being substantially invested in
stocks, the Fund is permitted to invest up to 35% of its assets in bonds and
other fixed income securities and may invest without limit in such securities
during abnormal market conditions for temporary defensive purposes. The Fund's
fixed income investments may include securities of the U.S. Government, its
agencies and instrumentalities, corporate notes and bonds, commercial paper,
bankers' acceptances, and certificates of deposit. Fixed income securities must
be rated at least A by Standard & Poor's Corporation or Moody's Investors
Service, or deemed of comparable quality by the Adviser, at the time of purchase
by the Fund. A security held by the Fund which is downgraded below such ratings
will be sold or retained based on the Adviser's determination of what is best
for the Fund and its stockholders.

Prior to September 6, 1994, the Fund's investment objective was to seek
long-term capital appreciation and current income. Stockholders approved a
change to the present investment objective, as well as the Fund's current name,
at a meeting held August 25, 1994.

INVESTMENTS AND INVESTMENT PRACTICES

U.S. Government Securities -- Securities of the U.S. Government, its
agencies and instrumentalities include instruments backed by the full faith and
credit of the U.S. Treasury, such as Treasury bills, notes and bonds and
obligations of the Government National Mortgage Association. Other such
instruments, including obligations of the Federal Home Loan Banks, Federal Farm
Credit Bank, Bank for Cooperatives, Federal Intermediate Credit Banks and the
Federal Land Bank, are guaranteed by the right of the issuer to borrow from the
U.S. Treasury. Still others, such as obligations of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase certain of the agency's obligations or, in the case of
agencies such as the Student Loan Marketing Association and the Tennessee Valley
Authority, are backed only by the credit of the issuing agency. For investments
not backed by the full faith and credit of the United States, the investor must
look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment.

Options and Futures -- The Fund may employ special investment practices as
a hedge against changes in the value of securities held in the Fund's portfolio
or securities it intends to purchase.

The Fund may purchase put and call options on stock and stock indexes for
hedging purposes. The Fund will not purchase a call or put option if as a result
the premium paid for the option together

8
<PAGE> 34

with premiums paid for all other stock options and options on stock indexes then
held by the Fund exceed 2% of the Fund's total net assets.

A call option gives the purchaser of the option, in return for premium
paid, the right to buy the underlying security at a specified price at any point
during the term of the option. A put option gives the purchaser the right to
sell the underlying security at the exercise price during the option period. In
the case of an option on a stock index, the option holder has the right to
obtain, upon exercise of the option, a cash settlement based on the difference
between the exercise price and the value of the underlying stock index.

The purchase of put and call options does involve certain risks. Through
investment in options, the Fund can profit from favorable movements in the price
of an underlying stock to a greater extent than if the Fund purchased the stock
directly. However, if the stock does not move in the anticipated direction
during the term of the option in an amount greater than the premium paid for the
option, the Fund may lose a greater percentage of its investment than if the
transaction were effected in the stock directly.

Generally, transactions in stock index options pose the same type of risks
as do transactions in stock options. Price movements in securities 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 which may not completely offset movements in the price
of such securities.

The Fund may also (i) invest up to 5% of its total assets in stock index
futures contracts and options on stock index futures and (ii) engage in margin
transactions with respect to such investments.

A stock index futures contract is an agreement under which two parties
agree to take or make delivery of an amount of cash based on the difference
between the value of a stock index at the beginning and at the end of the
contract period. When the Fund enters into a stock index futures contract, it
must make an initial deposit, known as "initial margin", as a partial guarantee
of its performance under the contract. As the value of the stock index
fluctuates, the Fund may be required to make additional margin deposits, known
as "variation margin", to cover any additional obligation it may have under the
contract.

Options on stock index futures contracts are similar to options on stocks
except that an option on a stock index futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a stock index
futures contract (a long position if the option is a call and a short position
if the option is a put), upon deposit of required margin. In the alternative,
the purchaser may resell the option, if it has value, or simply let it expire.
Upon expiration, the purchaser will either realize a gain or the option will
expire worthless, depending on the closing price of the index on that day. Thus,
the purchaser's risk is limited to the premium paid for the option.

The Fund will not leverage its portfolio by purchasing an amount of
contracts that would increase its exposure to stock market movements beyond the
exposure of a portfolio that was 100% invested in common stocks. The Fund will
not enter into transactions in futures contracts and options on such contracts
to the extent that, immediately thereafter, the sum of its initial margin
deposits on open futures contracts and premiums paid for options, exceeds 5% of
the market value of the Fund's total assets. In addition, the Fund will not
enter into futures contracts and options on

9
<PAGE> 35

such contracts to the extent that its outstanding obligations under these
contracts would exceed 20% of the Fund's total assets.

Successful use by the Fund of stock index futures contracts is subject to
certain special risk considerations. A liquid index futures market may not be
available when the Fund seeks to offset adverse market movements. In addition,
there may be an imperfect correlation between movements in the securities
included in the index and movements in the securities in the Fund's portfolio.
Successful use of stock index futures contracts and options on such contracts is
further dependent on the Adviser's ability to predict correctly movements in the
direction of the stock markets, and no assurance can be given that its judgment
in this respect will be correct. Risks in the purchase and sale of stock index
futures contracts are discussed further in the Statement of Additional
Information.

Foreign Securities -- Investment in foreign securities entails certain
special cost and risks. Although the Fund does not expect to invest extensively
in foreign securities, stockholders should be aware that such investments often
involve higher brokerage and custody costs, currency conversion costs and longer
settlement time. Other special factors regarding foreign investing include
thinner and more volatile trading markets; less extensive information about
securities, markets and issuers; lower levels of government regulation;
difficulties in enforcing obligations; different accounting standards;
fluctuations in values of foreign currencies against the U.S. dollar; and the
risk of negative government actions such as expropriation, nationalization,
imposition of withholding, confiscatory or other taxes, currency blockages or
restrictions on transfer.

Forward Foreign Currency Exchange Transactions -- The Fund may enter into
forward foreign currency exchange contracts in an attempt to hedge against
adverse movements in the relative rates of exchange between the U.S. dollar and
the currencies in which any non-U.S. investments are denominated, or between two
foreign currencies. The Fund may enter into this type of contract with respect
to a specific transaction or as a hedge for the Fund's portfolio positions.
These contracts involve an obligation to purchase or sell a specific currency at
a specified future date at a specified price. These contracts are traded in the
interbank market conducted between currency traders (generally large commercial
banks) and their customers. Although the Fund would enter into such a contract
to minimize the risk of loss due to adverse currency fluctuations, such a
contract may also limit the extent to which the Fund could gain from positive
fluctuations. There can be no assurance that these activities will be successful
in protecting the Fund against negative effects of currency fluctuation. For
more information on foreign securities and forward contracts, see the Statement
of Additional Information.

INVESTMENT RESTRICTIONS

The Fund has adopted certain investment restrictions which, together with
the investment objective and policies of the Fund, cannot be changed without
approval by holders of a majority of the Fund's outstanding voting shares. Such
majority is defined by the Investment Company Act of 1940 as the lesser of (i)
67% or more of the voting securities present in person or by proxy at a meeting,
if the holders of more than 50% of the outstanding voting securities are present
or represented by proxy, or (ii) more than 50% of the outstanding voting
securities. These restrictions,

10
<PAGE> 36

which are designed to enhance the realization of the Fund's investment
objective, provide, among other things, that the Fund may not:

1. Engage in margin transactions or short sales, except that the Fund may
engage in margin transactions with respect to transactions in stock index
futures contracts and options on stock index futures.

2. Invest more than 5% of the value of its total assets (at time of
investment) in the securities of any one issuer except the United States
Government and its instrumentalities.

3. Invest in companies for the purpose of exercising control of management.

4. Borrow any amount in excess of 5% of the value of its total assets less
all liabilities not represented by senior securities at the time the loan is
made, or amounts in excess of 10% of the gross assets of the Fund taken at cost,
whichever is less, and provided further that any such borrowings shall be
undertaken only as a temporary measure for extraordinary or emergency purposes.
Normally the Fund will borrow only to permit timely payment for shares
liquidated by stockholders for which it does not have ready funds to make
payment. While authorized to borrow, the Fund has never done so and has no plans
to do so.

5. Invest in securities of companies having a record of less than three
years continuous operation, if such purchase at the time would cause more than
5% of the total assets to be invested in the securities of such company or
companies.

6. Purchase or retain securities of a company, if those officers or
directors of the Fund or the Adviser who individually own beneficially more than
1/2 of 1% of the shares or securities of such company together own beneficially
more than 5% of the shares or securities of such company.

7. Invest in commodities or commodity contracts except that the Fund may
enter into stock index futures contracts and options on stock index futures
contracts to the extent that, (a) immediately thereafter, the sum of its initial
margin deposits on such open contracts and premiums paid for options on such
futures contracts does not exceed 5% of the market value of the Fund's total
assets and (b) its outstanding obligations under such contracts and options does
not exceed 20% of the Fund's total assets.

Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities.

Additional investment restrictions of the Fund which may not be changed
without stockholder approval are found under the caption "Investment
Restrictions" in the Fund's Statement of Additional Information.

PERFORMANCE INFORMATION

11
<PAGE> 37

maximum public offering price per share on the last day of the period. Average
annual total return and total return figures represent the increase (or
decrease) in the value of an investment in the Fund over a specified period.
Both calculations assume that all income dividends and capital gain
distributions during the period are reinvested at net asset value in additional
Fund shares. Quotations of the average annual total return reflect the deduction
of the maximum sales charge and a proportional share of Fund expenses on an
annual basis. The results, which are annualized, represent an average annual
compounded rate of return on a hypothetical investment in the Fund over a period
of 1, 5 and 10 years ending on the most recent calendar quarter. Quotations of
total return, which are not annualized, represent historical earnings and asset
value fluctuations. Total return figures used in advertisements or sales
literature will not usually reflect the deduction of the maximum sales charge
which if deducted would reduce the Fund's total return. Total return is based on
past performance and is not a guarantee of future results.

MANAGEMENT OF THE FUND

The Fund is an open-end diversified management investment company, commonly
called a mutual fund. Through the purchase of shares of the Fund, investors with
goals similar to the investment objective of the Fund can participate in the
investment performance of the portfolio of investments held by the Fund. The
management and affairs of the Fund are supervised by its Board of Directors.

ADVISER

Capstone Asset Management Company, a wholly-owned subsidiary of Capstone
Financial Services, Inc., acts as the Investment Adviser to the Fund. The
address of the Adviser is 5847 San Felipe, Suite 4100, Houston, Texas 77057. The
Adviser provides investment advisory and/or administrative services to five
other mutual funds: Capstone Government Income Fund, Capstone Balanced Fund
(formerly Capstone Fund of the Southwest), Capstone Nikko Japan Fund, Capstone
New Zealand Fund and Medical Research Investment Fund, Inc. (the "Capstone
Group"), pension and profit sharing accounts, corporations and individuals.
Total assets under management are approximately $1.4 billion.

Investment decisions for the Fund are made by two portfolio managers, Dan
E. Watson, Ph.D. and Albert P. Santa Luca, Ph.D. Dr. Watson began his career in
1971 at Texas Commerce Bank with planning responsibilities for the company's
life insurance operations. In 1977 he joined Tenneco Inc. and was subsequently
named Assistant to the Chairman of the Board. In 1981 he helped form Tenneco
Financial Services, the predecessor organization to Capstone Financial Services,
Inc., the parent company of the Adviser and Distributor.

Dr. Santa Luca began his investment career in 1984 at Team Bank/Texas
American Bank by managing common fund investing in midcap value and growth
stocks, and managing accounts for large charitable foundations, employee benefit
plans and high net worth individuals. In 1993 Team Bank/Team American Bank
became BancOne -- BancOne Investment Advisors. Dr. Santa Luca was subsequently
appointed as back-up manager and, in 1994, fund manager for the One Group Small
Company Growth Fund, a $400 million small capitalization growth fund.

12
<PAGE> 38

Pursuant to the terms of an investment advisory agreement which was
approved by stockholders on February 18, 1992, the Fund retains the Adviser to
(1) provide a program of continuous investment management for the Fund in
accordance with the Fund's investment objectives, policies and limitations, (2)
make investment decisions for the Fund, (3) place orders to purchase and sell
securities for the Fund, subject to the supervision of the Board of Directors,
and (4) provide administrative services for the Fund. In accordance with the
Fund's policy of allocating portfolio brokerage described in the Statement of
Additional Information, the Adviser is permitted to consider sales of Fund
shares as a factor in selecting broker-dealers to execute portfolio
transactions, subject to best execution, and may also place orders for Fund
portfolio transactions with the Fund's Distributor and Williams McKay Jordan &
Mills, Inc, broker-dealer affiliates of the Adviser.

The Fund pays all expenses incurred in the operation of the Fund other than
those borne by the Adviser under the Advisory Agreement. Expenses payable by the
Fund include: fees of directors who are not "interested persons" (as defined in
the 1940 Act) of the Adviser or its affiliates; Board of Director
meeting-related expenses of the directors and officers; expenses for legal and
auditing services; data processing and pricing services; costs of printing and
mailing proxies, stock certificates and stockholder reports; charges of the
custodian, transfer agent, registrar or dividend disbursing agent; expenses
pursuant to the Service and Distribution Plan; Securities and Exchange
Commission fees; membership fees in trade associations; fidelity bond coverage
for the Fund's officers; directors' and officers' errors and omissions insurance
coverage; interest; brokerage costs; taxes; expenses of qualifying the Fund's
shares for sale in various states; litigation; and other extraordinary or
non-recurring expenses and other expenses properly payable by the Fund.

For its services, the Adviser receives an annual fee on the basis of a
percentage of net assets. For the fiscal year ended October 31, 1994, the Fund
paid advisory fees equal to 0.68% of the average net assets of the Fund.

The Adviser also performs certain accounting, bookkeeping and pricing
services. For these services the Adviser receives a monthly fee to reimburse the
Adviser for its costs. This amount is not intended to include any profit to the
Adviser and is in addition to the advisory fees described above.

DISTRIBUTOR

Pursuant to a Distribution Agreement with the Fund dated May 11, 1992,
Capstone Asset Planning Company (the "Distributor") is the principal underwriter
of the Fund and, acting as exclusive agent, sells shares of the Fund to the
public on a continuous basis.

13
<PAGE> 39

answering questions concerning the Fund and their transactions with the Fund.
The Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
the Fund. In addition, the Plan authorizes payment by the Fund of the cost of
preparing, printing and distributing Fund Prospectuses and Statements of
Additional Information to prospective investors and of implementing and
operating the Plan.

Under the Plan, payments made to the Distributor may not exceed an amount
computed at an annual rate of 0.35% of the average net assets of the Fund. Of
this amount, the Distributor may reallocate amounts up to 0.25% of the Fund's
average net assets to Service Organizations (which may include the Distributor).
Any amounts not so allocated will be retained by the Distributor for the
purposes described above. The Distributor is permitted to collect the fees under
the Plan on a monthly basis. Any expenditures incurred by the Distributor in
excess of the limitation described above during a given month may be carried
forward up to twelve months for reimbursement, subject always to the 0.35%
limit, and no interest or carrying charges will be payable by the Fund on
amounts carried forward. The Plan may be terminated by the Fund at any time and
the Fund will not be liable for amounts not reimbursed as of the termination
date.

The Plan was last approved by a majority of the Fund's directors, including
a majority of the directors who have no direct or indirect financial interest in
the operation of the Plan or any of its agreements ("Plan Directors") on
November 13, 1994. The Plan was approved by the Fund's stockholders on February
18, 1992 and took effect on March 1, 1992. The Plan may be continued from year
to year, provided that such continuance is approved at least annually by a vote
of a majority of the Board of Directors, including a majority of the Plan
Directors.

The Glass-Steagall Act and other applicable laws currently prohibit banks
from engaging in the business of underwriting, selling or distributing
securities. Accordingly, unless such laws are changed, if the Fund engages banks
as Service Organizations, the banks would perform only administrative and
stockholder servicing functions. If a bank were prohibited from acting as a
Service Organization, alternative means for continuing the servicing of such
stockholders would be sought. State law may differ from Federal law and banks
and other financial institutions may be required to be registered as
broker-dealers to perform administrative and stockholder servicing functions.

The staff of the SEC has proposed amendments to Rule 12b-1. If the rule is
amended as proposed or in some other manner, it may be necessary for the Fund to
consider amending the Plan and any related agreements.

EXPENSES

The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. The Fund's total operating expenses during the
fiscal year ended October 31, 1994 were 1.28% of its average net assets.

14
<PAGE> 40
INVESTMENT APPLICATION FORM [LOGO]
Mail to: FUND/PLAN SERVICES, INC.
2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428

Please indicate the fund in which you wish to invest:
__________ Capstone Growth Fund, Inc.
__________ Medical Research Investment Fund, Inc.
__________ Capstone Balanced Fund
__________ Capstone Government Income Fund
__________ Capstone New Zealand Fund
__________ Capstone Nikko Japan Fund

1. YOUR ACCOUNT REGISTRATION
(CHECK ONLY ONE BOX) (PLEASE PRINT)

[ ] INDIVIDUAL OR JOINT ACCOUNT
__________________________________________________________________________
OWNER'S NAME
- -
__________________________________________________________________________
OWNER'S SOCIAL SECURITY NUMBER

__________________________________________________________________________
JOINT OWNER'S NAME
- -
__________________________________________________________________________
JOINT OWNER'S SOCIAL SECURITY NUMBER

[ ] GIFT OR TRANSFER TO A MINOR

___________________________________________________________as custodian for
CUSTODIAN'S NAME

__________________________________________________________________under the
MINOR'S NAME

__________Uniform Gifts/Transfers to Minors Act
STATE

_________________________________________ ________________________________
MINOR'S SOCIAL SECURITY NO. DATE OF BIRTH

[ ] TRUST
___________________________________________________________as trustee(s) of
TRUSTEE(S)' NAME
_________________________________________________________for the benefit of
NAME OF TRUST AGREEMENT
__________________________________________________________________________
BENEFICIARY'S NAME

_________________________________________ ________________________________
TAXPAYER ID NUMBER DATE OF TRUST AGREEMENT

[ ] CORPORATION, PARTNERSHIP OR OTHER ENTITY

__________________________________________________________________________
NAME OF CORPORATION OR OTHER ENTITY
__________________________________________________________________________
TYPE OF ENTITY
__________________________________________________________________________
TAXPAYER ID NUMBER

2 ADDRESS (PLEASE PRINT)

__________________________________________________________________________
STREET OR P.O. BOX
__________________________________________________________________________
CITY, STATE, ZIP
( ) ( )
____________________________________________ _____________________________
DAY PHONE EVENING PHONE

CITIZEN OF:

[ ] U.S. [ ] OTHER _________________________________________________

3 INVESTMENT METHOD

[ ] BY CHECK: I have enclosed a check payable to
__________________________________ for $ _________________________.

[ ] BY EXCHANGE: Please exchange _______________ shares
from my account ____________________ in ________________
ACCOUNT NO. FUND NAME

4 DIVIDEND AND CAPITAL GAINS PAYMENT OPTIONS
(CHECK ONLY ONE)

[ ] Reinvest all dividends and capital gains.
[ ] Pay all dividends and capital gains to me by check.
[ ] Pay all dividends by check and reinvest all capital gains.

All distributions will be reinvested unless otherwise indicated.

You may elect to aggregate your purchase of shares of the Fund and/or shares
of the Capstone Funds during a 13-month period to reduce your sales charge.

[ ] I request establishment of a Letter of Intent to purchase shares of the
Fund and/or the Capstone Funds as described in the Prospectus.

The aggregate amount of these purchases will be at least equal to (check
one):

[ ] $100,000 [ ] $250,000 [ ]$500,000
[ ] $1,000,000 [ ] $2,500,000 [ ]$5,000,000

6 SYSTEMATIC WITHDRAWAL PLAN
(FREE OPTION)

You can provide for withdrawals of $50 or more if you have made a minimum
investment of $5,000 in shares of the Fund.

[ ] Check the boxes and fill in the information requested.
Minimum $50 withdrawal.

[ ] I elect the Systematic Withdrawal Plan and authorize Fund/Plan Services,
Inc. to withdraw ________ from my Fund account (check one):
AMOUNT
[ ] monthly [ ] quarterly [ ] semi-annually
[ ] annually and mail the check to:

__________________________________________________________________________
NAME

__________________________________________________________________________
ADDRESS
<PAGE> 41
INVESTMENT APPLICATION FORM [LOGO]
Mail to: FUND/PLAN SERVICES, INC.
2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428

For help with this form or for more information, call us toll free at
1-800-262-6631

7 TELEPHONE EXCHANGE AND EXPEDITED REDEMPTION (FREE OF OPTIONS)

You or anyone you designate can exchange shares by phone for shares of any of
the Capstone Funds or redeem shares by phone and have the proceeds transmitted
to your bank or broker-dealer.

[ ] Check the boxes and fill in the information requested.

[ ] I authorize Fund/Plan Services Inc. to honor any telephone exchange request
without signature guarantee.

[ ] I authorize Fund/Plan Services, Inc. to honor any telephonic or telegraphic
request for redemption without signature guarantee, of any or all shares,
provided the proceeds are transmitted only to the entity designated below.
(check one).

[ ] COMMERCIAL BANK

___________________________________ ____________________________________
NAME OF ACCOUNT ACCOUNT NO.
___________________________________ ____________________________________
NAME OF BANK BANK'S ROUTING CODE
__________________________________________________________________________
ADDRESS OF BANK CITY STATE ZIP

[ ] BROKER-DEALER

___________________________________ ____________________________________
NAME OF ACCOUNT ACCOUNT NO.
__________________________________________________________________________
NAME OF BROKER-DEALER
__________________________________________________________________________
ADDRESS OF BROKER-DEALER CITY STATE ZIP

8 TELEPHONE PURCHASE AUTHORIZATION (FREE OPTION)

I (We) understand that subsequent investments initiated by telephone purchase
may not be less than $1,000 nor greater than five times the current value of
the unissued shares in my (our) account. I (We) agree that if payment for the
telephone purchase is not received within 7 days of its placement Fund/Plan
Services, Inc. is authorized to reverse the purchase and charge my (our)
account for any loss to the Fund.

I (We) understand that the Telephone Purchase privilege may be discontinued by
the Fund or Fund/Plan Services upon 30 days written notice, or at any time by
the investor by written notice to Fund/Plan Services after the settlement of
all outstanding trades.

I (We) hereby ratify any instructions given pursuant to this authorization and
agree that neither the Fund(s), the distributor, nor the transfer agent will
be liable for any loss, cost or expense for acting upon such instructions
believed by it to be genuine and in accordance with the procedures set forth in
this form and in the Prospectus.

[ ] Yes, I do wish to participate in the Telephone Purchase Authorization
program.

9 PRE-AUTHORIZED PAYMENT (FREE OPTION)

You can arrange to make monthly investments of $25 or more from your checking
account to your Fund account.

Check the box and fill in the information requested below.

[ ] ___________________________________ ____________________________________
BANK NAME BANK'S ROUTING CODE
___________________________________ ____________________________________
NAME OF ACCOUNT BANK ACCOUNT NO.
__________________________________________________________________________
BANK ADDRESS CITY STATE ZIP

___________________________________ ____________________________________
DEPOSITOR'S SIGNATURE JOINT DEPOSITOR'S SIGNATURE

[ ] Write "VOID" across the face of a check from the bank account you will be
using and attach the check to this application.

10 SIGNATURE

BY SIGNING THIS FORM, I CERTIFY THAT:

I have received, read and agree to the terms of the prospectus for each fund
in which I am investing. I have the authority and legal capacity to purchase
mutual fund shares, am of legal age in my state, and believe each investment
is suitable for me.

I authorize Fund/Plan Services, Inc., its affiliates, and the Fund to act on
any instructions believed to be genuine for any service authorized on this
form. I agree that they will not be liable for any resulting loss or expense.

Under penalty of perjury, I am NOT currently subject to IRS backup withholding
because: 1) I have not been notified, or 2) notification has been revoked.
(Cross out "NOT" if you are currently subject to backup withholding.)

Under penalty of perjury, the Social Security or Tax Identification Number
given is correct. If I fail to give the correct number or sign this form,
Fund/Plan Services, Inc. may reject, restrict or redeem my investment. I may
also be subject to IRS backup withholding on 31% of all distributions and
redemptions.

PLEASE SIGN HERE:
___________________________________________________________ ____________________
SIGNATURE (OWNER, TRUSTEE, ETC. DATE
EXACTLY AS IT APPEARS IN SECTION 1)

___________________________________________________________ ____________________
SIGNATURE (JOINT OWNER, CO-TRUSTEE, ETC. DATE
EXACTLY AS IT APPEARS IN SECTION 1)

11 DEALER AUTHORIZATION

The undersigned ("Dealer") agrees to all applicable provisions in this
application, guarantees the genuineness of the signature on the application
and agrees to notify Capstone Asset Planning Company (the "Distributor") of
any purchase made under a Letter of Intent or Rights or Accumulation. If the
shareholder does not sign this application, the Dealer warrants that this
Application is completed in accordance with the shareholder's instructions and
agrees to indemnify the Fund, the Distributor and Fund/Plan Services, Inc. for
any loss or liability from acting or relying upon such instructions.

---------- ---------- -------
DEALER NO. BRANCH NO. REP NO.
---------- ---------- -------

____________________________________________________ _________________________
FIRM NAME REP'S NAME
________________________________________________________________________________
FIRM ADDRESS
____________________________________________________ _________________________
AUTHORIZED SIGNATURE OF DEALER REP'S SIGNATURE

<PAGE> 42

PURCHASING SHARES

Capstone Asset Planning Company (the "Distributor"), located at 5847 San
Felipe, Suite 4100, Houston, Texas 77057, is the principal underwriter of the
Fund and, acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis. Edward L. Jaroski, a director and officer of the Fund, is
President and director of the Distributor and the Adviser. Most officers of the
Fund are also officers of the Adviser, the Distributor and their parent company,
Capstone Financial Services, Inc.

Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized investment dealers or directly from the
Fund's Distributor. Only the Distributor and investment dealers which have a
sales agreement with the Distributor are authorized to sell shares of the Fund.
For further information, reference is made to the caption "Distributor" in the
Fund's Statement of Additional Information.

Shares will be credited to a stockholder's account at the public offering
price next computed after an order is received by the Distributor. The minimum
initial investment is $200, except for continuous investment plans which have no
minimum, and there is no minimum for subsequent purchases. No stock certificates
representing shares purchased will be issued except upon written request to the
Fund's Transfer Agent. The Fund's management reserves the right to reject any
purchase order if, in its opinion, it is in the Fund's best interest to do so.

The public offering price is the net asset value (see "Determination of Net
Asset Value") plus a sales charge which varies in accordance with the amount of
the purchase as follows:

<TABLE>
<CAPTION>
DEALER
SALES CHARGE AS A REALLOWANCE
PERCENTAGE OF AS A
-------------------- PERCENTAGE
NET OF
OFFERING AMOUNT OFFERING
AMOUNT OF SINGLE TRANSACTION PRICE INVESTED PRICE
- --------------------------------------------------------- -------- -------- ----------
<S> <C> <C> <C>
Less than $100,000....................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000.......................... 3.50% 3.63% 3.00%
$250,000 but less than $500,000.......................... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000........................ 2.00% 2.04% 1.75%
$1,000,000 but less than $2,500,000...................... 1.00% 1.01% .90%
$2,500,000 but less than $5,000,000...................... 50% .50% .45%
$5,000,000 and over...................................... 00% .00% .00%*
</TABLE>

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

* A negotiated broker commission will be paid by the Distributor.

The size of investment shown in the above table applies to the total amount
being invested by any person in shares of the Fund alone or in any combination
of shares of the Fund and shares of certain other mutual funds sponsored by the
Adviser. See "Reduced Sales Charges". The Distributor retains the entire sales
charge when it makes sales directly to the public. Dealers who receive 90% or
more of the entire sales charge may be deemed to be underwriters under the
Securities Act of 1933.

At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor, during

15
<PAGE> 43

such programs, will reallow an amount not exceeding the total applicable sales
charges on the sales generated by the dealer to any dealer that sponsors sales
contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor. In
addition, the Adviser and/or the Distributor in their discretion may from time
to time, pursuant to objective criteria established by the Adviser and/or
Distributor, sponsor programs designed to reward selected dealers for certain
services or activities which are primarily intended to result in the sale of
shares of the Fund. These programs will not change the price you pay for your
shares or the amount that the Fund will receive from such sale.

INVESTING THROUGH AUTHORIZED DEALERS

If any authorized dealer receives an order of at least $200, the dealer may
contact the Distributor directly. Orders received by dealers by the close of
trading on the New York Stock Exchange on a business day that are transmitted to
the Distributor by 4:00 p.m. Central time on that day will be based on the
public offering price per share determined as of the close of trading on the New
York Stock Exchange on that day. Otherwise, the orders will be based on the next
determined public offering price. It is the dealer's responsibility to transmit
orders so that they will be received by the Distributor before 4:00 p.m. Central
time.

After each investment, the stockholder and the authorized investment dealer
receive confirmation statements of the number of shares purchased and owned.

PURCHASES THROUGH THE DISTRIBUTOR

An account may be opened by mailing a check or other negotiable bank draft
(payable to Capstone Growth Fund, Inc.) for $200 or more together with the
completed Investment Application Form included with this Prospectus to the
Transfer Agent: Capstone Growth Fund, Inc., c/o Fund/Plan Services, Inc., P.O.
Box 874, 2 W. Elm Street, Conshohocken, Pennsylvania 19428. The $200 minimum
initial investment may be waived by the Distributor for plans involving
continuing investments (see "Stockholder Services"). There is no minimum for
subsequent investments, which may be mailed directly to the Transfer Agent. All
such investments are made at the public offering price of Fund shares next
computed following receipt of payment by the Transfer Agent. Confirmations of
the opening of an account and of all subsequent transactions in the account are
forwarded by the Transfer Agent to the stockholder's address of record.

TELEPHONE PURCHASE AUTHORIZATION (INVESTING BY PHONE)

Stockholders who have completed the Telephone Purchase Authorization
section of the Investment Application Form may purchase additional shares by
telephoning the Fund's Transfer Agent at (800) 845-2340. The minimum telephone
purchase is $1,000 and the maximum is five times the net asset value of shares
(for which certificates have not been issued) held by the stockholder on the day
preceding such telephone purchase for which payment has been received. The
telephone purchase will be made at the offering price next computed after
receipt of the call by the Transfer Agent. Payment for the telephone purchase
must be received by the Transfer Agent within seven days. If payment is not
received within seven days, the stockholder will be liable for all losses
incurred as a result of the purchase.

16
<PAGE> 44

INVESTING BY WIRE

Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Fund by requesting their bank
to transmit funds by wire to: United Missouri Bank KC NA, ABA #10-10-00695, For:
Fund/Plan Services, Inc. Account #98-7037-0719; Further Credit Capstone Growth
Fund, Inc. The investor's name and account number must be specified in the wire.

Initial Purchases -- Before making an initial investment by wire, an
investor must first telephone (800) 845-2340 to be assigned an account number.
The investor's name, account number, taxpayer identification or social security
number, and address must be specified in the wire. In addition, the investment
application which accompanies this Prospectus should be promptly forwarded to
Capstone Growth Fund, Inc., c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm
Street, Conshohocken, Pennsylvania 19428.

Subsequent Purchases -- Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number. The investor's bank may impose a fee for investments by
wire.

REDUCED SALES CHARGES

Investors can utilize one of the programs described below to reduce the
sales charge on purchases of shares of the Fund alone or on purchases of shares
of the Fund and certain other Capstone Funds.

Quantity Discounts -- Purchases of shares of the Fund and certain other
Capstone Funds made at the same time by a "Purchaser" may be combined to receive
a quantity discount. The term "Purchaser" is defined as:

-- an individual, his/her spouse and children under the age of 21, trust or
custodial accounts established for their sole benefit(s), and any
corporation, partnership or sole proprietorship which is 100% owned,
either alone or in combination, with any of the foregoing;

-- a trustee or other fiduciary purchasing for a single trust estate or a
single fiduciary account; and

-- a "company" as defined in Section 2(a)(8) of the Investment Company Act
of 1940.

Rights of Accumulation -- A Purchaser may also qualify for reduced sales
charges by combining the amount being invested in shares of the Fund and shares
of the Capstone Funds owned by the Purchaser calculated at the then current
offering price. To qualify for obtaining the discount on a particular purchase,
the Purchaser must send the Distributor a list of account numbers and the names
in which such accounts of the Purchaser are registered at the time the purchase
is made. If shares are being purchased through an authorized dealer, such
information must be communicated by the dealer to the Distributor at the time of
purchase.

17
<PAGE> 45

Letter of Intent. Each investment made during the period receives the reduced
sales commission applicable to the total amount of the investment goal. If all
shares are not purchased, a price adjustment is made, depending upon the actual
amount invested within the period covered by the Letter of Intent, by the
redemption of sufficient shares held in escrow for the account of the Purchaser.
During the period of the Letter of Intent the Transfer Agent will hold a portion
of the shares purchased in escrow. Those shares will be released upon completion
of the intended investment. Additional information regarding this procedure is
contained in Appendix A in the back of the Prospectus.

401(k) Plans -- For information concerning reduced sales charges applicable
to 401(k) plans, reference is made to the caption "Reduced Sales Charges" in the
Fund's Statement of Additional Information.

SALES AT NET ASSET VALUE

Purchases of the Fund's shares at net asset value without a sales charge
may be made by the following persons: (a) tax-exempt entities whose minimum
initial investment (or whose investment pursuant to a Letter of Intent) is
$250,000 or more, (b) purchases by a bank or trust company in a single account
where such bank or trust company is named as trustee and the minimum initial
investment (or whose investment pursuant to a Letter of Intent) is $250,000 or
more, (c) any current or retired officer, director or employee, or any member of
the immediate family of such person of the Fund, Adviser, Distributor or its
affiliates thereof, (d) the Fund's Adviser, Distributor or any affiliated
company thereof, (e) any employee benefit plan established for employees of the
Adviser, Distributor or its affiliates, (f) advisory clients of the Adviser,
other than those persons participating in an asset allocation plan established
by the Adviser, who do not qualify for net asset value purchases under any other
category, (g) registered representatives and their spouses and minor children
and employees of broker-dealers who have entered into Selling Group Agreements
with the Distributor, (h) separate accounts of life insurance companies or
commingled accounts of financial institutions, (i) Tenneco Inc. and its
affiliates, present, future and retired employees and any employee benefit plan
established for such employees, (j) stockholders of the Fund as of February 28,
1986, (k) investors who are clients of recognized consulting firms which provide
consulting services to pension funds or corporations, state and local
governments, Taft-Hartley Plans and foundations and endowments which have
contacted the Fund, the Adviser or the Distributor with respect to furnishing
advice to such clients of such consulting firm or with respect to distribution
of securities of the Fund by such client or purchase of securities of the Fund
by such client, and (l) in connection with the Fund's merger with or acquisition
of any investment company or trust. In the opinion of the Fund's management
these sales will result in less selling effort and expense.

If purchases by tax-exempt entities, bank or trust companies, separate
accounts or commingled accounts at net asset value are made through dealers who
have executed dealer agreements with respect to the Capstone Group, the
Distributor may make a payment out of its own resources to such dealers.

18
<PAGE> 46

DISTRIBUTIONS AND TAXES

PAYMENT OPTIONS

Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to stockholders of the Fund are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset value as
of the close of business on the record date for such distributions. However, a
stockholder may elect on the application form which accompanies this Prospectus
to receive distributions as follows:

Option 1. To receive income dividends in cash and capital gain
distributions in additional Fund shares, or

Option 2. To receive all income dividends and capital gain distributions in
cash.

The Fund intends to pay any dividends from investment company taxable
income and distributions representing capital gain at least annually, usually in
November. The Fund will advise each stockholder annually of the amounts of
dividends from investment company taxable income and of net capital gain
distributions reinvested or paid to the stockholder during the calendar year.

If you select Option 1 or Option 2 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, your
distribution checks will be reinvested in your account at the then current net
asset value and your election will be converted to the purchase of additional
shares.

TAXES

The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under the Federal tax law. In any taxable year in
which the Fund so qualifies and distributes at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest,
and the excess of realized net short-term capital gain over realized net
long-term capital loss), the Fund generally will be relieved of Federal income
tax on its investment company taxable income and net capital gain (the excess of
realized net long-term capital gains over realized net short-term capital
losses) distributed to stockholders. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are also subject to
a nondeductible 4% excise tax. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December 31
of the calendar year if it is declared by the Fund in October, November or
December of that year to stockholders of record on a date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to stockholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.

Distributions from investment company taxable income are taxable to
stockholders as ordinary income. Distributions of the net capital gain
designated by the Fund as capital gain dividends are taxable as long-term
capital gains regardless of the length of time a stockholder may have held
shares of the Fund. The tax treatment of distributions treated as ordinary
income or capital gain will be the same whether the stockholder reinvests the
distributions in additional shares or elects to receive them in cash.

19
<PAGE> 47

Stockholders will be notified each year of the amounts and nature of
dividends and distributions including the amounts (if any) for that year which
have been designated as capital gain dividends.

Special tax rules may apply to the Fund's purchase of put and call options,
its acquisition of stock index futures, and its acquisition of options on such
futures. Such rules, among other things: (i) may affect whether capital gains
and losses from such transactions are considered to be short-term or long-term;
(ii) may have the effect of converting capital gains and losses into ordinary
income and losses; (iii) may have the effect of deferring losses and/or
accelerating the recognition of gains or losses; and (iv) for purposes of
qualifying as a regulated company, may limit the extent to which the Fund will
be able to engage in such transactions.

Upon the sale, redemption or other disposition of shares of the Fund, a
stockholder generally will realize a taxable gain or loss, depending upon his
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the stockholder's hands and generally will
be long-term or short-term, depending upon the stockholder's holding period for
the shares. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced (including shares acquired pursuant
to the reinvestment plan) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a stockholder on a disposition of Fund shares held by the
stockholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received by the stockholder with
respect to such shares.

The Fund may be required to withhold Federal income tax at the rate of 31%
of all taxable distributions (including gross proceeds from the redemption of
Fund shares) payable to stockholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
where the Fund or the stockholder has been notified by the Internal Revenue
Service that the stockholder is subject to backup withholding. Corporate
stockholders and certain other stockholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the stockholder's Federal
income tax liability.

Distributions also may be subject to additional state, local, and foreign
taxes depending upon each stockholder's particular situation. In addition,
foreign stockholders may be subject to Federal income tax rules that differ
significantly from those described above. Stockholders are advised to consult
their tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.

REDEMPTION AND REPURCHASE OF SHARES

Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Growth
Fund, Inc., c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm Street,
Conshohocken, Pennsylvania 19428. In addition, certain expedited redemption
methods described below are available. If stock certificates have been issued
for shares being redeemed, such certificates must accompany the written request
with the stockholder's signature guaranteed by an "eligible guarantor
institution", as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, which participates in a signature

20
<PAGE> 48

guarantee program. Eligible guarantor institutions include banks, brokers,
dealers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. A broker-dealer
guaranteeing signatures must be a member of a clearing corporation or maintain
net capital of at least $100,000. Credit unions must be authorized to issue
signature guarantees. No signature guarantees for shares for which no
certificates have been issued are required when an application is on file at the
Transfer Agent and payment is to be made to the stockholder of record at the
stockholder's address of record. However, if the proceeds of the redemption are
to be paid to someone other than the registered holder, or to other than the
stockholder's address of record, or if the shares are to be transferred, the
owner's signature must be guaranteed by a commercial bank or by a securities
firm having membership on a recognized national securities exchange. The
redemption price shall be the net asset value per share next computed after
receipt of the redemption request. See "Determination of Net Asset Value".

In addition, the Distributor is authorized as agent for the Fund to offer
to repurchase shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. The repurchase price is the net
asset value per share next determined after the request is received. See
"Determination of Net Asset Value". Broker-dealers may charge for their services
in connection with the repurchase, but the Distributor and its affiliates will
not charge any fee for such repurchase. Payment for shares presented for
repurchase or redemption by authorized investment dealers will be made within
seven days after receipt by the Transfer Agent of a written notice and/or
certificate in proper order.

The Fund reserves the right to pay any portion of redemption requests in
excess of $1 million in readily marketable securities from the Fund's portfolio.
In this case, the stockholder may incur brokerage charges on the sale of the
securities.

The right of redemption and payment of redemption proceeds are subject to
suspension for any period during which the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or when trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission; during any period when an emergency as defined by the rules and
regulations of the Securities and Exchange Commission exists; or during any
period when the Securities and Exchange Commission has by order permitted such
suspension. The Fund will not mail redemption proceeds until checks (including
certified checks or cashier's checks) received for the shares purchased have
cleared, which can be as long as 15 days.

The value of shares on repurchase or redemption may be more or less than
the investor's cost depending upon the market value of the Fund's portfolio
securities at the time of redemption. No redemption fee is charged for the
redemption of shares.

EXPEDITED TELEPHONE REDEMPTION

A stockholder redeeming at least $1,000 of shares (for which certificates
have not been issued), and who has authorized expedited redemption on the
application form filed with the Transfer Agent may at the time of such
redemption request that funds be mailed or wired to the commercial bank or
registered broker-dealer he has previously designated on the application form by
telephoning the Transfer Agent at (800) 845-2340. Redemption proceeds will be
sent on the next business day following receipt of the telephone redemption
request. If a stockholder seeks to use an expedited method of redemption of
shares recently purchased by check, the Fund may withhold the

21
<PAGE> 49

redemption proceeds until it is reasonably assured of the collection of the
check representing the purchase. The Fund, Distributor and Transfer Agent
reserve the right at any time to suspend or terminate the expedited redemption
procedure or to impose a fee for this service. During periods of unusual
economic or market changes, stockholders may experience difficulties or delays
in effecting telephone redemptions.

When exchange or redemption requests are made by telephone, the Fund has
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmations of transactions. The Fund will not be liable for losses
due to unauthorized or fraudulent telephone transactions unless it does not
follow such procedures, in which case it may be liable for such losses.

DETERMINATION OF NET ASSET VALUE

Portfolio securities listed on an exchange or quoted on a national market
system are valued at the last sales price. Other securities are valued at the
mean between the most recent bid and asked prices. In the event a listed
security is traded on more than one exchange, it is valued at the last sale
price on the exchange on which it is principally traded. If there are no
transactions in a security during the day, it is valued at the mean between the
most recent bid and asked price. However, debt securities (other than short-term
obligations) including listed issues, may be valued on the basis of valuations
furnished by a pricing service which utilizes electronic data processing
techniques to determine valuations for normal institutional size trading units
of debt securities, without exclusive reliance upon exchange or over-the-counter
prices. Short-term obligations are valued at amortized cost. For information
concerning pricing of financial futures, see "Determination of Net Asset Value"
in the Fund's Statement of Additional Information. Securities as to which market
quotations are not readily available and other assets held by the Fund, if any,
are valued at their fair value as determined in good faith by the Board of
Directors.

All portfolio securities, except options on stock and stock indexes and
except for stock index futures and options thereon, are valued as of the close
of regular trading on the New York Stock Exchange (which is currently 4:00 p.m.
Eastern time). Options on stock and stock indexes traded on national securities
exchanges, and stock index futures and options thereon, which are traded on
commodities exchanges, are valued at their last daily settlement prices as of
the close of such exchanges (which is currently 4:15 p.m. Eastern time).

22
<PAGE> 50

STOCKHOLDER SERVICES

Capstone Growth Fund, Inc. provides its stockholders with a number of
services and conveniences designed to assist investors in the management of
their investments. These stockholder services include the following:

TAX-DEFERRED RETIREMENT PLANS

Shares may be purchased by virtually all types of tax-deferred retirement
plans. The Distributor or its affiliates make available plan forms and/or
custody agreements for the following:

- Individual Retirement Accounts (for individuals and their non-employed
spouses who wish to make limited tax deductible contributions to a
tax-deferred account for retirement); and

- Simplified Employee Pension Plans.

Dividends and distributions will be automatically reinvested without a
sales charge. For further details, including fees charged, tax consequences and
redemption information, see the specific plan documents which can be obtained
from the Fund.

Investors should consult with their tax adviser before establishing any of
the tax-deferred retirement plans described above.

EXCHANGE PRIVILEGE

Shares of the Fund which have been outstanding 15 days or more may be
exchanged for shares of other Capstone Funds with no administrative charge. The
exchange of shares held 15 days or more will be effected at net asset value,
plus an amount equal to the difference, if any, between the sales charges
previously paid or deemed applicable with respect to the shares being exchanged,
and the sales charge payable on shares of the Capstone Fund for which those
shares are being exchanged, determined in accordance with applicable legal
requirements. A stockholder requesting such an exchange will be sent a current
prospectus for the fund into which the exchange is requested. Shares held less
than 15 days cannot be exchanged. In such instances, the shares will be redeemed
at the next computed net asset value and the entire sales commission paid on the
purchase will be refunded to the investor.

Purchases, redemptions and exchanges should be made for investment purposes
only. A pattern of frequent exchanges, purchases and sales may be deemed abusive
by the Adviser and, at the discretion of the Adviser, can be limited by the
Fund's refusal to accept further purchase and/or exchange orders from the
investor. Although the Adviser will consider all factors it deems relevant in
determining whether a pattern of frequent purchases, redemptions and/or
exchanges by a particular investor is abusive and not in the best interests of
the Fund or its other stockholders, as a general policy investors should be
aware that engaging in more than one exchange or purchase-sale transaction
during any thirty-day period with respect to a particular fund may be deemed
abusive and therefore subject to the above restrictions.

An exchange of shares is treated for Federal income tax purposes as a sale
of shares given in exchange and the stockholders may, therefore, realize a
taxable gain or loss. The exchange privilege may be exercised only in those
states where shares of the fund for which shares held are

23
<PAGE> 51

being exchanged may be legally sold, and the privilege may be amended or
terminated upon 60 days' notice to stockholders.

Under certain circumstances, the sales charge incurred in acquiring shares
of the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of the Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Capstone Fund or another regulated investment company are acquired without a
sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. The portion of the sales charge
affected by this rule will be treated as a sales charge paid for the new shares.

The stockholder may exercise the following exchange privilege options:

Exchange by Mail -- Stockholders may mail a written notice requesting
an exchange to the Fund's Transfer Agent.

Exchange by Telephone -- Stockholders must authorize telephone
exchange on the application form filed with the Transfer Agent to exchange
shares by telephone. Telephone exchanges may be made from 9:30 a.m. to 4:00
p.m. Eastern time, Monday through Friday, except holidays. If certificates
have been issued to the investor, this procedure may be utilized only if he
delivers his certificates, duly endorsed for transfer, to the Transfer
Agent prior to giving telephone instructions. During periods of unusual
economic or market changes, stockholders may experience difficulties or
delays in effecting exchanges over the telephone.

PRE-AUTHORIZED PAYMENT

A stockholder who has completed the Pre-Authorized Payment section of the
Investment Application Form may arrange to make regular monthly investments of
$25 or more automatically from his checking account by authorizing the Fund's
Transfer Agent to withdraw the payment from his checking account.

SYSTEMATIC WITHDRAWAL PLAN

Investors may open a withdrawal plan providing for withdrawals of $50 or
more monthly, quarterly, semi-annually or annually if they have made a minimum
investment of $5,000 in shares of the Fund. The minimum amount which may be
withdrawn pursuant to this plan is $50.

These payments may constitute return of initial capital and do not
represent a yield or return on investment. In addition, such payments may
deplete or eliminate the investment. Stockholders cannot be assured that they
will receive payment for any specific period because payments will

24
<PAGE> 52

terminate when all shares have been redeemed. The number of such payments will
depend primarily upon the amount and frequency of payments and the yield on the
remaining shares. Under this plan, any distributions must be reinvested in
additional shares at net asset value.

The Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or alter
the stockholder's right to redeem shares. Such Plan may be terminated in writing
at any time by either the stockholder or the Fund. The cost of operating the
Systematic Withdrawal Plan is borne by the Fund. It would not be advisable for
investors to make purchases of shares involving any sales charge while
participating in the Systematic Withdrawal Plan.

GENERAL INFORMATION

The Fund is an open-end diversified management investment company, as
defined in the Investment Company Act of 1940, as amended. It was incorporated
in New Jersey in 1952 and merged into a Pennsylvania corporation in 1967.
Effective May 11, 1992 the Fund was reorganized as a Maryland corporation and
its name was changed from U.S. Trend Fund, Inc. to Capstone U.S. Trend Fund,
Inc. The Fund's name was changed to Capstone Growth Fund, Inc. effective
September 6, 1994, upon approval by the Fund's stockholders at a special meeting
held on August 25, 1994.

The Fund's authorized capitalization consists of twenty-five million shares
of $0.001 par value common stock. There is no other class of security
outstanding. All shares have equal voting and liquidation rights and have one
vote per share. Voting rights are non-cumulative, which means that holders of
more than 50% of the shares voting for the election of directors may elect 100%
of the directors if they choose to do so, and in such event the holders of the
remaining less than 50% of the shares voting for the directors will not be able
to elect any directors. All shares have equal dividend rights, are fully paid,
nonassessable and freely transferable and have no conversion, pre-emptive or
subscription rights. Fractional shares have the same rights, pro rata, as full
shares.

If additional series are added, on all matters submitted to stockholder
vote, all shares of the Fund then issued and outstanding, irrespective of
series, will be voted in the aggregate and not by individual series except (i)
when required by the Investment Company Act of 1940, shares will be voted by
individual series, and (ii) when a matter is determined by the directors to
affect less than all of the Fund's series, then only holders of shares of the
affected series will be entitled to vote on such matter.

As of January 3, 1995 NationsBank, as trustee under the Tenneco Inc. Thrift
Plan, owned approximately 38.3% and PliFunds Investment Plans owned
approximately 7.4% of the outstanding shares of the Fund.

The Fund's securities are held by The Fifth Third Bank, Cincinnati, Ohio,
under a Custodian Agreement with the Fund. Fund/Plan Services, Inc. acts as both
Transfer Agent and dividend paying agent for the Fund.

Inquiries by stockholders of the Fund should be addressed to the Fund at
its address stated on the cover page of this Prospectus.

25
<PAGE> 53

ANNUAL MEETING

The Fund is not required to hold an annual meeting of its stockholders;
however, stockholders have the right to require the Secretary of the Fund to
call a stockholders' meeting upon the written request of stockholders entitled
to vote not less than ten percent of all votes entitled to be cast at such
meeting, provided that (1) such request shall state the purposes of such meeting
and the matters proposed to be acted on, and (2) the stockholders requesting
such meeting shall have paid to the Fund the reasonably estimated cost of
preparing and mailing the notice thereof, which the Secretary shall determine
and specify to such stockholders. No meeting shall be called upon the request of
stockholders to consider any matter which is substantially the same as a matter
voted upon at any special meeting of the stockholders held during the preceding
twelve months, unless requested by the holders of a majority of all shares
entitled to be voted at such meeting.

26
<PAGE> 54

APPENDIX A

INFORMATION PERTAINING TO LETTER OF INTENT

Subject to conditions specified below, each purchase during the
thirteen-month period subsequent to the effective date of a Letter of Intent
(the "Letter") will be made at the public offering price applicable to a single
transaction of the dollar amount indicated, as described in the then effective
prospectus. The offering price may be further reduced under the Rights of
Accumulation if the Transfer Agent is advised of any shares previously purchased
and still owned. At any time during the period the investor may revise upward
his stated intention by submitting a written request to that effect. Such
revision shall provide for the escrowing of additional shares. The original
period of the Letter, however, shall remain unchanged. Each separate purchase
made pursuant to the Letter is subject to the terms and conditions contained in
the prospectus in effect at the time of that particular purchase. The Letter
does not constitute a commitment to purchase shares, but if purchases so made
within thirteen months from the effective date of a Letter do not aggregate the
amount specified, the investor must pay the increased amount of sales charge
prescribed in the terms of escrow. The investor or his dealer must refer to the
Letter of Intent in placing each order for shares while the Letter is in effect.
When remitting funds directly to the Transfer Agent for investment in an
account, specific reference must be made to the Letter.

TERMS OF ESCROW

1. To assure compliance with provisions of the Investment Company Act of
1940, out of the initial purchase (or subsequent purchase if necessary) 5% of
the dollar amount indicated on the application form will be held in escrow in
the form of shares (computed to the nearest full share at the applicable public
offering price) registered in the Purchaser's name. These shares will be held at
the Fund's Transfer Agent and be subject to the terms of escrow.

2. If total purchases pursuant to the Letter equal the amount specified as
the expected aggregate purchases, escrow shares will be released from
restriction.

3. If the total purchases pursuant to the Letter are less than the amount
specified, the Purchaser shall remit to the Distributor an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases if all
such purchases had been made at a single time. If the Distributor, within 10
business days after request, does not receive said difference in sales charge,
it will instruct the Fund's Transfer Agent to redeem an appropriate number of
escrow shares to realize such difference. If the proceeds from this redemption
are inadequate, the Purchaser will be liable to the Distributor for the
difference. The remaining shares after the redemption will be deposited to his
account unless otherwise instructed.

4. The investor irrevocably constitutes and appoints the Fund's Transfer
Agent as attorney to surrender for redemption any or all shares on the books of
the Fund, under the conditions previously outlined, with full power of
substitution in the premises.

REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

As all income dividends and/or capital gains distributions are reinvested at
net asset value without sales commissions; shares acquired through reinvestment
are not applied to the Letter of Intent.

PROVISIONS FOR PRICE ADJUSTMENT

If total purchases made under a Letter of Intent and the Rights of
Accumulation are large enough to qualify for a lower sales charge than that
applicable to the amount initially specified, or if trades not initially made
under the Letter subsequently qualify for a lower sales charge through the
90-day back-dating provisions (see "Reduced Sales Charges -- Letter of Intent"
in the Prospectus), an adjustment will be made at the expiration of this Letter
to give effect to the lower charge. Such adjustment in sales charge will be used
to purchase additional shares for the investor.

CANCELLATION OR LIQUIDATION

If at any time prior to or after completion of the Letter of Intent a
Purchaser wishes to cancel the Letter, he must notify the Distributor in
writing. If at any time prior to the completion of the Letter of Intent the
Purchaser requests the Fund's Transfer Agent to liquidate his total shares, a
cancellation of the Letter will automatically be effected. Under either of the
above conditions the total purchased pursuant to the Letter may be less than the
amount specified as the expected aggregate purchases. If so, the Fund's Transfer
Agent will redeem an appropriate number of escrowed shares and remit to the
Distributor an amount equal to the difference between the dollar amount of sales
charge actually paid and the amount of sales charge which would have been paid
on the total purchases if all such purchases had been made at a single time.

27
<PAGE> 55
(LOGO)
THE CAPSTONE GROUP
OF INVESTMENT COMPANIES

================================================================================
EQUITY

* CAPSTONE GROWTH FUND, INC.
================================================================================

================================================================================
FIXED INCOME

* CAPSTONE GOVERNMENT INCOME FUND
================================================================================

================================================================================
BALANCED

* CAPSTONE BALANCED FUND
================================================================================

================================================================================
INTERNATIONAL/GLOBAL

* CAPSTONE NIKKO JAPAN FUND
* MEDICAL RESEARCH INVESTMENT FUND, INC.
* CAPSTONE NEW ZEALAND FUND
================================================================================

For more complete information about the Capstone Funds including charges and
expenses, contact the Distributor at the address below to receive a prospectus.
Please read it carefully before you invest or send money.

CAPSTONE ASSET PLANNING COMPANY
5847 SAN FILIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631

================================================================================

PROSPECTUS AND APPLICATION
JANUARY 17, 1995

================================================================================

CAPSTONE
GROWTH
FUND, INC.

(FORMERLY CAPSTONE
U.S. TREND FUND, INC.)

================================================================================

(LOGO) A MEMEBER OF
THE CAPSTONE GROUP
OF INVESTMENT COMPANIES

================================================================================
<PAGE> 56
EXHIBIT B

AGREEMENT AND PLAN OF REORGANIZATION

THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this ____ day of __________, 1995, by and between Capstone Series, Inc.
("CSI"), a Maryland corporation with principal offices at 5847 San Felipe,
Suite 4100, Houston, Texas 77057, on behalf of its series, Capstone Balanced
Fund (the "Acquired Fund"), and Capstone Growth Fund, Inc. (the "Acquiring
Fund"), a Maryland corporation with principal offices at 5847 San Felipe, Suite
4100, Houston, Texas 77057.

This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of
the United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of
substantially all of the assets of the Acquired Fund in exchange solely for
shares of Common Stock of the Acquiring Fund ("Acquiring Fund Shares") and the
assumption by the Acquiring Fund of certain liabilities of the Acquired Fund
and the distribution, after the Closing Date hereinafter referred to, of
Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation
of the Acquired Fund as provided herein, all upon the terms and conditions
hereinafter set forth in this Agreement.

WHEREAS, CSI (including the Acquired Fund) and the Acquiring Fund are
registered investment companies of the management type and the Acquired Fund
owns securities that generally are assets of the character in which the
Acquiring Fund is permitted to invest; and

WHEREAS, both the Acquired Fund and the Acquiring Fund are authorized
to issue shares of common stock; and

WHEREAS, the Board of Directors of CSI on behalf of the Acquired Fund
has determined that the exchange of all of the assets and certain of the
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption
of such liabilities by the Acquiring Fund is in the best interests of the
Acquired Fund's shareholders and that the interests of the existing
shareholders of the Acquired Fund would not be diluted as a result of this
transaction; and

WHEREAS, the Board of Directors of the Acquired Fund has determined
that the exchange of all of the assets of the Acquired Fund for Acquiring Fund
Shares is in the best interests of the Acquiring Fund shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction.

NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:

B-1
<PAGE> 57
I. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ACQUIRING FUND
SHARES AND ASSUMPTION OF THE STATED LIABILITIES AND LIQUIDATION OF THE
ACQUIRED FUND

1.1 Subject to the terms and conditions herein set forth and on
the basis of the representations and warranties contained herein, the Acquired
Fund agrees to transfer the Acquired Fund's assets as set forth in paragraph
1.2 to the Acquiring Fund, and the Acquiring Fund agrees in exchange therefor:
to deliver to the Acquired Fund the number of Acquiring Fund Shares, including
fractional Acquiring Fund Shares, determined by dividing the value of the
Acquired Fund's net assets computed in the manner and as of the time and date
set forth in paragraph 2.1, by the net asset value of one Acquiring Fund Share
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain liabilities of the Acquired Fund, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for
in paragraph 3.1 (the "Closing").

1.2 (a) The assets of the Acquired Fund to be acquired by the
Acquiring Fund shall consist of all property including, without limitation, all
cash, securities, and dividend or interest receivables which are owned by the
Acquired Fund and any deferred or prepaid expenses shown as an asset on the
books of the Acquired Fund on the closing date provided in paragraph 3.1 (the
"Closing Date").

(b) The Acquired Fund has provided the Acquiring Fund with a list
of all of the Acquired Fund's assets as of the date of execution of this
Agreement. The Acquired Fund reserves the right to sell any of these
securities but will not, without the prior approval of the Acquiring Fund,
acquire any additional securities other than securities of the type in which
the Acquiring Fund is permitted to invest. The Acquiring Fund will, within a
reasonable time prior to the Closing Date, furnish the Acquired Fund with a
statement of the Acquiring Fund's investment objectives, policies and
restrictions and a list of the securities, if any, on the Acquired Fund's list
referred to in the first sentence of this paragraph which do not conform to the
Acquiring Fund's investment objectives, policies and restrictions. In the
event that the Acquired Fund holds any investments which the Acquiring Fund may
not hold, the Acquired Fund will dispose of such securities prior to the
Closing Date. In addition, if it is determined that the portfolios of the
Acquired Fund and the Acquiring Fund, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Acquiring
Fund with respect to such investments, the Acquired Fund, if requested by the
Acquiring Fund, will dispose of and/or reinvest a sufficient amount of such
investments as may be necessary to avoid violating such limitations as of the
Closing Date.

1.3 The Acquired Fund will endeavor to discharge all the Acquired
Fund's known liabilities and obligations prior to the Closing Date. The
Acquiring Fund shall assume all liabilities, expenses, costs, charges and
reserves reflected on an unaudited statement of assets and liabilities of the
Acquired Fund prepared by Capstone Asset Management Company ("CAMCO"), as
investment adviser of the Acquiring Fund and the Acquired Fund, as of the
Valuation Date (as defined in paragraph 2.1), in accordance with generally
accepted accounting principles consistently applied from the prior audited
period. The Acquiring Fund shall assume only those

B-2
<PAGE> 58
liabilities of the Acquired Fund reflected in that unaudited statement of
assets and liabilities and shall not assume any other liabilities, whether
absolute or contingent, not reflected thereon.

1.4 As provided in paragraph 3.4, as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), the Acquired Fund will
liquidate and distribute pro rata to the Acquired Fund's shareholders of record
determined as of the close of business on the Closing Date (the "Acquired Fund
Shareholders") the Acquiring Fund Shares it receives pursuant to paragraph 1.1.
Such liquidation and distribution will be accomplished by the transfer of the
Acquiring Fund Shares then credited to the account of the Acquired Fund on the
books of the Acquiring Fund to open accounts on the share records of the
Acquiring Fund in the name of the Acquired Fund's shareholders and representing
the respective pro rata number of the Acquiring Fund Shares due such
shareholders. All issued and outstanding shares of the Acquired Fund will
simultaneously be cancelled on the books of the Acquired Fund, although share
certificates representing interests in the Acquired Fund will represent a pro
rata number of Acquiring Fund Shares after the Closing Date as determined in
accordance with Section 2.3. The Acquiring Fund shall not issue certificates
representing the Acquiring Fund Shares in connection with such exchange.

1.5 Ownership by Acquired Fund shareholders of Acquiring Fund
Shares will be shown on the books of the Acquiring Fund's transfer agent.
Shares of the Acquiring Fund will be issued in the manner described in the
Acquiring Fund's current prospectus and statement of additional information.

1.6 Any transfer taxes payable upon issuance of the Acquiring Fund
Shares in a name other than the registered holder of the Acquired Fund Shares
on the books of the Acquired Fund as of that time shall as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund Shares
are to be issued and transferred.

1.7 Any reporting responsibility of the Acquired Fund is and shall
remain the responsibility of the Acquired Fund up to and including the Closing
Date and such later dates on which the Acquired Fund is terminated.

2. VALUATION

2.1 The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") on
the Closing Date (such time and date being hereinafter called the "Valuation
Date"), using the valuation procedures set forth in the Acquiring Fund's then
current prospectus or statement of additional information.

2.2 The net asset value of an Acquiring Fund Share shall be the
net asset value per share computed as of the close of regular trading on the
NYSE on the Valuation Date, using the valuation procedures set forth in the
Acquiring Fund's then current prospectus or statement of additional
information.

B-3
<PAGE> 59
2.3 The number of the Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Acquired Fund's net
assets shall be determined by dividing the value of the net assets of the
Acquired Fund determined using the same valuation procedures referred to in
paragraph 2.1 by the net asset value per share of an Acquiring Fund share
determined in accordance with paragraph 2.2.

2.4 All computations of value shall be made by CAMCO in accordance
with its regular practice for the Acquiring Fund.

3. CLOSING AND CLOSING DATE

3.1 The Closing Date shall be May 31, 1995, or such later date as
the parties may agree to in writing. All acts taking place at the Closing
shall be deemed to take place simultaneously as of the close of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 5:00
p.m., at the offices of CAMCO, 5847 San Felipe, Suite 4100, Houston, Texas
77057, or at such other time and/or place as the parties may agree.

3.2 The Fifth Third Bank, as custodian for the Acquiring Fund (the
"Custodian"), shall deliver at the Closing a certificate of an authorized
officer stating that: (a) the Acquired Fund's portfolio securities, cash and
any other assets shall have been delivered in proper form to the Acquiring Fund
within two business days prior to or on the Closing Date and (b) all necessary
taxes including all applicable federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities.

3.3 In the event that on the Valuation Date (a) the NYSE or
another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereon shall be
restricted or (b) trading or the reporting of trading on the NYSE or elsewhere
shall be disrupted so that accurate appraisal of the value of the net assets of
the Acquiring Fund or the Acquired Fund is impracticable, the Closing Date
shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.

3.4 The Acquired Fund shall deliver at the Closing a list of the
names and addresses of the Acquired Fund's shareholders and the number and
percentage ownership of outstanding Shares owned by each such shareholder
immediately prior to the Closing, as reflected in the records of the Acquired
Funds' transfer agent and certified on behalf of the Company by its President.
The Acquiring Fund shall issue and deliver a confirmation evidencing the
Acquiring Fund Shares to be credited on the Closing Date to the Secretary of
the Acquired Fund or provide evidence satisfactory to the Acquired Fund that
such Acquiring Fund Shares have been credited to the Acquired Fund's account on
the books of the Acquiring Fund. At the Closing, each party shall deliver to
the other such bills of sale, checks, assignments, share certificates, if any,
receipts or other documents as such other party or its counsel may reasonably
request.

B-4
<PAGE> 60
4. REPRESENTATIONS AND WARRANTIES

4.1 CSI and the Acquired Fund represent and warrant to the
Acquiring Fund as follows:

(a) CSI is a Maryland corporation, duly organized,
validly existing and in good standing under the laws of the State of
Maryland;

(b) CSI is a registered investment company classified as
a management company of the open-end type and its registration with
the Securities and Exchange Commission (the "Commission") as an
investment company under the Investment Company Act of 1940 (the "1940
Act") is in full force and effect;

(c) CSI is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation
of its Articles of Incorporation or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which
CSI or the Acquired Fund is a party or by which it is bound;

(d) CSI and the Acquired Fund have no material contracts
or other commitments (other than this Agreement) which will be
terminated with liability prior to the Closing Date;

(e) Except as otherwise disclosed in writing to and
accepted by the Acquiring Fund, no litigation or administrative
proceeding or investigation of or before any court or governmental
body is presently pending or to its knowledge threatened against CSI,
the Acquired Fund or any of their properties or assets (other than
that previously disclosed to the other party to the Agreement) which,
if adversely determined, would materially and adversely affect their
financial condition or the conduct of their business. CSI and the
Acquired Fund know of no facts which might form the basis for the
institution of such proceedings and are not parties to or subject to
the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects their
business or their ability to consummate the transactions herein
contemplated;

(f) The financial statements of the Acquired Fund for the
fiscal year ended September 30, 1994 have been audited by Tait, Weller
& Baker, certified public accountants and are in accordance with
generally accepted accounting principles consistently applied, and
such statement (copies of which have been furnished to the Acquiring
Fund) fairly reflect the financial condition of the Acquired Fund as
of such date, and there are no known contingent liabilities of the
Acquired Fund as of such date not disclosed therein;

(g) Since September 30, 1994, there has not been any
material adverse change in the Acquired Fund's financial condition,
assets, liabilities or business other than changes occurring in the
ordinary course of business, or any incurrence by the Acquired

B-5
<PAGE> 61
Fund of indebtedness maturing more than one year from the date that
such indebtedness was incurred, except as otherwise disclosed to and
accepted by the Acquiring Fund. For the purposes of this subparagraph
(g), a decline in net asset value per share of the Acquired Fund
Shares shall not constitute a material adverse change;

(h) At the Closing Date, all federal and other tax
returns and reports of the Acquired Fund required by law to have been
filed by such dates shall have been filed, and all federal and other
taxes shall have been paid so far as due, or provision shall have been
made for the payment thereof and, to the best of the Acquired Fund's
knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;

(i) For the most recent fiscal year of its operation, the
Acquired Fund has met the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company;

(j) All issued and outstanding Shares of the Acquired
Fund are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable. All of the issued and
outstanding shares of the Acquired Fund will, at the time of Closing,
be held by the persons and in the amounts set forth in the records of
the transfer agent as provided in paragraph 3.4. The Acquired Fund
does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the Acquired Fund's shares, nor is
there outstanding any security convertible into any of the Acquired
Fund's shares;

(k) At the Closing Date, the Acquired Fund will have good
and marketable title to its assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power and authority to
sell, assign, transfer and deliver such assets hereunder and, upon
delivery and payment for such assets, the Acquiring Fund will acquire
good and marketable title thereto, subject to no restrictions on the
full transfer thereof including such restrictions as might arise under
the Securities Act of 1933, as amended (the "1933 Act"), other than as
disclosed to the Acquiring Fund;

(l) The execution, delivery and performance of this
Agreement will have been duly authorized prior to the Closing Date by
all necessary actions on the part of CSI's Board of Directors, and
subject to the approval of the Acquired Fund's shareholders, this
Agreement will constitute a valid and binding obligation of CSI and
the Acquired Fund, enforceable in accordance with its terms, subject
as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights
and to general equity principles;

(m) The information to be furnished by CSI and the
Acquired Fund for use in no-action letters, applications for exemptive
orders, registration statements, proxy materials and other documents
which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete in all material
respects

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<PAGE> 62
and shall comply in all material respects with federal securities and
other laws and regulations thereunder applicable thereto;

(n) The proxy statement of the Acquired Fund (the "Proxy
Statement") to be included in the registration statement (the
"Registration Statement") referred to in paragraph 5.7 (other than
information therein that relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date,
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not materially misleading.

4.2 The Acquiring Fund represents and warrants to CSI and the
Acquired Fund as follows:

(a) The Acquiring Fund is a Maryland corporation, duly
organized, validly existing and in good standing under the laws of the
State of Maryland;

(b) The Acquiring Fund is a registered investment company
classified as a management company of the open-end type and its
registration with the Commission as an investment company under the
1940 Act is in full force and effect;

(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to
the applicable requirements of the 1933 Act and the 1940 Act and the
rules and regulations of the Commission thereunder and do not include
any untrue, statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein. in light of the circumstances under which they were made, not
materially misleading.

(d) At the Closing Date, the Acquiring Fund will have
good and marketable title to the Acquiring Fund's assets;

(e) The Acquiring Fund is not, and the execution,
delivery and performance of this Agreement will not result, in a
material violation of its Articles of Incorporation or By-Laws or of
any agreement, indenture, instrument, contract, lease or other
undertaking to which the Acquiring Fund is a party or by which it is
bound;

(f) No material litigation or administrative proceeding
or investigation of or before any court or governmental body is
presently pending or threatened against the Acquiring Fund or any of
its properties or assets, except as previously disclosed in writing to
the Acquired Fund. The Acquiring Fund knows of no facts which might
form the basis for the institution of such proceedings and is not a
party to or subject to the provisions of any order, decree or judgment
of any court or governmental body which materially and adversely
affects its business or its ability to consummate the transactions
contemplated herein;

B-7
<PAGE> 63
(g) The financial statements of the Acquiring Fund for
the period from November 1, 1993 to October 31, 1994 have been audited
by Tait, Weller & Baker, certified public accountants, and are in
accordance with generally accepted accounting principles, and such
statements (copies of which have been furnished to the Acquired Fund)
fairly reflect the financial condition of the Acquiring Fund as of
such date, and there are no known contingent liabilities of the
Acquiring Fund as of such dates not disclosed therein;

(h) Since October 31, 1994, there has not been any
material adverse change in the Acquiring Fund's financial condition,
assets, liabilities or business other than changes occurring in the
ordinary course of business, or any incurrence by the Acquiring Fund
of indebtedness maturing more than one year from the date that such
indebtedness was incurred. For the purposes of this subparagraph (h),
a decline in net asset value per share of the Acquiring Fund Shares
shall not constitute a material adverse change;

(i) At the Closing Date, all federal and other tax
returns and reports of the Acquiring Fund required by law then to be
filed shall have been filed, and all federal and other taxes shown as
due on said returns and reports shall have been paid or provision
shall have been made for the payment thereof and, to the best of the
Acquiring Fund's knowledge, no such return is currently under audit
and no assessment has been asserted with respect to such returns;

(j) For the most recent fiscal year of its operation the
Acquiring Fund has met the requirements of Subchapter M of the Code
for qualification and treatment as a regulated investment company and
the Acquiring Fund intends to do so in the future;

(k) At the date hereof, all issued and outstanding
Acquiring Fund Shares are, and at the Closing Date will be, duly and
validly issued and outstanding, fully paid and non-assessable, with no
personal liability attaching to the ownership thereof. The Acquiring
Fund does not have outstanding any options, warrants or other rights
to subscribe for or purchase any Acquiring Fund Shares, nor is there
outstanding any security convertible into any Acquiring Fund Shares;

(l) The execution, delivery and performance of this
Agreement will have been duly authorized prior to the Closing Date by
all necessary actions, if any, on the part of the Board of Directors
of the Acquiring Fund and the Acquiring Fund's shareholders, and this
Agreement will constitute a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy. insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights and to general
equity principles;

(m) The Acquiring Fund Shares to be issued and delivered
to the Acquired Fund, for the account of the Acquired Fund's
shareholders, pursuant to the terms of this Agreement, will at the
Closing Date have been duly authorized and, when so issued and
delivered, will be duly and validly issued Acquiring Fund Shares, and
will be fully paid

B-8
<PAGE> 64
and nonassessable with no personal liability attaching to the
ownership thereof;

(n) The information to be furnished by the Acquiring Fund
for use in no-action letters, applications for exemptive orders,
registration statements, proxy materials and other documents which may
be necessary in connection with the transactions contemplated hereby
shall be accurate and complete in all material respects and shall
comply in all material respects with federal securities and other laws
and regulations applicable thereto;

(o) The Proxy Statement to be included in the
Registration Statement (only insofar as it relates to the Acquiring
Fund) will, on the effective date of the Registration Statement and on
the Closing Date, not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which such statements were made, not materially
misleading; and

(p) The Acquiring Fund agrees (i) to use all reasonable
efforts to obtain the approvals and authorizations required by the
1933 Act, the 1940 Act and such of the state Blue Sky or securities
laws as it may deem appropriate in order to continue its operations
after the Closing Date; and (ii) prior to the Closing Date, have
sufficient Acquiring Fund Shares qualified for sale in each state in
which Acquired Fund shareholders reside to permit Acquiring Fund
Shares to be distributed to Acquired Fund shareholders as provided
herein.

5. COVENANTS OF THE ACQUIRING FUND, THE TRUST, THE ACQUIRED FUND AND THE
COMPANY

5.1 The Acquiring Fund and the Acquired Fund each will operate its
business in the ordinary course between the date hereof and the Closing Date.
It is understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions and any other
dividends and distributions deemed advisable.

5.2 CSI will call a meeting of the Acquired Fund's shareholders to
consider and act upon this Agreement and to take all other actions necessary to
obtain approval of the transactions contemplated herein.

5.3 The Acquired Fund covenants that the Acquiring Fund Shares to
be issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this Agreement.

5.4 CSI and the Acquired Fund will assist the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Acquired Fund's Shares.

5.5 Subject to the provisions of this Agreement, the Acquiring
Fund, CSI and the

B-9
<PAGE> 65
Acquired Fund each will take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement.

5.6 As promptly as practicable, but in any case within sixty days
after the Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in
such form as is reasonably satisfactory to the Acquiring Fund, a statement of
the earnings and profits of the Acquired Fund for federal income tax purposes
which will be carried over to the Acquiring Fund as a result of Section 381 of
the Code, and which will be certified by the Acquired Fund's President or
Executive Vice President and its Treasurer.

5.7 The Acquired Fund and the Acquiring Fund each agree to provide
information reasonably necessary for the preparation of a prospectus (the
"Prospectus") and the Proxy Statement referred to in paragraph 4.1(n), all to
be included in a registration statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934 (the "1934 Act") and the 1940 Act in connection with the
meeting of the Acquired Fund's shareholders to consider approval of this
Agreement and the transactions contemplated herein.

6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE ACQUIRED
FUND

The obligations of CSI and the Acquired Fund to consummate
the transactions provided for herein shall be subject, at their election, to
the performance by the Acquiring Fund of all of the obligations to be performed
by it hereunder on or before the Closing Date and, in addition thereto, the
following further conditions:

6.1 All representations and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date,

6.2 The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its President or Executive Vice President
and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to
the Acquired Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquiring Fund made in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement and as to such other matters
as the Acquired Fund shall reasonably request: and

6.3 CSI shall have received on the Closing Date a favorable
opinion from Dechert Price & Rhoads, counsel to the Acquiring Fund, dated as of
the Closing Date, in a form reasonably satisfactory to the Acquired Fund,
covering the following points:

That (a) the Acquiring Fund is a Maryland corporation, validly
existing and in good

B-10
<PAGE> 66
standing under the laws of the State of Maryland and has the statutory power to
own all of its properties and assets and to carry on its business as presently
conducted; (b) the Agreement has been duly authorized, executed and delivered
by the Acquiring Fund and, assuming that the Prospectus and Registration/Proxy
Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and the rules
and regulations thereunder and, assuming due authorization, execution and
delivery of the Agreement by the Acquiring Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and to general equity principles; (c) the Acquiring
Fund Shares to be issued to the Acquired Fund's shareholders as provided by
this Agreement are duly authorized and upon such delivery will be validly
issued and outstanding and are fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights to subscription or
purchase in respect thereof; (d) the execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated hereby will not,
result in a material violation of the Acquiring Fund's Articles of
Incorporation or By-Laws or any provision of any agreement (known to such
counsel) to which the Acquiring Fund is a party or by which it is bound or, to
the knowledge of such counsel, result in the acceleration of any obligation or
the imposition of any penalty, under any agreement, judgment or decree to which
the Acquiring Fund is a party or by which it is bound; (e) to the knowledge of
such counsel, no consent, approval, authorization or order of any court or
governmental authority of the United States, the State of Texas or the State of
Maryland is required for the consummation by the Acquiring Fund of the
transactions contemplated herein, except such as have been obtained under the
1933 Act, the 1934 Act and the 1940 Act, and such as may be required under
state securities laws; (f) only insofar as they relate to the Acquiring Fund,
the descriptions in the Registration/Proxy Statement of statutes, legal and
governmental proceedings and contracts and other documents, if any, are
accurate and fairly present the information required to be shown; (g) such
counsel does not know of any legal or governmental proceedings, only insofar as
they, relate to the Acquiring Fund, existing on or before the effective date of
the Registration/Proxy Statement or the Closing Date required to be described
in the Registration/Proxy Statement or to be filed as exhibits to the
Registration/Proxy Statement which are not described as required; (h) the
Acquiring Fund is registered as an investment company under the 1940 Act and
its registration with the Commission as an investment company under the 1940
Act is in full force and effect; and (i) to the best knowledge of such counsel,
no litigation or administrative proceeding or investigation of or before any
court or governmental body is presently pending or threatened as to the
Acquiring Fund or any of its properties or assets and the Acquiring Fund is not
a party to or subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its
business, other than as previously disclosed in the Registration/Proxy
Statement. In addition, such counsel also shall state that they have
participated in conferences with officers and other representatives of the
Acquiring Fund at which the contents of the Registration/Proxy Statement and
related matters were discussed and, although they are not passing upon and do
not assume and responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration/Proxy Statement (except to the extent
indicated in paragraph (f) of their above opinion), on the basis of the
foregoing (relying as to materiality to a large extent upon the opinions of
officers and other representatives of the Acquiring Fund), no facts have come
to their attention that lead them to believe that the Registration/Proxy
Statement

B-11
<PAGE> 67
as of its date, as of the date of the Acquired Fund shareholders' meeting, and
as of the Closing Date, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein regarding, the
Acquiring Fund or necessary to make the statements therein regarding the
Acquiring Fund, in the light of the circumstances under which they were made,
not misleading. Such opinion may state that such counsel does not express any
opinion or belief as to the financial statements or other financial data or as
to the information relating to the Company and the Acquired Fund contained in
the Registration/Proxy Statement, and that such opinion is solely for the
benefit of CSI and the Acquired Fund, its Directors and its officers. (Such
counsel may rely as to matters governed by the laws of the State of Maryland on
an opinion of Maryland counsel.) Such opinion also shall include such other
matters incident to the transaction contemplated hereby as the Acquired Fund
may reasonably request. Finally, such opinion need not opine with respect to
the applicability, of Section 17(a) under the 1940 Act and Rule 17a-8
thereunder.

In this paragraph 6.3. references to the Registration/Proxy Statement
include and relate only to the text of such Registration/Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.

7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND

The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by
CSI and the Acquired Fund of all the obligations to be performed by them
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:

7.1 All representations and warranties of CSI and the Acquired
Fund contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date,

7.2 The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, together with a list
of the Acquired Fund's portfolio securities showing the tax costs of such
securities by lot and the holding periods of such securities, as of the Closing
Date, certified by the Treasurer or Assistant Treasurer of the Acquired Fund;

7.3 CSI shall have delivered to the Acquiring Fund on the Closing
Date a certificate executed in its name and on behalf of the Acquired Fund by
its President or Executive Vice President and its Treasurer or Assistant
Treasurer, in form and substance satisfactory to the Acquiring Fund and dated
as of the Closing Date, to the effect that the representations and warranties
of the CSI and the Acquired Fund made in this Agreement are true and correct at
and as of the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Acquiring
Fund shall reasonably request; and

7.4 The Acquiring Fund shall have received on the Closing Date a
favorable opinion

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<PAGE> 68
of Dechert Price & Rhoads, counsel to the Acquired Fund, in a form satisfactory
to the Acquiring Fund, covering the following points:

That (a) the Acquired Fund is a series of CSI which is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Maryland and has the corporate power to own all of its properties and
assets and to carry on its business as presently conducted, (b) the Agreement
has been duly authorized, executed and delivered by CSI on behalf of the
Acquired Fund and, assuming that the Prospectus and the Registration/Proxy
Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and the rules
and regulations thereunder and, assuming due authorization, execution and
delivery of the Agreement by CSI, is a valid and binding obligation of CSI and
the Acquired Fund enforceable against CSI and the Acquired Fund in accordance
with its terms, subject as to enforcement to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles; (c) the execution and
delivery of the Agreement did not, and the consummation of the transactions
contemplated hereby will not, result in a material violation of the CSI's
Articles of Incorporation or By-Laws or any provision of and agreement (known
to such counsel) to which CSI or the Acquired Fund is a party or by which it is
bound or, to the knowledge of such counsel, result in the acceleration of any
obligation or the imposition of any penalty, under any agreement, judgment or
decree to which CSI or the Acquired Fund is a party or by which it is bound;
(d) to the knowledge of such counsel, no consent, approval, authorization or
order of any court or governmental authority of the United States or the State
of Texas or State of Maryland is required for the consummation by CSI and the
Acquired Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and such as may be
required under state securities laws; (e) only insofar as they relate to CSI
and the Acquired Fund, the descriptions in the Registration/Proxy Statement of
statutes, legal and governmental proceedings and contracts and other documents,
if any, are accurate and fairly present the information required to be shown;
(f) such counsel does not know of any legal or governmental proceedings, only
insofar as they relate to CSI and the Acquired Fund existing on or before the
effective date of the Registration/Proxy Statement or the Closing Date,
required to be described in the Registration/Proxy Statement or to be filed as
exhibits to the Registration/Proxy Statement which are not described and filed
as required; (g) CSI is registered as an investment company under the 1940 Act
and its registration with the Commission as an investment company under the
1940 Act is in full force and effect; and (h) to the best knowledge of such
counsel, no litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or threatened as to
CSI or the Acquired Fund or any of its respective properties or assets and
neither CSI nor the Acquired Fund is a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body, which
materially and adversely affects its business other than as previously
disclosed in the Registration/Proxy Statement. Such counsel also shall state
that they have participated in conferences with officers and other
representatives of CSI and the Acquired Fund at which the contents of the
Registration/Proxy Statement and related matters were discussed and, although
they are not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the statement contained in the
Registration/Proxy Statement (except to the extent indicated in paragraph (e)
of their above opinion), on the basis of the foregoing (relying as to
materiality to a large extent upon the

B-13
<PAGE> 69
opinions of officers and other representatives of CSI and the Acquired Fund),
no facts have come to their attention that lead them to believe that the
Registration/Proxy Statement as of its date, as of the date of the Acquired
Fund's shareholder meeting, and as of the Closing Date, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein regarding CSI or the Acquired Fund or necessary in the light of
the circumstances under which they were made, to make the statements therein
regarding CSI or the Acquired Fund not misleading. Such counsel may rely as to
matters governed by the State of Maryland, on an opinion of Maryland counsel.
Such opinion may state that such counsel does not express any opinion or belief
as to the financial statements or other financial data, or as to the
information relating to the Acquiring Fund, contained in the Registration/Proxy
Statement or Registration/Proxy Statement, and that such opinion is solely for
the benefit of the Acquiring Fund, its Directors and its officers. Such
opinion also shall include such other matters incident to the transaction
contemplated hereby as the Acquiring Fund may reasonably request. Finally, the
opinion need not opine upon any issues arising from the applicability of
Section 17(a) under the 1940 Act and Rule 17a-8 thereunder.

In this paragraph 7.4, references to the Registration/Proxy Statement
include and relate to only the text of such Registration/Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.

8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND, CSI
AND THE ACQUIRED FUND

If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:

8.1 The Agreement and the transactions contemplated herein shall
have been approved by the requisite vote of the holders of the outstanding
shares of the Acquired Fund in accordance with the provisions of CSI's Articles
of Incorporation and By-Laws and certified copies of the votes evidencing such
approval shall have been delivered to the Acquiring Fund. Notwithstanding
anything herein to the contrary, neither the Acquiring Fund nor the Acquired
Fund may waive the conditions set forth in this paragraph 8.1;

8.2 On the Closing Date, no action, suit or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;

8.3 All consents of other parties and all other consents, orders
and permits of federal, state and local regulatory authorities (including those
of the Commission and of state securities authorities, including "no-action"
positions of and exemptive orders from such federal and state authorities)
deemed necessary by the Acquiring Fund or the Acquired Fund to permit
consummation, in all material respects, of the transactions contemplated hereby
shall have been obtained, except where failure to obtain any such consent,
order or permit would not involve a risk of a material adverse effect on the
assets or properties of the Acquiring Fund or the Acquired

B-14
<PAGE> 70
Fund, provided that either party hereto may for itself waive any of such
conditions;

8.4 The Registration/Proxy Statement shall have become effective
under the 1933 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or be
pending, threatened or contemplated under the 1933 Act;

8.5 The Acquired Fund and the Acquiring Fund shall have declared a
dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to the Acquired Fund and the Acquiring Fund's
shareholders all of each of the fund's investment company taxable income for
all taxable years ending on or prior to the Closing Date (computed without
regard to any deduction for dividends paid) and all of its net capital gain
realized in all taxable years ending on or prior to the Closing Date (after
reduction for any capital loss carryforward);

8.6 The parties shall have received a favorable opinion of Dechert
Price & Rhoads, addressed and satisfactory to the Acquiring Fund and the
Acquired Fund, substantially to the effect that for federal income tax
purposes:

(a) The transfer of all or substantially all of the
Acquired Fund's assets in exchange for the Acquiring Fund shares and
the assumption by the Acquiring Fund of certain identified liabilities
of the Acquired Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code and the Acquiring Fund and
the Acquired Fund are each a "party to a reorganization" within the
meaning of Section 368(b) of the Code; (b) no gain or loss will be
recognized by the Acquiring Fund upon the receipt of the assets of the
Acquired Fund solely in exchange for the Acquiring Fund shares and the
assumption by the Acquiring Fund of certain identified liabilities of
the Acquired Fund; (c) no gain or loss will be recognized by the
Acquired Fund upon the transfer of the Acquired Fund's assets to the
Acquiring Fund in exchange for the Acquiring Fund shares and the
assumption by the Acquiring Fund of certain identified liabilities of
the Acquired Fund or upon the distribution (whether actual or
constructive) of the Acquiring Fund shares to the Acquired Fund's
shareholders in exchange for their shares of the Acquired Fund; (d) no
gain or loss will be recognized by shareholders of the Acquired Fund
upon the exchange of their Acquired Fund shares for the Acquiring Fund
shares and the assumption by the Acquiring Fund of certain identified
liabilities of the Acquired Fund; (e) the aggregate tax basis for the
Acquiring Fund shares received by each of the Acquired Fund's
shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the Acquired Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding
period of the Acquiring Fund shares to be received by each Acquired
Fund shareholder will include the period during which the Acquired
Fund shares exchanged therefor were held by such shareholder (provided
that the Acquired Fund shares were held as capital assets on the date
of the Reorganization); and (f) the tax basis of the Acquired Fund's
assets acquired by the Acquiring Fund will be the same as the tax
basis of such assets to the Acquired Fund immediately prior to the
Reorganization, and the holding period of the assets of the

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<PAGE> 71
Acquired Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Acquired Fund.

Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Acquired Fund may waive the conditions set forth in this paragraph
8.6.

9. BROKERAGE FEES AND EXPENSES

9.1 The Acquiring Fund and the Acquired Fund each represents and
warrants to the other that there are no brokers or finders entitled to receive
any payments in connection with the transactions provided for herein.

9.2 Except as may be otherwise provided herein, the Acquired Fund
and the Acquiring Fund shall each be liable for its expenses incurred in
connection with entering into and carrying out the provisions of this
Agreement, whether or not the transactions contemplated hereby are consummated.

10. ENTIRE AGREEMENT, SURVIVAL OF WARRANTIES

10.1 The Acquiring Fund, CSI and the Acquired Fund agree that no
party has made any representation, warranty or covenant not set forth herein
and that this Agreement constitutes the entire agreement between the parties.

10.2 The representations, warranties and covenants contained in
this Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.

11. TERMINATION

11.1 This Agreement may be terminated at any time at or prior to
the Closing Date: (1) by mutual agreement of Acquired Fund and Acquiring Fund;
(2) by the Acquired Fund in the event the Acquiring Fund shall, or by the
Acquiring Fund in the event the Acquired Fund or CSI shall, materially breach
any representation, warranty or agreement contained herein to be performed at
or prior to the Closing Date; or (3) if a condition herein expressed to be
precedent to the obligations of the terminating party has not been met and it
reasonably appears that it will not or cannot be met.

11.2 In the event of any such termination, there shall be no
liability for damages on the part of either the Acquiring Fund or CSI, or their
respective Directors, or officers, to the other party.

12. AMENDMENTS

Except as otherwise provided herein, this Agreement may be amended,
modified or supplemented in such manner as may be mutually agreed upon in
writing by the authorized

B-16
<PAGE> 72
officers of CSI and the Acquiring Fund; provided, however, that following the
meeting of the Acquired Fund's shareholders called by CSI pursuant to paragraph
5.2 of this Agreement, no such amendment may have the effect of changing the
provisions for determining the number of the Acquiring Fund shares to be issued
to the Acquired Fund's shareholders under this Agreement to the detriment of
such shareholders, without their further approval.

13. NOTICES

Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to CSI, the Acquired Fund or
the Acquiring Fund at their address specified herein.

14. HEADINGS; COUNTERPARTS; GOVERNING LAW, ASSIGNMENT; LIMITATION OF
LIABILITY

14.1 The article and paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in anyway the meaning or
interpretation of this Agreement.

14.2 This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.

14.3 This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.

14.4 This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment
or transfer hereof or of any rights or obligations hereunder shall be made by
any party without the written consent of the other parties. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.

B-17
<PAGE> 73
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its President or Vice President and its seal to be
affixed hereto and attested by its Secretary or Assistant Secretary.

CAPSTONE SERIES, INC.
ON BEHALF OF CAPSTONE BALANCED FUND

By: _____________________________

Attest: __________________________

CAPSTONE GROWTH FUND, INC.

By: _____________________________

Attest: __________________________

B-18
<PAGE> 74
STATEMENT OF ADDITIONAL INFORMATION

Dated ___________, 1995

Relating to the acquisition of the assets of

CAPSTONE BALANCED FUND

(a series of Capstone Series, Inc.)

5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631

by and in exchange for shares of

CAPSTONE GROWTH FUND, INC.
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631

This Statement of Additional Information is not a prospectus but
should be read in conjunction with the related Proxy Statement/Prospectus dated
__________, 1995 which describes the shares of common stock of Capstone Growth
Fund, Inc. ("Growth") to be issued in exchange for substantially all the assets
of Capstone Balanced Fund ("Balanced"), a series of Capstone Series, Inc.
Please retain this Statement of Additional Information for future reference.

Copies of the Proxy Statement/Prospectus may be obtained by calling
Growth at 1-800-262-6631.

<PAGE> 75
TABLE OF CONTENTS

<TABLE>
<S> <C>
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Additional Information About Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General Information and History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Control Persons and Principal Holders of Securities . . . . . . . . . . . . . . . . . . . 3
Investment Advisory and Other Services . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Brokerage Allocation and Other Practices . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capital Stock and Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Purchase, Redemption and Pricing of Growth Shares . . . . . . . . . . . . . . . . . . . . 3
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Calculation of Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Additional Information About Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
General Information and History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Control Persons and Principal Holders of Securities . . . . . . . . . . . . . . . . . . . 4
Investment Advisory and Other Services . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Brokerage Allocation and Other Practices . . . . . . . . . . . . . . . . . . . . . . . . . 4
Capital Stock and Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Purchase, Redemption and Pricing of Growth Shares . . . . . . . . . . . . . . . . . . . . 4
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Calculation of Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

</TABLE>

- 2 -
<PAGE> 76
INTRODUCTION

This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement/Prospectus dated ___________, 1995
which covers shares of common stock of Growth to be issued in exchange for
substantially all the assets of Balanced. The Proxy Statement/Prospectus has
been sent to Balanced stockholders in connection with the solicitation of
proxies by the management of Balanced to be voted at a Special Meeting of
Balanced Stockholders to be held May 30, 1995. The Statement of Additional
Information of Growth dated January 17, 1995 ("Growth SAI") and the Statement
of Additional Information of Balanced ("Balanced SAI") are each incorporated by
reference into this Statement of Additional Information.

ADDITIONAL INFORMATION ABOUT GROWTH

Additional information about the following topics may be found in the
Growth SAI under the heading indicated below.

1. General Information and History - see "General Information" in the
Growth SAI.

2. Investment Objectives and Policies - see "Investment Restriction" and
"Risk Factors" in the Growth SAI.

3. Management of the Fund - see "Directors and Executive Officers" in the
Growth SAI.

4. Control Persons and Principal Holders of Securities - see "control
Persons and Principal Holders of Securities" in the Growth SAI.

5. Investment Advisory and Other Services - see "Investment Adviser,"
"Distributor" and "Other Information" in the Growth SAI.

6. Brokerage Allocation and Other Practices - see "Portfolio Transactions
and Brokerage" in the Growth SAI.

7. Capital Stock and Other Securities - see "Dividends and Distributions"
in the Growth SAI.

8. Purchase, Redemption and Pricing of Growth Shares - see "How to Buy
and Redeem Shares" in the Growth SAI.

9. Tax Status - see "Taxes" in the Growth SAI.

10. Underwriters - see "Distributor" in the Growth SAI.

- 3 -
<PAGE> 77
11. Calculation of Performance Data - see "Performance Information" in the
Growth SAI.

12. Financial Statements - see "Financial Statements" in the Growth SAI.

ADDITIONAL INFORMATION ABOUT BALANCED

Additional information about the following topics may be found in the
Balanced SAI under the heading indicated below.

1. General Information and History - see "General Information" in the
Balanced SAI.

2. Investment Objectives and Policies - see "Investment Restriction" and
"Investment Practices and Related Risks" in the Balanced SAI.

3. Management of the Fund - see "Directors and Executive Officers" in the
Balanced SAI.

4. Control Persons and Principal Holders of Securities - see "control
Persons and Principal Holders of Securities" in the Balanced SAI.

5. Investment Advisory and Other Services - see "Investment Advisory
Agreement," "Distributor" and "Other Information" in the Balanced SAI.

6. Brokerage Allocation and Other Practices - see "Portfolio Transactions
and Brokerage" in the Balanced SAI.

7. Capital Stock and Other Securities - see "Dividends and Distributions"
in the Balanced SAI.

8. Purchase, Redemption and Pricing of Balanced Shares - see "How to Buy
and Redeem Shares" in the Balanced SAI.

9. Tax Status - see "Taxes" in the Balanced SAI.

10. Underwriters - see "Distributor" in the Balanced SAI.

11. Calculation of Performance Data - see "Performance Information" in the
Balanced SAI.

12. Financial Statements - see "Financial Statements" in the Balanced SAI.

- 4 -
<PAGE> 78
FINANCIAL STATEMENTS

Financial statements for Growth and Balanced for their most recent
fiscal years are included in the Statement of Additional Information of each
fund which are attached hereto as Exhibits A and B, respectively.

- 5 -
<PAGE> 79

PAGE 1

CAPSTONE BALANCED FUND

PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MARKET
VALUE PERCENTAGE OF
COMMON STOCKS -- 94.60% SHARES (NOTE 1-A) NET ASSETS
- ------------------------------------- --------- ------------ -------------
<S> <C> <C> <C>
COSMETICS 20,000 Guest Supply, Inc.(a)....................... $ 378,750 6.94%
6.94%

ENTERTAINMENT 4,000 Disney (Walt) Co............................ 155,500 2.85
11.26% 8,500 Mattel, Inc. ............................... 229,500 4.21
640 Viacom Class A(a)........................... 26,160 0.48
4,849 Viacom Class B(a)........................... 192,748 3.53
8,000 Viacom Variable Common Rights(a)............ 10,500 0.19
------------
614,408

FINANCIAL SERVICES 10,000 Midland Financial Group, Inc. .............. 240,000 4.40
4.40%

FOODS 12,000 Albertson's Inc............................. 349,500 6.41
8.26% 4,000 Sysco Corp.................................. 101,000 1.85
------------
450,500

HOSPITAL MANAGEMENT 4,900 Horizon Healthcare Corp.(a)................. 132,912 2.44
2.44%

MACHINERY: INDUSTRIAL 16,000 Stewart & Stevenson Services................ 608,000 11.15
11.15%

MULTI-LINE INSURANCE 7,000 American General Corp....................... 189,000 3.46
3.46%

RESTAURANTS 22,500 Brinker International, Inc.(a).............. 551,250 10.11
10.11%

RETAIL STORES 11,200 Autozone, Inc.(a)........................... 256,200 4.70
16.65% 15,250 Dollar General Corp. ....................... 393,641 7.22
5,000 Penney, J.C. Company, Inc................... 258,125 4.73
------------
907,966

RETAIL: MISC. 13,500 Bombay Co.(a)............................... 170,437 3.12
6.59% 13,500 Tandy Brands Accessories, Inc.(a)........... 189,000 3.47
------------
359,437

TRANSPORTATION 21,000 Southwest Airlines Co....................... 472,500 8.66
13.34% 10,000 Werner Enterprises, Inc..................... 255,000 4.68
------------
727,500
------------ -------------
TOTAL COMMON STOCKS
(Cost $2,421,475)........................... $ 5,159,723 94.60%
------------ -------------

</TABLE>

<PAGE> 80

PAGE 2

CAPSTONE BALANCED FUND

PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MARKET
VALUE PERCENTAGE OF
PAR VALUE (NOTE 1-A) NET ASSETS
--------- ------------ -------------
<S> <C> <C> <C> <C>
BONDS $ 50,000 Ford Holdings, Inc.
1.92% 9.25% 07/15/97............................ $ 52,298 0.96%
50,000 Philip Morris Companies, Inc.
9.25% 12/01/97.............................. 52,301 0.96
------------ -------------
TOTAL BONDS
(Cost $98,695).............................. 104,599 1.92

SHORT-TERM $ 118,000 Ford Motor Credit Corp.
OBLIGATIONS 4.85%, 10/04/94, (Cost $118,000)............ 118,000 2.16
2.16% ------------ -------------
TOTAL INVESTMENTS
(Cost $2,638,170)........................... 5,382,322 98.68
OTHER ASSETS, LESS LIABILITIES.............. 71,786 1.32
------------ -------------
NET ASSETS.................................. $ 5,454,108 100.00%
------------ -------------
------------ -------------

</TABLE>

(a) Non-income producing security.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 81

PAGE 3

CAPSTONE BALANCED FUND

STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1994
- ------------------------------------------------------------------------------
ASSETS:

Investments in securities at market
(identified cost $2,638,170)(Note
1-A)............................. $ 5,382,322
Cash................................. 79,119
Receivables:
Capital stock sold............... 24,526
Distributor...................... 22,106
Dividends and interest........... 3,292
-----------

Total assets................. 5,511,365
-----------

LIABILITIES:

Payable for capital stock redeemed... 30,301
Accrued investment advisory and
administration fees.............. 5,468
Other accrued expenses............... 21,488
-----------

Total liabilities............ 57,257
-----------

NET ASSETS:.......................... $ 5,454,108
-----------
-----------

NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE: ($5,454,108 364,537
shares outstanding) $.001 par
value, 5,000,000 shares
authorized....................... $ 14.96
-----------
-----------

COMPUTATION OF OFFERING PRICE PER
SHARE: (Net asset value $14.96 x
100/95.25)....................... $ 15.71
-----------
-----------

SOURCE OF NET ASSETS:

Excess of redemptions paid out
over paid-in-capital.......... $ (804,687)
Accumulated net realized gain on
investments................... 3,514,643
Net unrealized appreciation of
investments................... 2,744,152
-----------
$ 5,454,108
-----------
-----------

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 82

PAGE 4

CAPSTONE BALANCED FUND

STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1994
- ------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:

Income:
Dividends.................................................................................... $ 55,309
Interest..................................................................................... 22,884
----------
Total investment income.................................................................. 78,193
----------
Expenses:
Investment advisory fees (Note 2)............................................................ 64,894
Administration fees (Note 2)................................................................. 24,000
Audit and legal fees......................................................................... 34,311
Transfer agent fees.......................................................................... 33,228
Registration fees............................................................................ 11,277
Custodian fees............................................................................... 8,198
Distribution fees (Note 2)................................................................... 8,131
Miscellaneous................................................................................ 9,255
----------
Total expenses........................................................................... 193,294
----------
Net investment loss.................................................................. (115,101)
----------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Notes 4 and 7):

Net realized gain from security transactions................................................... 4,935,464
Decrease in unrealized appreciation of investments: (6,009,449)
------------
Net realized and unrealized loss on investments............................................ (1,073,985)
------------
Net decrease in net assets resulting from operations....................................... $ (1,189,086)
------------
------------

</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 83

PAGE 5

CAPSTONE BALANCED FUND

STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
OPERATIONS: 1994 1993
-------------- -------------
<S> <C> <C>
Net investment loss................................................................... $ (115,101) $ (156,086)
Net realized gain on investments (Note 7)............................................. 4,935,464 902,786
Net change in unrealized of investments............................................... (6,009,449) 1,736,807
-------------- -------------
Net increase (decrease) in net assets resulting from operations................... (1,189,086) 2,483,507

DISTRIBUTIONS TO SHAREHOLDERS:
Distribution from net realized gains from investments ($1.125 and $0.79 per share,
respectively)........................................................................ (861,191) (685,171)

CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share transactions (Note 3).. (8,359,032) 702,437
-------------- -------------
Total increase (decrease) in net assets....................................... (10,409,309) 2,500,773

NET ASSETS:
Beginning of year..................................................................... 15,863,417 13,362,644
-------------- -------------
End of year (including net investment income of $0 and $85,033, respectively)......... $ 5,454,108 $ 15,863,417
-------------- -------------
-------------- -------------

</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994
- ------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Capstone Balanced Fund (the 'Fund'), formerly Capstone Fund of the
Southwest, is the sole series of Capstone Series, Inc. (the 'Corporation').
(See Note 6) The Corporation is registered under the Investment Company Act of
1940, as amended (the 'Act'), as a diversified open-end management investment
company.

B) DISTRIBUTIONS TO SHAREHOLDERS - The Fund distributes its net investment
income and net realized gains annually. Income and capital gain distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principals. These differences are primarily due
to differing treatments for net operating losses, and earnings and profits
attributed to shares redeemed. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.

<PAGE> 84

PAGE 6

CAPSTONE BALANCED FUND

C) FEDERAL INCOME TAXES - No provision has been made for Federal income taxes
since it is the policy of the Fund to distribute all of its taxable income,
including the net realized gains on investments, and to continue to qualify as
a 'regulated investment company' under the applicable sections of the Internal
Revenue Code.

D) OTHER - Investment security transactions are accounted for on a trade date
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Realized
gains and losses from security transactions are determined on the basis of
identified cost for both financial and Federal income tax reporting purposes.

NOTE 2 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

The Fund retains Capstone Asset Management Company (the 'Adviser') as its
Investment Adviser. Under the current Investment Advisory Agreement, the
Adviser is paid a monthly fee at the annual rate of .75% of the average daily
net value of the Fund's assets. The Adviser is also paid a monthly
administrative fee of $2,000 representing the cost of certain accounting and
bookkeeping services. This fee, which amounted to $24,000 for the year ended
September 30, 1994, is not subject to the expense limitation discussed below.

Pursuant to the Investment Advisory Agreement, the Adviser will reimburse
the Fund up to an amount equal to its advisory fees to insure that the Fund's
aggregate annual expenses (including the advisory fee but excluding interest,
taxes, brokerage fees and commissions, litigation costs and certain
distribution plan expenses) do not exceed the expense limitations of any state
having jurisdiction over the Fund. Currently, the strictest expense limitation
applicable to the Fund is 2.5% of the first $30 million of the Fund's average
daily net assets.

Capstone Asset Planning Company ('CAPCO') serves as Distributor and
Underwriter of the Fund's shares. Commissions and underwriting fees earned on
sales of the Fund's shares during the year ended September 30, 1994 by the
Distributor/Underwriter were $947 and $480, respectively.

The Fund has adopted a Service and Distribution Plan (the 'Plan') pursuant
to Rule 12b-1 under the Act whereby Fund assets are used to reimburse CAPCO
for costs and expenses incurred in the distribution and marketing of shares of
the Fund and servicing Fund shareholders. Distribution and marketing expenses
include, among other things, printing of prospectuses, advertising literature,
and costs of personnel involved with the promotion and the distribution of the
Fund's shares. Under the Plan, the Fund pays to CAPCO an amount computed at an
annual rate of up to 0.35% of the Fund's average net assets (including
reinvested dividends paid with respect to those assets). Of this amount, CAPCO
may reallocate to securities dealers (which may include CAPCO itself) and
other financial institutions and organizations (collectively, 'Service
Organizations') amounts up to 0.25% of the Fund's average net assets owned by
stockholders with whom the Service Organization has a servicing relationship.
The Plan permits CAPCO to carry forward for a maximum of twelve months
distribution expenses covered by the Plan for which CAPCO has not yet received
reimbursement. During the year ended September 30, 1994, $1,290 of
distribution expenses was paid to Service Organizations other than CAPCO.

The Adviser is an affiliate of the Distributor/Underwriter and both are
wholly-owned subsidiaries of Capstone Financial Services, Inc. ('CFS').

Certain officers and directors of the Corporation are also officers and
directors of the Adviser, Underwriter and CFS. During the year ended September
30, 1994 Directors of the Fund who are not 'interested persons' received
Directors fees of $4,000. All other officers and Directors serve without
compensation from the Fund.

<PAGE> 85

PAGE 7

CAPSTONE BALANCED FUND

NOTE 3 - CAPITAL STOCK

Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1994 1993
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Shares sold..................................................... 18,381 $ 319,113 24,136 $ 446,044
Shares issued to shareholders in reinvestment of
distributions................................................. 23,000 414,237 16,781 302,233
Shares issued in acquisition of Fund (Note 5)................... -- -- 113,131 2,047,664
Shares redeemed................................................. (491,416) (9,092,382) (114,055) (2,093,504)
---------- ------------- ---------- -------------
Net increase (decrease)......................................... (450,035) $ (8,359,032) 39,993 $ 702,437
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------

</TABLE>

NOTE 4 - SECURITIES TRANSACTIONS

Purchases and sales of securities other than short-term notes, aggregated
$2,357,117 and $11,063,305, respectively. At September 30, 1994, the cost of
investments for Federal income tax purposes was $2,638,170. Accumulated net
unrealized appreciation on investments was $2,744,152, consisting of
$2,789,217 gross unrealized appreciation and $45,065 gross unrealized
depreciation.

NOTE 5 - ACQUISITION OF RAY EQUITY/INCOME TRUST

On November 2, 1992, Capstone Fund of the Southwest acquired all the net
assets of Ray Equity/Income Trust ('Ray Equity'), a series of Capstone Equity
Series, Inc., pursuant to an Agreement and Articles of Transfer approved by
Ray Equity shareholders on October 30, 1992. The acquisition was accomplished
by a tax-free exchange of 113,131 shares of Capstone Fund of the Southwest
(valued at $2,047,664) for the 310,577 shares of Ray Equity outstanding on
November 2, 1992. The exchange had no effect on the net asset value per share
of the Fund. Ray Equity's net assets at that date were $2,047,664, consisting
of unrealized appreciation on investments of $220,895, paid in capital of
$1,998,147, accumulated deficit in net investment income of $170,657, and
accumulated net realized loss on investments of $721. The aggregate net assets
of Capstone Fund of the Southwest and Ray Equity immediately before the
acquisition were $13,681,870 and $2,047,664, respectively.

NOTE 6 - CHANGE OF FUND NAME AND INVESTMENT OBJECTIVE

On August 25, 1994, the shareholders approved a change in the Fund's
investment objective to that of a 'balanced fund' to seek long-term capital
appreciation and income. To reflect the change in the Fund's investment
objective, the Board of Directors changed the Fund's name to Capstone Balanced
Fund, effective October 3, 1994.

NOTE 7 - YEAR END DISTRIBUTION

In order to pay proceeds on current year redemptions, the Fund sold
portfolio securities at prices considerably in excess of their original
purchase price, thus realizing substantial long-term capital gains. Net
capital gains must be distributed annually to shareholders in accordance with
applicable tax requirements in order for the Fund to maintain its favorable
status under Federal tax laws and avoid paying Federal income or excise taxes.
Accordingly, a long-term capital gain distribution of $10.72 per share was
declared on November 4, 1994. The distribution was paid on November 14, 1994
to shareholders of record on November 7, 1994.

<PAGE> 86

PAGE 8

CAPSTONE BALANCED FUND

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors
of Capstone Series, Inc.

We have audited the accompanying statement of assets and liabilities of
Capstone Balanced Fund (formerly Capstone Fund of the Southwest), a series of
Capstone Series Inc., including the portfolio of investments, as of September
30, 1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period
then ended, and financial highlights for each of the periods presented. These
financial statements and 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 audits.

We conduct our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of September 30, 1994, by correspondence 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 that our audits provide 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 Capstone Balanced Fund as of September 30, 1994, the results of
its operations, changes in its net assets and financial highlights for the
respective years then ended, in conformity with generally accepted accounting
principles.

Tait, Weller & Baker

Philadelphia, Pennsylvania
November 14, 1994

<PAGE> 87

PAGE 1

CAPSTONE GROWTH FUND, INC.

PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MARKET
VALUE PERCENT OF
COMMON STOCKS -- 84.77% SHARES (NOTE 1-A) NET ASSETS
- ------------------------------------- ------------ ------------- ----------
<S> <C> <C> <C>
BEVERAGE-SOFT DRINKS 54,800 Coca-Cola Co.......................... $ 2,760,550 3.41%
3.41%

COMMUNICATIONS 25,000 Times Mirror Co. Class A.............. 818,750 1.01
1.01%

COMMUNICATIONS 23,500 Gannett Co............................ 1,128,000 1.39
EQUIP. 48,000 Motorola, Inc......................... 2,826,144 3.49
4.88%
------------ ----------
3,954,144 4.88

COMPUTERS & 6,000 Apple Computer, Inc................... 259,125 0.32
BUSINESS EQUIPMENT 500 Keane, Inc.(a)........................ 10,250 0.01
1.18% 7,000 Hewlett-Packard Co.................... 685,125 0.85
------------ ----------
954,500 1.18

CONSUMER DRUGS 33,600 Abbott Laboratories................... 1,041,600 1.29
3.61% 34,400 Johnson & Johnson..................... 1,879,100 2.32
------------ ----------
2,920,700 3.61

DRUGS 7,400 Allergan, Inc......................... 195,175 0.24
1.23% 10,800 Pfizer, Inc........................... 800,550 0.99
------------ ----------
995,725 1.23

ELECTRICAL EQUIPMENT 61,000 Arrow Electronics, Inc.(a)............ 2,302,750 2.85
11.71% 106,000 General Electric Co................... 5,180,750 6.40
52,875 Sensormatic Electrics Corp............ 1,989,422 2.46
------------ ----------
9,472,922 11.71

ENTERTAINMENT 12,000 The Walt Disney Co.................... 474,000 0.59
.59%

FINANCIAL SERVICES 38,000 Bank of New York Co., Inc............. 1,211,250 1.50
5.20% 37,500 Beneficial Corp....................... 1,467,187 1.81
44,000 Travelers, Inc........................ 1,529,000 1.89
------------ ----------
4,207,437 5.20

GROCERY STORES 40,000 Albertson's, Inc...................... 1,200,000 1.48
1.48%

HOSPITAL SUPPLIES 49,500 Biomet, Inc.(a)....................... 569,250 0.70
.70%

MANUFACTURING 55,000 Applied Materials, Inc.(a)............ 2,860,000 3.53
DIVERSIFIED INDUSTRY 10,000 The Bombay Company, Inc.(a)........... 120,000 0.15
10.45% 56,000 Dana Corp............................. 1,435,000 1.77
22,700 Johnson Controls, Inc................. 1,129,325 1.40
56,000 Mattel, Inc........................... 1,638,000 2.02
13,000 Offshore Logistics, Inc.(a)........... 170,625 0.21
11,000 Parker Hannifin Corp.................. 514,250 0.64
12,300 Tosco Corp............................ 390,525 0.48
5,000 Zebra Technologies Corp. Class A(a)... 201,250 0.25
------------ ----------
8,458,975 10.45

</TABLE>

<PAGE> 88

PAGE 2

CAPSTONE GROWTH FUND, INC.

PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MARKET
VALUE PERCENT OF
SHARES (NOTE 1-A) NET ASSETS
------------ ------------- ----------
<S> <C> <C> <C>
MISCELLANEOUS 50,000 Kinder-Care Learning Centers(a)....... $ 662,500 0.82%
.82%

MULTI-LINE INSURANCE 33,000 American General Corp................. 907,500 1.12
1.12%

OIL-INTEGRATED: 24,200 Amoco Corp............................ 1,533,675 1.89
DOMESTIC
1.89%

OIL-INTEGRATED: 12,600 Chevron Corp.......................... 567,000 0.70
INTERNATIONAL 12,800 Exxon Corp............................ 804,800 0.99
8.31% 17,150 Mobil Corp............................ 1,474,900 1.82
98,000 Panhandle Eastern Corp................ 2,303,000 2.85
18,000 Tenneco, Inc.......................... 796,500 0.98
12,000 Texaco, Inc........................... 784,500 0.97
------------ ----------
6,730,700 8.31

RAILROAD 15,000 Trinity Industries, Inc............... 513,750 0.63
1.74% 18,400 Union Pacific Corp.................... 899,300 1.11
------------ ----------
1,413,050 1.74

RESTAURANTS 89,700 Brinker International, Inc.(a)........ 2,074,312 2.56
5.05% 69,800 McDonald's Corp....................... 2,015,475 2.49
------------ ----------
4,089,787 5.05

RETAIL-SPECIALTY 117,656 Dollar General........................ 3,412,024 4.22
5.93% 15,000 Pep Boys-Manny, Moe & Jack............ 540,000 0.67
21,700 Toys R Us, Inc.(a).................... 838,163 1.04
------------ ----------
4,790,187 5.93

SAVINGS & LOAN CO. 15,000 Federal National Mortgage 1,140,000 1.41
Association.........................
1.41%

SOAPS 20,000 Gillette Co........................... 1,487,500 1.84
1.84%

TELEPHONE (NEW) 45,550 American Telephone & Telegraph Co..... 2,505,250 3.10
11.21% 11,917 Bell Atlantic Corp.................... 624,153 0.77
15,800 BellSouth Corp........................ 841,350 1.04
16,000 GTE Corp.............................. 496,000 0.61
136,500 MCI Communications Corp............... 3,139,500 3.88
24,000 Southwestern Bell Corp................ 1,005,000 1.24
12,200 US West, Inc.......................... 459,025 0.57
------------ ----------
9,070,278 11.21
------------ ----------
TOTAL COMMON STOCK
(Cost $50,766,177).................... 68,612,130 84.77

</TABLE>

<PAGE> 89

PAGE 3

CAPSTONE GROWTH FUND, INC.

PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MARKET
SHARES/ VALUE PERCENT OF
PAR VALUE (NOTE 1-A) NET ASSETS
----------- ------------ ----------
<S> <C> <C> <C>
SHORT-TERM $ 2,526,000 American Express Credit Corp.
OBLIGATIONS 4.88% 11-01-94........................ $ 2,526,000 3.12%
9.30% 1,780,000 Associates Corp.
4.94% 11-08-94........................ 1,780,000 2.20
1,023,000 Associates Corp.
4.76% 11-15-94........................ 1,023,000 1.26
2,200,000 Ford Motor Credit Corp.
4.76% 11-22-94........................ 2,200,000 2.72
------------ ----------
TOTAL SHORT-TERM
OBLIGATIONS (Cost $7,529,000)......... 7,529,000 9.30
------------ ----------

TOTAL INVESTMENTS 76,141,130 94.07
(Cost $58,295,177)..................

OTHER ASSETS LESS LIABILITIES......... 4,799,973 5.93
------------ ----------

NET ASSETS............................ $ 80,941,103 100.00%
------------ ----------
------------ ----------

</TABLE>

(a) Non-income producing security.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 90

PAGE 4

CAPSTONE GROWTH FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1994
- ------------------------------------------------------------------------------
ASSETS:

Investments in securities at market
value (identified cost
$58,295,177) (Note 1-A).......... $ 76,141,130
Cash................................. 179,478
Receivables:
Investments sold................. $ 6,391,345
Dividends and interest........... 109,619
Capital stock sold............... 1,231 6,502,195
----------- ------------

Total assets................. 82,822,803

LIABILITIES:

Payables:
Investments purchased............ 1,686,499
Capital stock redeemed........... 91,992
Accrued advisory and administration
fees............................... 48,960
Other accrued expenses............... 54,249
-----------

Total liabilities............ 1,881,700
------------

NET ASSETS........................... $ 80,941,103
------------
------------

NET ASSET VALUE PER SHARE:
($80,941,103 6,118,689 shares
outstanding) $.001 par value,
150,000,000 shares authorized.... $ 13.23
------------
------------

COMPUTATION OF OFFERING PRICE PER
SHARE: (Net asset value
$13.23 x 100/95.25).............. $ 13.89
------------
------------

SOURCE OF NET ASSETS:

Paid in capital.................. $ 61,735,272
Undistributed net investment
income........................ 345,195
Accumulated net realized gain on
investments................... 1,014,683
Net unrealized appreciation of
investments................... 17,845,953
------------
$ 80,941,103
------------
------------

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 91

PAGE 5

CAPSTONE GROWTH FUND, INC.

STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1994
- ------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:

Income:
Dividends.................................................................... $ 1,425,129
Interest..................................................................... 450,780
------------
Total investment income.................................................. 1,875,909
Expenses:
Advisory fees (Note 2)....................................................... $ 623,303
Distribution fees (Note 2)................................................... 313,597
Transfer agent fees (Note 2)................................................. 77,891
Professional fees............................................................ 33,637
Custodian fees............................................................... 30,774
Administrative services (Note 2)............................................. 24,000
Registration and filing fees................................................. 22,072
Directors' fees and expenses................................................. 13,377
Reports and notices to stockholders.......................................... 10,389
Miscellaneous................................................................ 16,360
------------
Total operating expenses................................................. 1,165,400
------------
Net investment income................................................ 710,509
------------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 5)

Net realized gain (loss) from:
Security transactions........................................................ 1,641,917
Futures contracts............................................................ (627,234)
------------
Net realized gains....................................................... 1,014,683
Unrealized appreciation of investments:
Beginning of year............................................................ 20,751,035
End of year.................................................................. 17,845,953
------------
Net decrease in unrealized appreciation of investments................... (2,905,082)
------------
Net realized and unrealized loss on investments.......................... (1,890,399)
------------
Net decrease in net assets resulting from operations................. $ (1,179,890)
------------
------------

</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 92

PAGE 6

CAPSTONE GROWTH FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
OPERATIONS: 1994 1993
------------- -------------
<S> <C> <C>
Net investment income................................................................... $ 710,509 $ 1,184,533
Net realized gain on investments........................................................ 1,641,917 5,950,605
Net realized gain (loss) on futures contracts........................................... (627,234) 367,734
Net decrease in unrealized appreciation of investments.................................. (2,905,082) (750,669)
------------- -------------
Net increase (decrease) in net assets resulting from operations..................... (1,179,890) 6,752,203

NET EQUALIZATION DEBITS (Note 1-C)...................................................... (23,748) (1,450)

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................... (875,074) (1,496,980)
Net realized gains from investment transactions......................................... (6,318,338) (2,218,728)

CAPITAL SHARE TRANSACTIONS:
Decrease in net assets resulting from capital share transactions (Note 3)............... (7,127,271) (3,646,382)
------------- -------------
Total decrease in net assets........................................................ (15,524,321) (611,337)

NET ASSETS:
Beginning of year....................................................................... 96,465,424 97,076,761
------------- -------------
End of year (including undistributed net investment income of $345,195 and $509,760,
respectively)......................................................................... $ 80,941,103 $ 96,465,424
------------- -------------
------------- -------------

</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1994
- ------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Capstone Growth Fund, Inc., formerly Capstone U.S. Trend Fund, Inc. (the
'Fund'), is registered under the Investment Company Act of 1940, as amended
(the 'Act'), as a diversified open-end management investment company. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles.

A) VALUATION OF SECURITIES - The Fund's investments in securities are carried
at market value. Securities listed on an exchange or quoted on a national
market system are valued at the last sales price. Other securities are quoted
at the mean between the most recent bid and asked prices. Short-term
obligations are valued at cost. Securities as to which market quotations are
not readily available and other assets held by the Fund, if any, are valued at
their fair value as determined in good faith by the Board of Directors.

<PAGE> 93

PAGE 7

CAPSTONE GROWTH FUND, INC.

B) FEDERAL INCOME TAXES - No provision has been made for Federal income taxes
since it is the policy of the Fund to distribute all of its taxable income,
including the net realized gains on investments, and to continue to qualify as
a 'regulated investment company' under the applicable sections of the Internal
Revenue Code.

C) EQUALIZATION - The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
repurchases of capital shares, equivalent on a per share basis to the amount
of distributable investment income on the date of transactions, is credited or
charged to undistributed income. As a result, undistributed investment income
per share is unaffected by sales or redemptions of Fund shares.

D) FUTURES CONTRACTS - Initial margin deposits required upon entering into
futures contracts are made by depositing cash, as collateral, for the account
of the broker (the Fund's agent in acquiring the futures position). During the
period the futures contracts are open, changes in the value of the contract
are recognized as unrealized gains or losses by 'marking to market' on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are made or received, depending upon
whether unrealized gains or losses are incurred. When the contract is closed
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract.

Futures contracts involve credit and market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The contract amounts of
these futures contracts reflect the extent of the Fund's exposure to
off-balance sheet risk. The Fund's credit risk is minimized by entering only
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market. The Fund assumes the
market risk which arises from any changes in securities values.

E) OTHER - Investment security transactions are accounted for on a trade date
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Realized
gains and losses from security transactions are determined on the basis of
identified cost for both financial and Federal income tax reporting purposes.

NOTE 2 - INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS
WITH AFFILIATES

The Fund retains Capstone Asset Management Company as its Investment
Adviser. Under the Investment Advisory Agreement (the 'Agreement'), the
Adviser is paid a monthly fee based on the average net assets at the annual
rate of .75% on the first $50 million and .60% on the next $150 million.
Pursuant to the Agreement, the Adviser will reimburse the Fund up to an amount
equal to its advisory fees to insure that the Fund's aggregate annual expenses
(including the advisory fee but excluding interest, taxes, brokerage fees and
commissions, litigation costs and certain distribution plan expenses) do not
exceed the expense limitations of any state having jurisdiction over the Fund.
Currently, the strictest expense limitation applicable to the Fund is 2.5% of
the first $30 million of the Fund's average net assets, 2% of the next $70
million of the Fund's average net assets, and 1.5% of the Fund's average net
assets in excess of $100 million. For the year ended October 31, 1994, no
reimbursement was required pursuant to this provision. The Adviser is also
paid a monthly fee of $2,000 representing the cost of certain accounting and
bookkeeping services. This amount is not intended to include any profit to the
Adviser and is in addition to the advisory fees described above.

Capstone Asset Planning Company ('CAPCO') serves as Distributor and
Underwriter of the Fund's shares. Commissions and underwriting fees earned on
sales of the Fund's shares during the year ended October 31, 1994 by the
Distributor / Underwriter were $1,408 and $177, respectively.

The Fund has adopted a Service and Distribution Plan (the 'Plan') pursuant
to Rule 12b-1 under the Act whereby the Fund assets are used to reimburse
CAPCO for costs and expenses incurred with the distribution and marketing of
shares of the Fund and servicing of Fund shareholders. Distribution and
marketing expenses include, among other things, printing of prospectuses,
advertising literature, and costs of personnel involved with the promotion and
the distribution of the Fund's shares. Under the Plan, the Fund pays CAPCO an
amount computed at an annual rate of up

<PAGE> 94

PAGE 8

CAPSTONE GROWTH FUND, INC.

to .35% of the Fund's average net assets (including reinvested dividends paid
with respect to those assets). Of this amount, CAPCO may reallocate to
securities dealers (which may include CAPCO itself) and other financial
institutions and organizations (collectively, 'Service Organizations') amounts
up to .25% of the Fund's average net assets owned by shareholders for whom the
Service Organization has a servicing relationship. The Plan permits CAPCO to
carry forward for a maximum of twelve months distribution expenses covered by
the Plan for which CAPCO has not yet received reimbursement. For the year
ended October 31, 1994, the Fund paid $313,597 in 12b-1 fees. Of this amount
less than 1% was paid to Service Organizations other than CAPCO.

The Adviser is an affiliate of the Distributor/Underwriter and both are
wholly-owned subsidiaries of Capstone Financial Services, Inc. ('CFS').
Certain officers and directors of the Corporation are also officers and
directors of the Adviser, Underwriter and CFS. During the year ended October
31, 1994 Directors of the Fund who are not 'interested persons' received
directors' fees of $10,000. All other officers and Directors serve without
compensation from the Fund.

NOTE 3 - CAPITAL STOCK

Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1994 1993
------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold................................................. 838,553 $ 11,369,698 530,833 $ 7,558,487
Shares issued to shareholders in reinvestment of
distributions............................................. 509,170 6,613,689 245,331 3,419,584
---------- ------------- ------------ --------------
1,347,723 17,983,387 776,164 10,978,071
Shares redeemed............................................. 1,913,976 25,110,658 (1,024,945) (14,624,453)
---------- ------------- ------------ --------------
Net decrease................................................ (566,253) $ (7,127,271) (248,781) $ (3,646,382)
---------- ------------- ------------ --------------
---------- ------------- ------------ --------------
</TABLE>

NOTE 4 - DIVIDEND DISTRIBUTIONS

On November 13, 1994 the Board of Directors declared a distribution of
$.225 a share, consisting of $.168 from realized gains and $.057 from ordinary
income. The distribution is payable on November 28, 1994 to shareholders of
record on November 21, 1994.

NOTE 5 - PURCHASES AND SALES OF SECURITIES

Purchases and sales of securities other than short-term obligations and
futures aggregated $9,545,051 and $31,284,168, respectively.

NOTE 6 - CHANGE OF FUND NAME AND INVESTMENT OBJECTIVE

On August 25, 1994, shareholders approved a change in the Fund's
investment objective to that of a 'growth fund', to seek long-term capital
appreciation. To reflect the change in the Fund's investment objective,
shareholders also approved changing the Fund's name to Capstone Growth Fund,
Inc.

<PAGE> 95

PAGE 9

CAPSTONE GROWTH FUND, INC.

FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year......................... $ 14.43 $ 14.00 $ 14.65 $ 11.88 $ 14.76
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income.................................... 0.11 0.17 0.20 0.30 0.37
Net realized and unrealized gain (loss) on investments.. (0.23) 0.80 0.56 3.42 (1.48)
--------- --------- --------- --------- ---------

Total from investment operations..................... (0.12) 0.97 0.76 3.72 (1.11)
--------- --------- --------- --------- ---------
Less Distributions:
From net investment income............................... 0.13 0.22 0.24 0.37 0.40
From net realized gain on investments.................... 0.95 0.32 1.17 0.58 1.37
--------- --------- --------- --------- ---------
Total distributions...................................... 1.08 0.54 1.41 0.95 1.77
--------- --------- --------- --------- ---------

Net asset value at end of year............................... $ 13.23 $ 14.43 $ 14.00 $ 14.65 $ 11.88
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN+................................................ (0.67)% 7.05% 5.83% 33.58% (8.55)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands)..................... $ 80,941 $ 96,465 $ 97,076 $ 95,606 $ 76,780
Ratios of operating expenses to average net assets........... 1.28% 1.24% 1.10% 0.97% 0.94%
Ratio of net investment income to average net assets......... 0.78% 0.19% 1.43% 2.21% 2.77%
Portfolio turnover rate...................................... 12% 45% 22% 38% 48%

</TABLE>

+ Calculated without sales charge.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 96

PAGE 10

CAPSTONE GROWTH FUND, INC.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors
of Capstone Growth Fund, Inc.

We have audited the accompanying statement of assets and liabilities of
Capstone Growth Fund, Inc. (formerly Capstone U.S. Trend Fund, Inc.) including
the portfolio of investments, as of October 31, 1994, and the related
statement of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and financial
highlights for each of the 5 years ended. These financial statements and
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 audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether financial statements and financial
highlights are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities owned
as of October 31, 1994 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Capstone Growth Fund, Inc. as of October 31, 1994, the results of
its operations, changes in its net assets and financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.

Tait, Weller & Baker

Philadelphia, Pennsylvania
November 22, 1994
<PAGE> 97
PART C - OTHER INFORMATION

ITEM 15. OTHER INFORMATION

7.4 Indemnification. The Corporation, including its successors and assigns,
shall indemnify its directors and officers and make advance payment of related
expenses to the fullest extent permitted, and in accordance with the procedures
required, by the General Laws of the State of Maryland and the Investment
Company Act of 1940. The By-Laws may provide that the Corporation shall
indemnify its employees and/or agents in any manner and within such limits as
permitted by applicable law. Such indemnification shall be in addition to any
other right or claim to which any director, officer, employee or agent may
otherwise be entitled. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise or
employee benefit plan, against any liability [(including, with respect to
employee benefit plans, excise taxes)] asserted against and incurred by such
person in any such capacity or arising out of such person's position, whether
or not the Corporation would have had the power to indemnify against such
liability. The rights provided to any person by this Article 7.4 shall be
enforceable against the Corporation by such person who shall be presumed to
have relied upon such rights in serving or continuing to serve in the
capacities indicated herein. No amendment of these Articles of Incorporation
shall impair the rights of any person arising at any time with respect to
events occurring prior to such amendment.

The By-Laws of Growth contain the following provision:

ARTICLE VI
Indemnification

The Corporation shall indemnify (a) its Directors and officers,
whether serving the Corporation or at its request any other entity, to the full
extent required or permitted by (i) Maryland law now or hereafter in force,
including the advance of expenses under the procedures and to the full extent
permitted by law, and (ii) the Investment Company Act of 1940, as amended, and
(b) other employees and agents to such extent as shall be authorized by the
Board of Directors and be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law.

- 1 -
<PAGE> 98
The General Distribution Agreement of Growth contains the following
provision:

11 - The Issuer agrees to indemnify and hold harmless the Distributor and each
of its directors and officers and each person, if any, who controls the
Distributor within the meaning of Section 15 of the 1933 Act against any loss,
liability, claim, damages or expenses (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damages, or
expense and reasonable counsel fees incurred in connection therewith), arising
by reason of any person acquiring any shares, based upon the ground that the
registration statement, Prospectus, shareholder reports or other information
filed or made public by the Issuer (as from time to time amended), included an
untrue statement of a material fact or omitted to state a material fact
required to be stated or necessary in order to make the statements not
misleading under the 1933 Act, or any other statute or the common law.
However, the Issuer does not agree to indemnify the Distributor or hold it
harmless to the extent that the statement or omission was made in reliance
upon, and in conformity with, information furnished to Issuer by or on behalf
of the Distributor. In no case (i) is the indemnity of the Issuer in favor of
the Distributor or any person indemnified to be deemed to protect the
Distributor or any person against any liability to the Issuer or its security
holders to which the Distributor or such person would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under this Agreement, or (ii) is the Issuer to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Distributor or any person indemnified unless the Distributor or any
person shall have notified the issuer in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the
Distributor or any person (or after the Distributor or the person shall have
received notice of service on any designated agent). However, failure to
notify the Issuer of any claim shall not relieve the Issuer from any liability
which it may have to the Distributor or any person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Issuer shall be entitled to participate at its own expense in
the defense, or, if it so elects, to assume the defense of any suit brought to
enforce the claims, but if the Issuer elects to assume the defense, the defense
shall be conducted by counsel chosen by it and satisfactory to the Distributor
or person or persons, defendant or defendants in the suit. In the event the
Issuer elects to assume the defense of any suit and retain counsel, the
Distributor, officers or directors or controlling person or persons, defendant
or defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them. If the Issuer does not elect to assume the defense
of any suit, it will reimburse the Distributor, officers or directors or
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them. The Issuer
agrees to notify the Distributor promptly of the commencement of any litigation
or proceedings against it or any of its officers or trustees in connection with
the issuance or sale of any of the shares.

The Distributor also covenants and agrees that it will indemnify and hold
harmless the Issuer and each of its Board members and officers and each person,
if any, who controls the Issuer

- 2 -
<PAGE> 99
within the meaning of Section 15 of the 1933 Act, against any loss, liability,
damages, claim or expense (including the reasonable counsel fees incurred in
connection therewith) arising by reason of any person acquiring any shares,
based upon the 1933 Act or any other statute or common law, alleging that the
registration statement, Prospectus, shareholder reports or other information
filed or made public by the Issuer (as from time to time amended), included an
untrue statement of a material fact or omitted to state a material fact
required to be stated or necessary in order to make the statements not
misleading, insofar as the statement or omissions was made in reliance upon,
and in conformity with information furnished to the Issuer by or on behalf of
the Distributor. In no case (i) is the indemnity of the Distributor in favor
of the Issuer or any person indemnified to be deemed to protect the Issuer or
any person against any liability to which the Issuer or any person against any
liability to which the Issuer or such person would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under this Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Issuer or any person indemnified unless the Issuer or person, as
the case may be, shall have notified the Distributor in writing of the claim
within a reasonable time after the summons or other first written notification
giving information of the nature of the claim shall have been served upon the
Issuer or upon such person, or after the Issuer or such person shall have
received notice of service on any designated agent. However, failure to notify
the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Issuer or any person against whom the action
is brought otherwise than on account of its indemnity agreement contained in
this paragraph. In the case of any notice to the Distributor, it shall be
entitled to participate, at its own expense, in the defense or, if it so
elects, to assume the defense of any suit brought to enforce the claim, but if
the Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Issuer, to its officers and Board
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Issuer or controlling persons, defendant or defendants in
the suit, shall bear the fees and expenses of any additional counsel retained
by them. If the Distributor does not elect to assume the defense of any suit,
it will reimburse the Issuer, officers and Board or controlling person or
persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Distributor agrees to notify the
Issuer promptly of the commencement of any litigation or proceedings against it
in connection with the issue and sale of any of the shares.

- 3 -
<PAGE> 100
ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
(1) Articles of Incorporation of Registrant(1)

(2) By-Laws of Registrant(1)

(3) Not Applicable

(4) Agreement and Plan of Reorganization between Registrant and Capstone Series, Inc. on behalf of Capstone Balanced
Fund(2)

(5) Specimen copy of certificate for Registrant's shares of common stock(3). See also Items 16(1) and (2).

(6) Investment Advisory Agreement between Registrant and Capstone Asset Management Company(1)

(7) (a) General Distribution Agreement between Registrant and Capstone Asset Planning Company(4)

(b) Selling Group Agreement for the Capstone Funds(1)

(8) Not Applicable

(9) Custody Agreement between Registrant and The Fifth Third Bank(5)

(10) (a) Copy of Service and Distribution Plan(1)

(b) Copy of Service Agreement(1)

</TABLE>

_________________________
(1) Incorporated herein by reference to the Exhibits filed with Registrant's
Post-Effective Amendment No. 12 to Registration Statement No. 2-83397
(2) Filed herewith as Exhibit B to Proxy Statement and Prospectus
(3) Incorporated herein by reference to the Exhibits filed with Registration
Statement No. 2-83397
(4) Incorporated herein by reference to the Exhibits filed with
Registrant's Post-Effective Amendment No. 13 to Registration Statement
No. 2-83397
(5) Incorporated herein by reference to the Exhibits filed with Registrant's
Post-Effective Amendment No. 17 to Registration Statement No. 2-83397

- 4 -
<PAGE> 101
<TABLE>
<S> <C>
* (11) Opinion and consent of Dechert Price & Rhoads as to the legality of securities being offered

(12) Not Applicable

(13) Shareholder Services Agreement between Registrant and Fund/Plan Services, Inc.6

* (14) Consent of Tait, Weller & Baker

(15) Not Applicable

* (16) Powers of Attorney of Messrs. James F. Leary, John R. Parker, Philip C. Smith and Bernard J. Vaughan

* (17) (a) Copy of Declaration of Registrant pursuant to Rule 24f-2 under the Investment Company Act of 1940

(b) Form of Proxy

ITEM 17. UNDERTAKINGS

1. The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.

2. The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.

___________________________
* Filed herewith
6 Incorporated herein by reference to the Exhibits filed with
Registrant's Post-Effective Amendment No. 11 to Registration
Statement No. 2-83397

- 5 -
<PAGE> 102
SIGNATURES

As required by the Securities Act of 1933, this registration statement has been
signed on behalf of the registrant, in the City of Houston and State of Texas
on the 13th day of April, 1995.

Registrant: CAPSTONE GROWTH FUND, INC.

By: /s/ EDWARD L. JAROSKI, CHAIRMAN
____________________________________________________________________________
(Signature and Title)

As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
__________________________________ President April __, 1995
Dan E. Watson

/s/ EDWARD L. JAROSKI Chairman, Executive April 13, 1995
__________________________________ Vice President,
Edward L. Jaroski Director

__________________________________ Secretary April __, 1995
Iris R. Clay

__________________________________ Treasurer April __, 1995
Linda G. Giuffre

__________________________________ Director April __, 1995
James F. Leary

__________________________________ Director April __, 1995
John R. Parker

__________________________________ Director April __, 1995
Philip C. Smith

__________________________________ Director April __, 1995
Bernard J. Vaughan

</TABLE>

- 6 -
<PAGE> 103
INDEX TO EXHIBITS

(11) Opinion and consent of Dechert Price & Rhoads as to the legality of
securitites being offered

(14) Consents of Tait, Weller & Baker

(16) Powers of Attorney of Messrs. James F. Leary, John R. Parker, Philip
C. Smith and Bernard J. Vaughan

(17) (a) Copy of Declaration of Registrant pursuant to Rule 24f-2 under
the Investment Company of 1940

(b) Form of Proxy

<PAGE> 1

April 14, 1995

Board of Directors
Capstone Growth Fund, Inc.
5847 San Felipe, Suite 4100
Houston, Texas 77057

Board of Directors
Capstone Series, Inc.
5847 San Felipe, Suite 4100
Houston, Texas 77057

Gentlemen:

You have requested our opinion regarding certain Federal income tax
consequences to the Capstone Balanced Fund (the "Fund"), a separate series of
Capstone Series, Inc., to the Capstone Growth Fund, Inc. ("Growth Fund"), and
to the holders of the shares of common stock of the Fund, in connection with
the proposed transfer of all of the properties of the Fund to Growth Fund, in
exchange solely for voting shares of common stock of Growth Fund ("Growth Fund
Shares") and the assumption by Growth Fund of certain liabilities of the Fund
followed by the distribution of such Growth Fund Shares received by the Fund in
complete liquidation and termination of the Fund, all pursuant to the Agreement
and Plan of Reorganization (the "Agreement") to be executed by the Fund and
Growth Fund and included as an exhibit to Form N-14.

For purposes of this opinion, we have examined and rely upon (1) the
Agreement, (2) the Form N-14, dated __________, 1995, and filed by Growth Fund
on said date with the Securities and Exchange Commission, and (3) such other
documents and instruments as we have deemed necessary or appropriate for
purposes of rendering this opinion. We assume that the transaction that is the
subject of this letter will be carried out in accordance with the terms of the
Agreement and as described in the documents we have examined.

<PAGE> 2
Board of Directors
Capstone Growth Fund, Inc.

Board of Directors
Capstone Series, Inc.

April 14, 1995
Page 2

This opinion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), United States Treasury regulations, judicial decisions,
and administrative rulings and pronouncements of the Internal Revenue Service,
all as in effect on the date hereof. This opinion is conditioned upon (a) the
Reorganization taking place in the manner described in the Agreement and the
Form N-14 to which reference is made above, and (b) there being no change in
the Code, United States Treasury regulations, judicial decisions, or
administrative rulings and pronouncements of the Internal Revenue Service
between the date hereof and the closing date of the Reorganization.

This opinion is further conditioned upon our receiving such executed
letters of representation from the Fund and Growth Fund as we shall request.
This opinion shall be effective only at such time as we receive those letters
and confirm our opinion in writing on the closing date of the Reorganization
and, in the absence of such confirmation, will be deemed to have been withdrawn.

Based upon the foregoing, it is our opinion that, for Federal income
tax purposes:

(1) The acquisition by Growth Fund of all of the properties of the
Fund in exchange solely for Growth Fund Shares and the assumption by Growth
Fund of certain liabilities of the Fund followed by the distribution of Growth
Fund Shares to the shareholders of the Fund in exchange for their Fund shares in
complete liquidation and termination of the Fund will constitute a
reorganization within the meaning of Section 368 of the Code. The Fund and
Growth Fund will each be "a party to a reorganization" within the meaning of
Section 368(b) of the Code.

(2) The Fund will recognize no gain or loss upon transferring its
properties to Growth Fund in exchange solely for Growth Fund Shares and the
assumption by Growth Fund of certain liabilities of the Fund or upon
distributing to its shareholders the Growth Fund Shares received by the Fund
in the transaction pursuant to the Agreement.

(3) Growth Fund will recognize no gain or loss upon receiving the
properties of the Fund in exchange for Growth Fund Shares and the assumption by
Growth Fund of certain liabilities of the Fund.
<PAGE> 3
Board of Directors
Capstone Growth Fund, Inc.

Board of Directors
Capstone Series, Inc.

April 14, 1995
Page 3

(4) The aggregate adjusted basis to Growth Fund of the properties of
the Fund received by Growth Fund in the Reorganization will be the same as the
aggregate adjusted basis of those properties in the hands of the Fund
immediately before the exchange.

(5) Growth Fund's holding periods with respect to the properties of
the Fund that Growth Fund acquires in the transaction will include the
respective periods for which those properties were held by the Fund (except
where investment activities of Growth Fund have the effect of reducing or
eliminating a holding period with respect to an asset).

(6) The shareholders of the Fund will recognize no gain or loss upon
receiving Growth Fund Shares solely in exchange for Fund shares.

(7) The aggregate basis of the Growth Fund Shares received by a
shareholder of the Fund in the transaction will be the same as the aggregate
basis of the Fund shares surrendered by the shareholder in exchange therefor.

(8) A Fund shareholder's holding period for the Growth Fund Shares
received by the shareholder in the transaction will include the holding period
during which the shareholder held the Fund shares surrendered in exchange
therefor, provided that the shareholder held such shares as a capital asset on
the date of Reorganization.

We express no opinion as to the tax consequences of the Reorganization
except as expressly set forth above, or as to any transaction except those
consummated in accordance with the Agreement and the representations to be made
to us.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form N-14 filed by Growth Fund with the Securities
and Exchange Commission.

Very truly yours,

<PAGE> 1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the reference to our firm in the Registration Statement
(Form N-14) and related Statement of Additional Information of Capstone Growth
Fund, Inc. and to the inclusion of our report dated November 22, 1994 to the
Shareholders and Board of Directors of Capstone Growth Fund, Inc.

TAIT, WELLER & BAKER

PHILADELPHIA, PENNSYLVANIA
APRIL 13, 1995
<PAGE> 2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the reference to our firm in the Registration Statement
(Form N-14) and related Statement of Additional Information of Capstone Growth
Fund, Inc. and to the inclusion of our report dated November 14, 1994 to the
Shareholders and Board of Directors of Capstone Balanced Fund.

TAIT, WELLER & BAKER

PHILADELPHIA, PENNSYLVANIA
APRIL 13, 1995

<PAGE> 1

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Edward L. Jaroski as his true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

/s/ JAMES F. LEARY Director April 13, 1995
- -----------------------------
James F. Leary

/s/ JOHN R. PARKER
- ----------------------------- Director April 13, 1995
John R. Parker

/s/ PHILIP C. SMITH
- ----------------------------- Director April 13, 1995
Philip C. Smith

/s/ BERNARD J. VAUGHAN
- ---------------------------- Director April 13, 1995
Bernard J. Vaughan

<PAGE> 1

As filed with the Securities and Exchange Commission on May 12, 1983

REGISTRATION NO. 2-83397

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

Pre-Effective Amendment No. ______ /X/

Post-Effective Amendment No. ______ /X/

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/

Amendment No. ______ /X/

Plitrend Fund, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

777 Walker Avenue, Suite 2000 Houston, Texas 77002
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code (713) 757-5656

Dan E. Watson, 777 Walker Avenue, Suite 2000 Houston, Texas 77002
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering
As soon as practicable after the Registration Statement becomes effective

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended, an indefinite number of shares of Common Stock, par value $.01, of
Plitrend Fund, Inc. is being registered by this Registration Statement.

The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

<PAGE> 1
EXHIBIT 17b

[Form of Proxy]

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

CAPSTONE BALANCED FUND, A SERIES OF CAPSTONE SERIES, INC. - COMMON STOCK PROXY
- - for the Special Meeting of Stockholders at 2:00 p.m. CST, May 30, 1995 at
5847 San Felipe, Suite 4100, Houston, Texas 77057.

The undersigned hereby appoints DAN E. WATSON and IRIS R. CLAY, or any of them,
with full power of substitution, as Proxies to vote the shares of Common Stock
of the undersigned at the above stated Special Meeting, and any adjournments
thereof, upon the matters set forth in the notice and proxy statement as
follows:

1. Approval of the Agreement and Plan of Reorganization by and between
Capstone Series, Inc. for and on behalf of its series, Capstone
Balanced Fund, and Capstone Growth Fund, Inc.

FOR ______ AGAINST ______ ABSTAIN ______

2. In their discretion, the Proxies are authorized to vote upon such
other matters as may properly come before the Special Meeting.

THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, IT WILL BE
VOTED FOR PROPOSAL 1 AND WITH THE DISCRETION OF THE PROXY OR PROXIES ON ANY
OTHER BUSINESS.

Any proxy heretofore given by the undersigned with respect to such stock is
hereby revoked. Receipt of the Notice of Special Meeting and Proxy Statement
is hereby acknowledged.

Please Mark, Sign, Date and Return the Proxy Promptly
using the Enclosed Envelope.

Date: ___________________, 1995

______________________________

______________________________
(Joint owners must EACH sign. Please sign EXACTLY as
your name(s) appear(s) on this card. When signing as
attorney, trustee, executor, administrator, guardian or
corporate officer, please give your FULL title.)

<PAGE> 1
EXHIBIT 17c

CAPSTONE BALANCED FUND
(FORMERLY CAPSTONE FUND OF THE SOUTHWEST)

A Series of Capstone Series, Inc.

5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631

January 13, 1995

PROSPECTUS

Capstone Balanced Fund ("the Fund") is the sole series of Capstone Series,
Inc. (the "Corporation"), an open-end diversified management investment company.
The Fund's investment objective is to seek long-term capital appreciation and
income. The Fund pursues this objective by investing in both equity and fixed
income securities.

This Prospectus sets forth certain information about Capstone Balanced Fund
that a prospective investor should know before investing. Investors should read
and retain this Prospectus for future reference.

A STATEMENT OF ADDITIONAL INFORMATION about Capstone Balanced Fund dated
January 13, 1995 has been filed with the Securities and Exchange Commission and
contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing the
Fund at the telephone number or address listed above. The Statement of
Additional Information is incorporated herein by reference.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2

CAPSTONE BALANCED FUND

<TABLE>
<S> <C>
Investment Adviser: Shareholder Servicing Agent:
Capstone Asset Management Company Fund/Plan Services, Inc.
5847 San Felipe 2 W. Elm Street
Suite 4100 P.O. Box 874
Houston, Texas 77057 Conshohocken, Pennsylvania 19428
</TABLE>

Distributor:
Capstone Asset Planning Company
5847 San Felipe
Suite 4100
Houston, Texas 77057

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................... 3
Fund Expenses......................................................... 5
Financial Highlights.................................................. 6
Investment Objective and Policies..................................... 7
Investments and Investment Practices.................................. 8
Investment Restrictions............................................... 11
Performance Information............................................... 12
Management of the Fund................................................ 13
Purchasing Shares..................................................... 15
Distributions and Taxes............................................... 20
Redemption and Repurchase of Shares................................... 20
Determination of Net Asset Value...................................... 22
Stockholder Services.................................................. 23
General Information................................................... 25
Appendix.............................................................. 27
</TABLE>

2
<PAGE> 3

CAPSTONE BALANCED FUND

PROSPECTUS SUMMARY

<TABLE>
<S> <C>
Type of Company...................... The Fund is the initial series of Capstone Series,
Inc., an open- end diversified management investment
company. (see page 25)

Investment Objective................. The Fund seeks long-term capital appreciation and
income. There is no assurance that this objective will
be achieved. (see page 7)

Investment Policies.................. The Fund invests in both equity and fixed income
securities. Under normal market conditions, at least
25% of the Fund's assets will be invested in fixed
income securities and at least 25% will be invested in
equity securities. The Fund may also engage in certain
hedging transactions. (see page 7)

Risk Factors......................... For hedging purposes, the Fund may invest up to 2% of
its total net assets in options on stock and stock
indexes and up to 5% of the market value of its assets
in margin deposits on stock index futures and options
on stock index futures. The Fund may also enter into
forward foreign currency exchange contracts as a hedge
in connection with its foreign investments. These
investments entail special risks. The Fund's
investments in foreign securities involve different
risks than investments in securities of U.S. issuers.
The Fund's investments in Baa/BBB securities (and
securities deemed of comparable quality by the
Adviser) may have speculative characteristics. The
value of the Fund's debt securities will be adversely
affected by increases in interest rates. Its
investments in mortgage- and other asset-backed
securities also involve prepayment risks. See
"Investments and Investment Practices." There can be
no assurance the Fund will achieve its investment
objective and investors should be aware that the value
of the Fund's shares will fluctuate, which may cause a
loss in principal value. (see page 8)

Investment Adviser................... Capstone Asset Management Company (the "Adviser") is
the Fund's Investment Adviser. The Adviser provides
advisory and/or administrative services to the other
mutual funds in the Capstone Group. (see page 13)

Expenses of the Fund................. For the last fiscal year, the Fund's total operating
expenses, including investment fees, were 2.23% of its
average net assets. (see page 15)
</TABLE>

3
<PAGE> 4

<TABLE>
<S> <C>
Dividends and
Distributions...................... The Fund pays any dividends from net investment income
and distributions from capital gains at least
annually. (see page 20)
Offering Price and
Sales Charge....................... The public offering price is equal to the net asset
value plus a sales charge equal to 4.75% of the public
offering price (4.99% of the amount invested), reduced
on investments of $100,000 or more. The Fund bears
certain expenses pursuant to a Rule 12b-1 distribution
plan. (see page 16)

Minimum Purchase..................... The minimum initial investment is $200, except for
continuous investment plans, and there is no minimum
for subsequent purchases. (see page 16)

Redemption........................... Shares of the Fund can be redeemed at the next
determined net asset value, without charge. (see page
20)

Distributor.......................... The Distributor is Capstone Asset Planning Company.
</TABLE>

4
<PAGE> 5

FUND EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases 4.75% on initial investment, zero on
(as a percentage of offering price) reinvested dividends
Deferred Sales Load (as a percentage of 0%
original purchase price or redemption of
proceeds, as applicable)
Redemption Fees (as a percentage of amount 0%
redeemed, if applicable)
Exchange Fee 0%
A 4.75% maximum sales load applies to
exchanges of shares that have not been
outstanding at least 15 days

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management and Administration Fees 0.75%
12b-1 Fees* 0.09%
Other Expenses 1.39%
Total Fund Operating Expenses 2.23%
</TABLE>

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $ 69 $ 114 $ 161 $292
</TABLE>

The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The information disclosed in the table under the heading
"Shareholder Transaction Expenses" is based on the maximum sales load now in
effect for the Fund. See "Purchasing Shares" and "Redemption and Repurchase of
Shares" below for more complete descriptions of those expenses, including a
description of available reductions in the sales charge. The information under
the heading "Annual Fund Operating Expenses" is based on information actually
incurred by the Fund during its last fiscal year ended September 30, 1994. A
separate charge by the Adviser for accounting, pricing and bookkeeping services
is included in "Other Expenses." The example which immediately follows the table
is based on Fund assets as of September 30, 1994 and assumes (1) the
reinvestment of all dividends and distributions and (2) that the percentage of
Total Fund Operating Expenses remains constant at the level shown in the table
above. The example should not be considered a representation of past or future
expenses. Actual Fund expenses may be greater or lesser than those shown in the
example or in the table.
- ---------------

* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against
the assets of a Fund, long-term stockholders may indirectly pay more in
total sales charges than the economic equivalent of the maximum front-end
sales charge permitted by rules of the NASD (see "Distributor").

5
<PAGE> 6

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value
at beginning of
year........... $19.47 $ 17.25 $ 16.48 $ 11.97 $ 13.86 $ 10.35 $ 11.57 $ 11.19 $ 10.34 $ 11.17
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
investment
operations:
Net investment
income
(loss)......... (.23)(c) (.19) (.16) (.03) .03 .23 .08 .06 .06 .09
Net realized and
unrealized gain
(loss) on
investments.... (3.15)(c) 3.20 1.54 4.71 (1.74) 3.37 (1.24) 2.17 .93 .03
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations..... (3.38) 3.01... 1.38 4.68 (1.71) 3.60 (1.16) 2.23 .99 .12
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Less
Distributions
From:
Net investment
income......... -- -- -- .05 .18 .09 .03 -- .14 --
Net realized
gain on
investments.... 1.13 .79 .61 .12 -- -- .03 1.85 -- .95
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions... 1.13 .79 .61 .17 .18 .09 .06 1.85 .14 .95
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value
at end of
year........... $14.96 $ 19.47 $ 17.25 $ 16.48 $ 11.97 $ 13.86 $ 10.35 $ 11.57 $ 11.19 $ 10.34
======= ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN*... (18.36)% 17.82% 8.66% 39.64% (12.47)% 34.96% (9.93)% 22.64% 9.54% 1.43%
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of year (in
thousands)..... $5,454 $15,863 $13,363 $13,988 $13,192 $15,401 $14,152 $17,056 $14,579 $13,360
RATIOS:
Operating
expenses to
average net
assets......... 2.23% 2.12% 1.96% 1.52%(a) 1.39% 1.46% 1.50% 1.42% 1.47% 1.54%
Net investment
income (loss)
to average net
assets......... (1.33)% (1.01)% (.95)% (.23)%(b) .21% 1.61% .78% .53% .52% 1.07%
Portfolio
turnover
rate........... 29% 7% 7% 21% 19% 32% 62% 41% 134% 53%
</TABLE>

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

(*) Calculated without sales charge.

(a) Expenses to average net assets prior to reimbursement were 1.62%.

(b) Net investment income to average net assets prior to reimbursement was
(.33)%.

6
<PAGE> 7

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek long-term capital appreciation
and income. This investment objective is a fundamental policy of the Fund and
cannot be changed without stockholder approval. The Fund pursues its objective
by investing in both equity and fixed income securities. The Fund's portfolio,
under normal market conditions, is at least 25% invested in fixed income
securities and 25% invested in equity securities. Opportunities for capital
appreciation come primarily from the Fund's investments in equity securities,
including common stocks, securities convertible into common stocks, and
preferred stocks. These securities are selected because of their potential for
capital appreciation, their dividend income, and their potential for increased
earnings. The Fund will earn income through its investments in fixed income
securities and, to a lesser extent, from dividend-paying stocks. The Fund's
fixed income investments will include securities of the U.S. Government, its
agencies and instrumentalities; corporate notes and bonds; certain mortgage- and
other asset-backed securities; convertible and preferred securities; and money
market instruments, including commercial paper, bankers' acceptances and
certificates of deposit.

The Fund will invest only in fixed income securities rated investment
grade -- i.e., rated at least BBB by Standard & Poor's Corporation ("S&P") or
Baa by Moody's Investors Service ("Moody's"), or deemed of comparable quality by
the Adviser. If a security's rating is lowered while it is held by the Fund, the
Adviser will determine whether it will retain or sell the security based on the
best interests of the Fund and its stockholders. Securities rated BBB or Baa may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to weaken the obligor's capacity to make principal
and interest payments on such securities than is the case for higher grade
bonds.

The Fund will generally invest primarily in securities of U.S. issuers but
has adopted no limit on the extent to which it can invest in securities of
foreign issuers. Investment in foreign securities can help diversify the Fund's
risk but also entails certain special costs and risks. Although the Fund does
not expect to invest extensively in foreign securities, investors should be
aware that such investments involve considerations different from domestic
investments, including higher brokerage and custody costs, currency conversion
costs and longer settlement times. Other special factors regarding foreign
investing include thinner and more volatile trading markets; less extensive
information about securities, markets and issuers; lower levels of government
regulation; difficulties in enforcing obligations; different accounting
standards; fluctuations in values of foreign currencies against the U.S. dollar;
and the risk of negative government actions such as expropriation,
nationalization, imposition of withholding, confiscatory or other taxes,
currency blockages or restrictions on transfer.

As a hedge against negative changes in exchange rates affecting its foreign
investments, the Fund is permitted to enter into forward foreign currency
exchange contracts. There can be no assurance that these contracts will have the
desired effect. (See "Investment Practices.")

The portfolio turnover rate for the fiscal years ended September 30, 1994
and 1993 was 29% and 7%, respectively.

Prior to October 3, 1994 the Fund's name was Capstone Fund of the Southwest
and its investment objective was to seek long-term capital appreciation by
investing primarily in companies located in the Southwestern region of the
United States. The Fund's current investment objective

7
<PAGE> 8

was approved by stockholders at a meeting held August 25, 1994. The name change
was effected by the Fund's Board of Directors.

INVESTMENTS AND INVESTMENT PRACTICES

The Fund may employ special investment practices as a hedge against changes
in the value of securities held in the Fund's portfolio or securities it intends
to purchase.

Options -- The Fund may purchase put and call options on stock and stock
indices for hedging purposes. The Fund will not purchase a call or put option if
as a result the premium paid for the option together with premiums paid for all
other stock options and options on stock indices then held by the Fund exceed 2%
of the Fund's total net assets.

Stock Index Futures and Related Options -- The Fund may also invest up to
5% of its total assets in stock index futures contracts and options on stock
index futures and engage in margin transactions with respect to such investment.
The Fund will purchase and sell stock index futures contracts and will purchase
put and call options on such contracts only as a hedge against changes in the
value of securities held in the Fund's portfolio or which it intends to purchase
and where the transactions are economically appropriate to the reduction of
risks inherent in the ongoing management of the Fund. The Fund will not enter
into futures contracts and related options to the extent its outstanding
obligations under such contracts would exceed 20% of its total assets.

8
<PAGE> 9

either realize a gain or the option will expire worthless, depending on the
closing price of the index on that day. Thus, the purchaser's risk is limited to
the premium paid for the option.

Generally, transactions in options on stock index futures contracts pose
the same type of risks as do transactions in options on stock. Price movements
in securities 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 which may not completely offset
movements in the price of such securities.

Successful use by the Fund of stock index futures contracts is subject to
certain special risk considerations. A liquid index futures market may not be
available when the Fund seeks to offset adverse market movements. In addition,
there may be an imperfect correlation between movements in the securities
included in the index and movements in the securities in the Fund's portfolio.
Successful use of stock index futures contracts and options on such contracts is
further dependent on the management's ability to predict correctly movements in
the direction of the stock markets, and no assurance can be given that its
judgment in this respect will be correct. Risks in the purchase and sale of
stock index futures contracts are discussed further in the Statement of
Additional Information.

Forward Foreign Currency Exchange Transactions -- The Fund may also enter
into forward foreign currency exchange contracts in an attempt to hedge against
adverse movements in the relative rates of exchange between the U.S. dollar and
the currencies in which any non-U.S. investments are denominated, or between two
foreign currencies. The Fund may enter into this type of contract with respect
to a specific transaction or as a hedge for the Fund's portfolio positions.
These contracts involve an obligation to purchase or sell a specific currency at
a specified future date at a specified price. These contracts are traded in the
interbank market conducted between currency traders (generally large commercial
banks) and their customers. Although the Fund would enter into such a contract
to minimize the risk of loss due to adverse currency fluctuations, such a
contract may also limit the extent to which the Fund could gain from positive
fluctuations.

Following is information on debt securities in which the Fund may invest.

Bank Obligations -- The Fund may invest in obligations of U.S. or foreign
banks that have more than $1 billion in total assets.

9
<PAGE> 10

Commercial Paper -- Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions, as well as similar instruments issued by government
agencies and instrumentalities. (See the Statement of Additional Information for
more information.)

Mortgage-Related Securities -- The Fund may invest in various
mortgage-related securities. Mortgage pass-through securities represent
interests in pools of mortgages from which monthly payments of interest and
principal on the mortgages are passed through to security holders, net of
certain fees. Prepayment of underlying mortgages exposes the Fund to the risk of
reinvesting at a lower rate of return. If a prepaid mortgage was purchased at a
premium, the value of the premium would also be lost. Although, like other fixed
income securities, the value of mortgage-related securities rises as interest
rates fall and falls when interest rates rise, such increase in value would be
diminished where underlying mortgages have prepayment features.

Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (such as securities guaranteed by
the Government National Mortgage Association). Other securities that are
guaranteed by agencies or instrumentalities of the U.S. Government (such as
securities guaranteed by the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation) are further supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations. Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.

The Fund may also invest in Collateralized Mortgage Obligations ("CMOs")
which are instruments backed by whole mortgage loans or by portfolios of
mortgage pass-through securities. CMOs typically are issued in classes with
different maturities. Payments based on interest and principal are usually
distributed semi-annually first to holders of the CMO class with the shortest
maturity, with each subsequent maturity class getting payments only after the
preceding class has been retired. Some CMOs are debt obligations of the Federal
Home Loan Mortgage Corporation, with each maturity class secured by a pool of
conventional mortgages purchased by the agency. Other CMOs are issued by
corporate issuers in several series, with the proceeds used to purchase
mortgages or mortgage pass-through certificates. With some CMOs, the issuer
serves as a conduit to allow loan originators (such as builders or savings and
loan associations) to borrow against their loan portfolios.

As other types of mortgage-related securities are created, the Adviser may
consider them for investment by the Fund to the extent they are consistent with
the Fund's investment objectives and policies.

The Fund may invest in Certificates for Automobile Receivables ("CARS"),
which represent undivided fractional interests in a trust ("Trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS are passed through monthly to certificate holders and

10
<PAGE> 11

are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. Underlying sales contracts are subject to prepayment,
which may reduce the overall return to certificate holders. If the letter of
credit is exhausted, certificate holders may also experience delays in payment
or losses on CARS if the full amounts due on underlying sales contracts are not
realized by the Trust because of unanticipated legal or administrative costs of
enforcing the contracts, or because of depreciation, damage or loss of the
vehicles securing the contracts, or other factors.

RISKS OF LOWER RATED SECURITIES

The Fund's investments in fixed income securities will be in securities
rated, at the time of investment, Baa or higher by Moody's Investors Service,
Inc. ("Moody's") and/or BBB or higher by Standard & Poor's Corporation ("S&P")
or deemed by the Adviser to be of comparable quality. A description of the
characteristics of ratings of securities in which the Fund may invest is
attached as Appendix A to the Statement of Additional Information.

Bonds rated Baa or BBB may have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to weaken the
obligor's capacity to make principal and interest payments on such securities
than is the case for higher grade bonds. The Adviser relies on multiple sources,
in addition to credit ratings assigned by nationally recognized rating agencies,
in analyzing an issuer's financial condition and determining the advisability of
particular investments. Thus, a security will not automatically be sold if it
drops below Baa or BBB if the Adviser deems it in the Fund's best interests to
retain the security. For a fuller disclosure of risk factors relating to the
Fund's investments in these lower-rated securities, see the Statement of
Additional Information.

INVESTMENT RESTRICTIONS

The Fund has adopted certain investment restrictions which, together with
the investment objective and policies of the Fund, cannot be changed without
approval by holders of a majority of the Fund's outstanding voting shares. Such
majority is defined by the Investment Company Act of 1940 as the lesser of (i)
67% or more of the voting securities present in person or by proxy at a meeting,
if the holders of more than 50% of the outstanding voting securities are present
or represented by proxy; or (ii) more than 50% of the outstanding voting
securities. These restrictions, which are designed to enhance the realization of
the Fund's investment objective, provide, among other things, that the Fund may
not:

1. Have more than 25% of its total assets invested in any one industry.

2. With respect to 75% of the Fund's total assets, invest more than 5% of
the value of its total assets in securities of any one issuer. With respect to
the remaining 25%, the Fund will normally invest those assets under the same
limitations as are applicable to the 75%, but may from time to time invest the
entire amount in securities of one or more issuers.

3. Own more than 10% of the voting securities of any one issuer.

4. Underwrite securities issued by others or invest more than 10% of the
value of its assets (at time of investment) in any securities it could not
freely sell to the public without registration under the Securities Act of 1933.

11
<PAGE> 12

5. Borrow over 25% of the value of its total assets with the further
condition that immediately upon borrowing, there must be asset coverage of at
least 300%. Borrowing, which will be only from banks, will be used (i) for the
purpose of making additional investments ("leverage") or (ii) for temporary or
emergency purposes in unusual circumstances when in the opinion of management it
is in the best interest of the stockholders to do so. While authorized to use
leverage, the Fund has no present plans to do so.

6. Directly or indirectly pledge in excess of 15% (or such lesser maximum
percentage as may be permitted by applicable state securities laws requirements)
of its gross assets taken at cost to secure borrowings, subject to any
applicable limitations under rules promulgated by the Federal Reserve Board,
except as provided herein in connection with transactions in options and
futures.

7. Make loans (a purchase of part of an issue of publicly distributed
bonds, debentures, or other debt securities not being considered a loan) or act
as underwriter, except to the extent that it might be deemed to be an
underwriter for the purposes of the Securities Act of 1933, as amended, with
respect to securities which it sells to the public if registration under such
Act, as amended, is required in connection with such sale.

8. Invest in commodities or commodity contracts except that the Fund may
enter into stock index futures contracts and options on stock index futures
contracts to the extent that, (a) immediately thereafter, the sum of its initial
margin deposits on such open contracts and premiums paid for options on such
futures contracts does not exceed 5% of the market value of the Fund's total
assets and (b) its outstanding obligations under such contracts and options does
not exceed 20% of the Fund's total assets.

9. Invest in real estate (except for its own use in connection with its
business).

In addition, the Fund has policies relating to restrictions on its
investments which may be changed by action of the Board of Directors. For
further information about such restrictions, reference is made to the caption
"Investment Restrictions" in the Fund's Statement of Additional Information.

PERFORMANCE INFORMATION

The Fund may from time to time include figures indicating the Fund's yield,
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a given 30-day period
(including dividends and interest), less expenses accrued during the period
("net investment income"), and will be computed by dividing net investment
income by the maximum public offering price per share on the last day of the
period. Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and capital
gain distributions during the period are reinvested at net asset value in
additional Fund shares. Quotations of the average annual total return reflect
the deduction of the maximum sales charge and

12
<PAGE> 13

a proportional share of Fund expenses on an annual basis. The results, which are
annualized, represent an average annual compounded rate of return on a
hypothetical investment in the Fund over a period of 1, 5 and 10 years ending on
the most recent calendar quarter. Quotations of total return, which are not
annualized, represent historical earnings and asset value fluctuations. Total
return figures used in advertisements or sales literature will not usually
reflect the deduction of the maximum sales charge which if deducted would reduce
the Fund's total return. Performance figures are based on past performance and
are not a guarantee of future results.

MANAGEMENT OF THE FUND

The Fund is a series of an open-end diversified management investment
company, commonly called a mutual fund. Through the purchase of shares of the
Fund, investors with goals similar to the investment objective of the Fund can
participate in the investment performance of the portfolio of investments held
by the Fund. The management and affairs of the Fund are supervised by its Board
of Directors.

Capstone Asset Management Company (the "Adviser"), a wholly-owned
subsidiary of Capstone Financial Services, Inc., acts as the Investment Adviser
to the Fund. The address of the Adviser is 5847 San Felipe, Suite 4100, Houston,
Texas 77057. The Adviser provides investment advisory and/or administrative
services to five other mutual funds: Capstone Government Income Fund, Capstone
Growth Fund, Inc., Capstone New Zealand Fund, Capstone Nikko Japan Fund and
Medical Research Investment Fund, Inc. (the "Capstone Group"), pension and
profit sharing accounts, corporations and individuals. Total assets under
management are approximately $1.5 billion.

Pursuant to the terms of an investment advisory agreement which was
approved by the Fund's stockholders on February 18, 1992, the Fund retains the
Adviser to manage its investment operations and furnish advice with respect to
the purchase and sale of securities. Subject to the authority of the
Corporation's Board of Directors, the Adviser is responsible for overall
management of the Fund's business affairs. The Adviser provides to the
Corporation's officers and directors (who may be affiliated with the Adviser)
investment consultation and financial advice. In addition, the Adviser is
required to render regular reports of the Fund's investment activities to the
directors. The Adviser selects brokers and dealers to execute the Fund's
portfolio transactions with the primary objective of obtaining the best price
and execution. Consistent with this objective, the Adviser may place orders for
portfolio transactions with the Distributor, and may consider sales of Fund
shares as a factor in placing such orders.

Investment decisions for the Fund are made by two portfolio managers, Dan
E. Watson, Ph.D. and Sharon K. Keith. Dr. Watson began his career in 1971 at
Texas Commerce Bank with planning responsibilities for the company's life
insurance operations. In 1977 he joined Tenneco Inc. and was subsequently named
Assistant to the Chairman of the Board. In 1981 he helped form Tenneco Financial
Services, the predecessor organization to Capstone Financial Services, Inc., the
parent company of the Adviser and Distributor.

Ms. Keith began her investment career in 1979 in the institutional sales
department at Shearson Lehman Brothers. Prior to joining the Adviser in 1987,
she served over six years as portfolio manager at Service Corporation
International, where she was responsible for equity investments

13
<PAGE> 14

and administration of the trust accounts. She is a graduate of Rice University
and a past President of the Houston Society of Financial Analysts.

The Fund pays all expenses incurred in the operation of the Fund other than
those borne by the Adviser under the Advisory Agreement. Expenses payable by the
Fund include: fees of directors who are not "interested persons" (as defined in
the 1940 Act) of the Adviser or its affiliates; Board of Director meeting-
related expenses of the directors and officers; expenses for legal and auditing
services; data processing and pricing services; costs of printing and mailing
proxies, stock certificates and stockholder reports; charges of the custodian,
transfer agent, registrar or dividend disbursing agent; expenses pursuant to the
Service and Distribution Plan; Securities and Exchange Commission fees;
membership fees in trade associations; fidelity bond coverage for the Fund's
officers; directors' and officers' errors and omissions insurance coverage;
interest; brokerage costs; taxes; expenses of qualifying the Fund's shares for
sale in various states; litigation; and other extraordinary or non-recurring
expenses and other expenses properly payable by the Fund.

For its services, the Adviser receives an annual fee on the basis of a
percentage of net assets. For the fiscal year ended September 30, 1994, the Fund
paid advisory fees equal to 0.75% of the average net assets of the Fund.

DISTRIBUTOR

The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to which it uses its assets to finance activities relating to the distribution
of its shares to investors and provision of certain stockholder services. The
Plan permits payments to be made by the Fund to the Distributor to reimburse it
for expenditures incurred by it in connection with the distribution of the Fund
shares to investors and provision of certain stockholder services including but
not limited to the payment of compensation, including incentive compensation, to
securities dealers (which may include the Distributor itself) and other
financial institutions and organizations (collectively, the "Service
Organizations") to obtain various distribution related and/or administrative
services for the Fund. These services include, among other things, processing
new stockholder account applications, preparing and transmitting to the Fund's
Transfer Agent computer processable tapes of all transactions by customers and
serving as the primary source of information to customers in answering questions
concerning the Fund and their transactions with the Fund. The Distributor is
also authorized to engage in advertising, the preparation and distribution of
sales literature and other promotional activities on behalf of the Fund. In
addition, the Plan authorizes payment by the Fund of the cost of preparing,
printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.

14
<PAGE> 15
INVESTMENT APPLICATION FORM [LOGO]
Mail to: FUND/PLAN SERVICES, INC.
2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428