CAPSTONE GROWTH FUND INC, 497, 1996-04-30

CAPSTONE GROWTH FUND INC
497, 1996-04-30

Previous: PIONEER FUND /MA/, 485BPOS, 1996-04-30

Next: POTLATCH CORP, 10-Q, 1996-04-30

<PAGE> 1
CAPSTONE GROWTH FUND, INC.
(FORMERLY CAPSTONE U.S. TREND FUND, INC.)

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

FEBRUARY 29, 1996

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 February 29, 1996 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> 2
CAPSTONE GROWTH FUND, INC.

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

Distributor:
Capstone Asset Planning Company
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631

TABLE OF CONTENTS

PAGE
----
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 . . . . . . . . . . . . . . . . . . . . . . .14
Distributions and Taxes . . . . . . . . . . . . . . . . . . . .16
Redemption and Repurchase of Shares . . . . . . . . . . . . . .18
Determination of Net Asset Value. . . . . . . . . . . . . . . .19
Stockholder Services. . . . . . . . . . . . . . . . . . . . . .20
General Information . . . . . . . . . . . . . . . . . . . . . .22

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.

<PAGE> 3
CAPSTONE GROWTH FUND, INC.

PROSPECTUS SUMMARY

Type of Company . . . . The Fund is an open-end diversified management
investment company. (see page 22)

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 1.31% of its average net assets. (see
page 14)

Dividends and . . . . . The Fund pays any dividends from net investment
Distributions income and distributions from capital gains at
least annually. (see page 16)

Distributor and . . . . Shares of the Fund are continuously offered for
Offering Price sale through the Fund's Distributor, Capstone
Asset Planning Company, without a sales load, at
the net asset value next determined after receipt
of the order. The Fund pays certain expenses
pursuant to a Rule 12b-1 distribution

<PAGE> 4
plan. (see page 14)

Minimum Purchase. . . . The minimum initial investment is $200, except for
continuous investment plans, and there is no
minimum for subsequent purchases. (see page 14)

Redemption. . . . . . . Shares of the Fund can be redeemed at the next
determined net asset value, without charge. (see
page 18)

<PAGE> 5
FUND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Load Imposed on Purchases 0%
(as a percentage of offering price)

Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price) 0%

Deferred Sales Load (as a percentage of
original purchase price or redemption
of proceeds, as applicable) 0%

Redemption Fee (as a percentage of
amount redeemed, if applicable) 0%

Exchange Fee 0%

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)

Management Fees 0.69%
12b-1 Fees* 0.25%
Other Expenses 0.28%
Total Fund Operating Expenses 1.22%

EXAMPLE

1 year 3 years 5 years 10 years
------ ------- ------- --------
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: $12 $39 $67 $148

_____________
* 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").

<PAGE> 6
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 management fee information contained
in the table is based on the maximum asset-based fees currently in effect
and does not include any deduction for expense reimbursements or waivers by
the Fund's Adviser. An administrative charge is also included in the
expense information contained in the table. See "Management of the Fund"
for a more complete 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, effective August 21, 1995,
may be incurred by the Fund. The actual amount paid by the Fund during the
fiscal year ended October 31, 1995 was 0.34% of its average net assets.
(Prior to August 21, 1995 the maximum payout permitted under the 12b-1 Plan
was 0.35% of the Fund's 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, 1995.

THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE USES THE "TOTAL FUND
OPERATING EXPENSES" FIGURE ABOVE AND ASSUMES IT WILL REMAIN CONSTANT OVER
THE ILLUSTRATED PERIOD. 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.

<PAGE> 7
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,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA

Net asset value at beginning of
year . . . . . . . . . . . . . . $13.23 $14.43 $14.00 $14.65 $11.88 $14.76 $12.12 $11.40 $14.71 $12.35
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income . . . . . 0.17 0.11 0.17 0.20 0.30 0.37 0.37 0.31 0.28 0.32
Net realized and unrealized
gain (loss) on investments. . . 1.93 (0.23) 0.80 0.56 3.42 (1.48) 2.92 1.01 0.49 2.59
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations. 2.10 (0.12) 0.97 0.76 3.72 (1.11) 3.29 1.32 0.77 2.91
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income . . . . . 0.16 0.13 0.22 0.24 0.37 0.40 0.36 0.31 0.32 0.23
Net realized gain on investments. 1.35 0.95 0.32 1.17 0.58 1.37 0.29 0.29 3.76 0.32
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions . . . . . . 1.51 1.08 0.54 1.41 0.95 1.77 0.65 0.60 4.08 0.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of year. . $13.82 $13.23 $14.43 $14.00 $14.65 $11.88 $14.76 $12.12 $11.40 $14.71
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN+ . . . . . . . . . . 17.04% (0.67)% 7.05% 5.83% 33.58% (8.55)% 28.47% 12.23% 6.76% 24.15%

RATIOS/SUPPLEMENTAL DATA
Net assets at the end of year
(in thousands). . . . . . . . . $85,324 $80,941 $96,465 $97,076 $95,606 $76,780 $86,243 $88,658 $89,729 $83,685

Ratio of operating expenses to
average net assets. . . . . . . 1.31% 1.28% 1.24% 1.10% 0.97% 0.94% 0.95% 1.01% 0.94% 1.01%
Ratio of net investment income to
to average net assets . . . . . 1.21% 0.78% 0.19% 1.43% 2.21% 2.77% 2.76% 2.76% 2.14% 2.21%

Portfolio turnover rate . . . . . 119% 12% 45% 22% 38% 48% 50% 62% 56% 214%
</TABLE>
______________

+ Calculated without a sales charge.

<PAGE> 8
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

<PAGE> 9
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
such contracts to the extent that its outstanding obligations under these
contracts would exceed 20% of the Fund's total assets.

<PAGE> 10
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, 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.

<PAGE> 11
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

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

<PAGE> 12
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 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 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 Intermediate Government Fund, 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 $1.3
billion.

Investment decisions for the Fund are made by the portfolio manager,
Albert P. Santa Luca, Ph.D. Dr. Santa Luca was appointed as co-manager in
October 1994 and assumed full responsibility in August, 1995. 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.

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, TradeStar Investments, Inc. and Williams McKay
Jordan & Mills, Inc, broker-dealer affiliates of the Adviser.

<PAGE> 13
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, 1995, the
Fund paid advisory fees equal to 0.69% 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 he
Fund to the public on a continuous basis.

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.

Under the Plan, payments made to the Distributor may not exceed an
amount computed at an annual rate of 0.25% of the average net assets of the
Fund. (Prior to August 21, 1995, the maximum payout under the Plan was
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

<PAGE> 14
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 0.25% 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 May 7, 1995. 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.

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, 1995 were 1.31% of its average net
assets.

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. Except for the Fund itself, 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 of the Fund are sold at net asset value, without a sales
charge, and will be credited to a stockholder's account at the net asset
value next computed after an order is received by the Distributor. The
minimum initial investment is $200, except for continuous investment plans
which have no

<PAGE> 15
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.

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 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.

Payment for all orders to purchase Fund shares must be received by the
Fund's Transfer Agent within three business days after the order was
placed.

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 effected at the net asset value 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 net asset value. 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 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 effected at the net asset value 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

<PAGE> 16
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 effected at the
net asset value next computed after receipt of the call by the Transfer
Agent. Payment for the telephone purchase must be received by the Transfer
Agent within three business days after the order is placed. If payment is
not received within three business days, the stockholder will be liable for
all losses incurred as a result of the purchase.

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.

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.

<PAGE> 17
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.

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

<PAGE> 18
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
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. Signature guarantees
will be accepted from any eligible guarantor institution which participates
in a signature guarantee program. 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 as
specified above. 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

<PAGE> 19
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 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

The net asset value per share is computed daily, Monday through
Friday, as of the close of regular trading on the New York Stock Exchange,
which is currently 4:00 p.m. Eastern time, except that the net asset value
will not be computed on the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. The net asset value per share is
computed by deducting total liabilities from total assets of the Fund and

<PAGE> 20
dividing the remainder by the total number of shares outstanding. The net
asset value so computed will be used for all purchase orders and redemption
requests received between such computation and the preceding computation.

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).

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:

o 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

o 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

<PAGE> 21
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 at a price based on their
respective net asset values with no sales or administrative charge. 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; such shares will be redeemed at the next
computed net asset value.

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

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.

<PAGE> 22
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 do not represent a yield or return on investment and
may constitute return of initial capital. 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
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.

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

<PAGE> 23
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 February 15, 1996 NationsBank, as trustee under the Tenneco Inc.
Thrift Plan, owned approximately 34.5% and PliFunds Investment Plans owned
approximately 7.2% 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.

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.

<PAGE> 24
CAPSTONE GROWTH FUND, INC.
(FORMERLY CAPSTONE U.S. TREND FUND, INC.)

STATEMENT OF ADDITIONAL INFORMATION

FEBRUARY 29, 1996

This Statement of Additional Information is not a Prospectus but
contains information in addition to and more detailed than that set forth
in the Prospectus and should be read in conjunction with the Prospectus.
The Statement of Additional Information and the related Prospectus are both
dated February 29, 1996. A Prospectus may be obtained without charge by
contacting Capstone Asset Planning Company, by phone at (800) 262-6631 or
by writing to it at 5847 San Felipe, Suite 4100, Houston, Texas 77057.

TABLE OF CONTENTS

Page
----
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . .2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . .2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . .7
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . .8
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . 13
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . 15
How to Buy and Redeem Shares . . . . . . . . . . . . . . . . . . . . . 15
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . 16
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Control Persons and Principal Holders of Securities. . . . . . . . . . 19
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 20

<PAGE> 25
GENERAL INFORMATION

The Fund is an "open-end diversified management company" under the
Investment Company Act of 1940. It was incorporated in New Jersey in 1952
and commenced business shortly thereafter. On February 28, 1967, it was
merged into a Pennsylvania corporation and operated under the laws of that
state until May 11, 1992 when it was reorganized as a Maryland corporation
and its name changed from U.S. Trend Fund, Inc. to Capstone U.S. Trend
Fund, Inc. Effective September 6, 1994 the Fund's name was changed to
Capstone Growth Fund, Inc. This change was approved by stockholders at a
meeting held August 25, 1994.

The Fund is a member of a group of investment companies sponsored by
Capstone Asset Management Company (the "Adviser"), which provides
investment advisory and administrative services to the Fund. The Adviser
and Capstone Asset Planning Company (the "Distributor") are wholly-owned
subsidiaries of Capstone Financial Services, Inc.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of
a majority of its outstanding shares. In addition to the fundamental
investment limitations set forth in the Fund's Prospectus, the Fund shall
not:

1. Invest in real estate, or other interests in real estate which
are not readily marketable.

2. Underwrite securities issued by others, or invest in any
securities it could not freely sell to the public without
registration under the Securities Act of 1933, as amended, except
that the Fund may invest up to 10% of its assets in securities
which have not been registered under the Securities Act of 1933,
as amended.

3. Purchase the securities of any one issuer if such purchase would
cause more than 10% of any class of outstanding securities,
including outstanding voting securities, of such issuer to be
held by the Fund.

4. Lend any part of its assets apart from the purchase of portions
of issues of publicly distributed bonds, debentures, notes and
other evidences of indebtedness and privately distributed debt
obligations of publicly owned companies.

5. Issue warrants or options for the acquisition of Fund shares.

6. Pledge or otherwise encumber any of its assets to an extent
greater than 15% of the gross assets of the Fund taken at cost.
(In order to comply with Illinois law, management has decided to
follow a more restrictive policy for the present time.
Accordingly, the Fund will not, as a matter of operating policy,
pledge, mortgage or hypothecate its portfolio securities to the
extent that at any time the percentage of pledged securities will
exceed 10% of the offering price of the Fund's shares, except as
permitted in transactions in options and futures.)

<PAGE> 26
7. Invest more than 25% of the value of its assets in a particular
industry.

8. The Fund will not invest in oil, gas or other mineral exploration
or development programs (although the Fund is not prohibited from
investing in issuers that own or invest in such investors).

9. Invest in securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition, or
reorganization, and (b) the Fund may invest up to 10% of its
total assets in shares of other investment companies.

The portfolio securities of the Fund may be turned over whenever
necessary or appropriate in the opinion of the Fund's management to seek
the achievement of the basic objective of the Fund. The turnover rate of
the Fund's portfolio was 119% for the fiscal year ended October 31, 1995
and 12% for the fiscal year ended October 31, 1994.

RISK FACTORS

STOCK INDEX FUTURES AND RELATED OPTIONS

The Fund may engage in transactions in options on stock and stock
indices, and stock index futures and options on such futures as a hedge
against changes in the value of securities held in the Fund's portfolio or
securities it intends to purchase.

To protect the value of its portfolio against declining stock prices,
the Fund may purchase put options on stock indices. To protect against an
increase in the value of securities that it wants to purchase, the Fund may
purchase call options on stock indices. A stock index (such as the S&P
500) assigns relative values to the common stocks included in the index and
the index fluctuates with the changes in the market values of the common
stocks so included. Options on stock indices are similar to options on
stock except that, rather than giving the purchaser the right to take
delivery of stock at a specified price, an option on a stock index gives
the purchaser the right to receive cash. The amount of cash is equal to
the difference between the closing price of the index and the exercise
price of the option, expressed in dollars, times a specified multiple (the
"multiplier"). The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Gain or loss with
respect to options on stock indices depends on price movements in the stock
market generally rather than price movements in individual stocks.

The multiplier for an index option performs a function similar to the
unit of trading for a stock option. It determines the total dollar value
per contract of each point in the difference between the exercise price of
an option and the current level of the underlying index. A multiplier of
100 means that a one-point difference will yield $100. Options on
different indices may have different multipliers.

Because the value of a stock index option depends upon movements in
the level of the stock index rather than the price of a particular stock,
whether a fund will realize a gain or loss on the purchase of a put or call
option on a stock index depends upon movements in the level of stock prices
in the stock market generally or in an industry or market segment rather
than movements in the price of a particular stock. Accordingly, successful
use by the Fund of both put and call options on stock indices will be

<PAGE> 27
subject to the Adviser's ability to accurately predict movements in the
direction of the stock market generally or of a particular industry. In
cases where the Adviser's prediction proves to be inaccurate, the Fund will
lose the premium paid to purchase the option and it will have failed to
realize any gain.

In addition, the Fund's ability to hedge effectively all or a portion
of its securities through transactions in options on stock indices (and
therefore the extent of its gain or loss on such transactions) depends on
the degree to which price movements in the underlying index correlate with
price movements in the Fund's securities. Inasmuch as such securities will
not duplicate the components of an index, the correlation probably will not
be perfect. Consequently, the Fund will bear the risk that the prices of
the securities being hedged will not move in the same amount as the option.
This risk will increase as the composition of the Fund's portfolio diverges
from the composition of the index.

A stock index futures contract is a bilateral agreement to which two
parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
at the close of the last trading day of the contract and the futures
contract price. The value of a unit is the current value of the stock
index. For example, the Standard & Poor's Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P Index assigns relative weightings to the value of one
share of each of these 500 common stocks included in the Index, and the
Index fluctuates with changes in the market values of the shares of those
common stocks. In the case of the S&P 500 Index, contracts are to buy or
sell 500 units. Thus, if the value of the S&P 500 Index Futures were $150,
one contract would be worth $75,000 (500 units X $150). Stock index
futures contracts specify that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of a contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the
expiration of the contract. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date
at a contract price of $150 and the S&P 500 Index is at $154 on that future
date, the Fund will gain $2,000 (500 units X gain of $4). If the Fund
enters into a futures contract to sell 500 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, the Fund will lose $2,000 (500 units X loss of
$4).

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 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.

Successful use of stock index futures contracts and options on such
contracts is subject to the Adviser's ability to predict correctly
movements in the direction of the stock markets. No assurance can be given
that the Adviser's judgement in this respect will be correct.
Additionally, the correlation between movements in the price of futures
contracts or options on futures contracts and movements in prices of
securities being hedged or used for cover is not perfect.

The Fund will purchase and sell stock index futures contracts and will
purchase put and call options on stock index futures 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

<PAGE> 28
appropriate to the reduction of the risks inherent in the ongoing
management of the Fund. Generally, the Fund may hedge its securities
portfolio against a period of market decline by selling stock index futures
contracts or by purchasing puts on stock index futures contracts for the
purpose of protecting its portfolio against such decline. Conversely, the
Fund may purchase stock index futures contracts or call options thereon as
a means of protecting against an increase in the prices of securities which
the Fund intends to purchase. The Fund will not engage in transactions in
stock index futures contracts or options on such contracts for speculation
and will not write options on stock index futures contracts.

When purchasing stock index futures contracts, the Fund will be
required to post a small initial margin deposit, held by the Fund's
custodian in the name of the futures broker selected by the Fund; the
remaining portion of the contracts' value will be retained in short-term
investments in order to meet variation margin requirements or net
redemptions. In the event of net redemptions, the Fund would close out
open futures contracts and meet redemptions with cash realized from
liquidating short-term investments.

The Fund will not enter into transactions involving futures contracts
and options on futures contracts to the extent that, immediately
thereafter, the sum of its initial margin deposits on open futures
contracts and premiums paid for options on futures contracts would exceed
5% of the market value of the Fund's total assets. In addition, the Fund
will not enter into futures contracts and options on futures contracts to
the extent that its outstanding obligations under these contracts and
options would exceed 20% of the Fund's total assets.

Stock index futures contracts by their terms settle at settlement date
on a cash basis. In most cases, however, the contracts are "closed out"
before the settlement date. Closing out an open futures position is done
by taking an opposite position ("buying" a contract which has previously
been "sold" or selling a previously purchased contract) in an identical
contract to terminate the position.

Positions in stock index futures contracts may be closed out only on
an exchange which provides a secondary market for such futures. There can
be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specified time. Thus, it may not be
possible to close out a futures position, which could have an adverse
impact on the cash position of the Fund, and which could possibly force the
sale of portfolio securities at a time when it may be disadvantageous to do
so. In the opinion of the Fund's management, the risk that the Fund will
be unable to close out a futures contract will be 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 risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required and to the
extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price movement in a futures contract may result
in immediate and substantial loss (as well as gain) to an investor.
Because the Fund will only engage in futures strategies for hedging
purposes, the Fund's management does not believe that the Fund will be
subject to the risks of substantial loss that may be associated with
futures transactions.

<PAGE> 29
FOREIGN SECURITIES

Although the Fund expects to invest principally in securities of U.S.
issuers, it may invest in U.S. dollar- or foreign currency-denominated
foreign equity and debt securities traded in the United States or in
foreign markets. Its investments may include securities represented by
European Depositary Receipts ("EDRs) and American Depositary Receipts
("ADRs"). Investments in securities of foreign issuers involve certain
costs, risks and considerations not typically associated with investments
in U.S. issuers. These include: differences in accounting, auditing and
financial reporting standards; generally higher commission rates on foreign
portfolio transactions; the possibility of nationalization, expropriation
or confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer
currency from a country); and political instability which could affect U.S.
investments in foreign countries. Additionally, foreign securities, and
dividends and interest payable on those securities, may be subject to
foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility and less
liquidity. Additional costs associated with an investment in foreign
securities may include higher custodial fees and transaction costs than are
typical of U.S. investments, as well as currency conversion costs. Changes
in foreign exchange rates also will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. The Fund's
objective may be affected either favorably or unfavorably by fluctuations
in the relative rates of exchange between the currencies of different
nations, by exchange control regulations and by indigenous economic and
political developments. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of
the Fund's holdings of securities denominated in such currency and,
therefore, will cause an overall decline in the Fund's net asset value and
any net investment income and capital gains to be distributed in U.S.
dollars to shareholders. The rate of exchange between the U.S. dollar and
other currencies is determined by several factors including the supply and
demand for particular currencies, central bank efforts to support
particular currencies, the movement of interest rates, the pace of business
activity in certain other countries and the United States, and other
economic and financial conditions affecting the world economy.

Although the Fund values its assets daily in terms of U.S. dollars,
the Fund does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. When effected, currency conversion involves
costs in the form of a "spread" between the foreign exchange dealer's
buying and selling prices.

FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS

The Fund may enter into forward foreign currency exchange contracts in
connection with its investments in foreign securities. A forward foreign
currency exchange contract ("forward contract") is an agreement to purchase
or sell a specific amount of a particular foreign currency at a specified
price on a specified future date. These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for
trades. Closing transactions with respect to forward contracts are
effected with the currency trader who is a party to the original forward
contract.

The Fund will enter into a forward contract only for hedging purposes,
with respect to specific anticipated portfolio transactions (including
receivables and payables) or with respect to portfolio

<PAGE> 30
positions denominated in a particular currency. By entering into such a
contract, the Fund hopes to protect against, or benefit from, an anticipated
change in relevant currency exchange rates. For example, when the Fund
anticipates purchasing or selling a security, or receiving a dividend
payment, it may enter into a forward contract to set the rate at which the
relevant currencies will be exchanged at the time of the transaction. Or,
if the Fund anticipates a decline in the value of a currency in which some
of its assets are denominated, it may attempt to "lock in" the current more
favorable rate by entering into a contract to sell an amount of that
currency which approximates the current value of those securities. Each
such contract involves some cost to the Fund and requires that the Fund
maintain with its custodian a segregated account of liquid assets
sufficient to satisfy its obligations under the contract. In the event
that the currencies do not move in the direction, or to the extent, or
within the time frame, anticipated, the Fund may lose some or all of the
protection or benefit hoped for.

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
particular 30-day period (including dividends and interest), less expenses
accrued during the period ("net investment income"), and are computed by
dividing net investment income by the maximum offering price per share
(which includes the maximum sales charge) on the last day of the period,
according to the following formula:

YIELD = 2[(a-b + 1)6-1]
---
cd

where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements or
waivers),
c = the average daily number of shares outstanding during period that
were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.

For the 30-day period ended October 31, 1995 the Fund's yield was
1.080%.

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 gains 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 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 calculated pursuant to the following formula:

P (1 + T)n= ERV

where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and

<PAGE> 31
ERV = the ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the period.

For the 1, 5 and 10 year periods ended October 31, 1995 the Fund's
average annual total return was 17.04%, 11.96% and 11.89%, respectively.

Quotations of total return, which are not annualized, represent
historical earnings and asset value fluctuations. Total return is based on
past performance and is not a guarantee of future results. For the 1, 5
and 10 year periods ended October 31, 1995 the Fund's total return was
17.04%, 75.92% and 207.47%, respectively.

Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Price
Index ("S&P 500 Index"), the Dow Jones Industrial Average ("DJIA"), or
other appropriate unmanaged indices of performance of various types of
investments, so that investors may compare the Fund's results with those of
indices widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications, or persons who rank
mutual funds on overall performance or other criteria; and (iii) the
Consumer Price Index (a measure of inflation) to assess the real rate of
return from an investment in the Fund. Unmanaged indices may assume the
reinvestment of dividends, but generally do not reflect deductions for
administrative and management costs and expenses.

Performance information for the Fund reflects only the performance of
a hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information should be
considered in light of the Fund's investment objectives and policies, the
types and quality of the Fund's portfolio investments, market conditions
during the particular time period and operating expenses. Such information
should not be considered as a representation of the Fund's future
performance.

DIRECTORS AND EXECUTIVE OFFICERS

The Fund's directors and executive officers are listed below. All
persons named as directors also serve in similar capacities for other
mutual funds sponsored by the Adviser as indicated below.

* EDWARD L. JAROSKI, Chairman of the Board, Executive Vice President and
Director. 5847 San Felipe, Suite 4100, Houston, Texas 77057.
President (since 1992) and Director (since 1987) of the Capstone
Asset Management Company; President and Director of Capstone Asset
Planning Company and Capstone Financial Services, Inc. (since
1987); Director/Trustee and Officer of other Capstone Funds.

____________
* Director who is an interested person as defined in the Investment
Company Act of 1940 because of his relationship to the Adviser and
Distributor.

<PAGE> 32
JAMES F. LEARY, Director. c/o Search Capital Group, Inc., 700 N.
Pearl Street, Suite 400, L.B. 401, Dallas, Texas 75201-2809.
President of Sunwestern Management, Inc. (since June 1982) and
President of SIF Management (since January 1992), venture capital
limited partnership concerns; General Partner of Sunwestern
Advisors, L.P., Sunwestern Associates, Sunwestern Associates II,
Sunwestern Partners, L.P. and Sunwestern Ventures, Ltd. (venture
capital limited partnership entities affiliated with Sunwestern
Management, Inc. and SIF Management, Inc.). Director of: other
Capstone Funds; Anthem Financial, Inc. (financial services);
Associated Materials, Inc. (tire cord, siding and industrial cable
manufacturer); The Flagship Group, Inc. (vertical market
microcomputer software); Marketing Mercadeo International (public
relations and marketing consultants); MaxServ, Inc. (appliance
repair database systems); MESBIC Ventures, Inc. (minority
enterprise small business investment company); OpenConnect Systems,
Inc. (computer networking hardware and software); PhaseOut of
America, Inc. (smoking cessation products); and Search Capital
Group, Inc. (financial services).

JOHN R. PARKER, Director. P.O. Box 42, Woodbury, Vermont 05681.
Consultant and private investor (since 1990); Director of Nova
Natural Resources (oil, gas, minerals); Director of other Capstone
Funds; formerly Senior Vice President of McRae Capital Management,
Inc. (1991-1995); and registered representative of Rickel &
Associates (1988-1991).

PHILIP C. SMITH, Director. 87 Lord's Highway, Weston, Connecticut
06880. Private investor; Director of other Capstone Funds and the
Lexington Mutual Funds.

BERNARD J. VAUGHAN, Director. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly
Vice President of Fidelity Bank (1979-1993).

ALBERT P. SANTA LUCA, President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President of Capstone Financial
Services, Inc. and Capstone Asset Management Company (since 1994);
Officer of other Capstone Funds; formerly Vice President and Equity
Fund Manager of BancOne -- BancOne Investment Advisors (1984-1994).

DAN E. WATSON, Executive Vice President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Chairman of the Board (since 1992) and
Director of Capstone Asset Management Company (since 1987);
Chairman of the Board and Director of Capstone Asset Planning
Company and Capstone Financial Services, Inc. (since 1987); Officer
of other Capstone Funds.

IRIS R. CLAY, Secretary. 5847 San Felipe, Suite 4100, Houston, Texas
77057. Secretary (since February 1996), Assistant Vice President
(1994-1996) and Assistant Secretary (1990-1994) of Capstone
Financial Services, Inc., Capstone Asset Management Company and
Capstone Asset Planning Company; Officer of other Capstone Funds.

NORMA R. YBARBO, Assistant Secretary. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Assistant Compliance Officer (since 1994),
Compliance Analyst (1993-1994) and Compliance Assistant (1987-1993)
of Capstone Financial Services, Inc.; Officer of other Capstone
Funds.

LINDA G. GIUFFRE, Treasurer. 5847 San Felipe, Suite 4100, Houston,
Texas 77057. Vice President and Treasurer (since February 1996) of
Capstone Financial Services, Inc., Capstone

<PAGE> 33
Asset Management Company and Capstone Asset Planning Company;
Treasurer (1990-1996) and Secretary (1994-1996) of Capstone
Financial Services, Inc. and Capstone Asset Management Company;
Treasurer (1990-1996) and Secretary (1995-1996) of Capstone Asset
Planning Company; Officer of other Capstone Funds.

The directors and officers of the Fund as a group own less than one
percent of the outstanding shares of the Fund. The directors of the Fund
(other than Mr. Jaroski) also received compensation for serving as
directors of other Capstone Funds.

Each director not affiliated with the Adviser is entitled to $250 for
each Board meeting attended, and is paid a $2,000 annual retainer by the
Fund. The directors and officers of the Fund are also reimbursed for
expenses incurred in attending meetings of the Board of Directors. For the
fiscal year ended October 31, 1995, the Fund paid or accrued for the
account of its officers and directors, as a group for services in all
capacities, a total of $11,306.

The following table represents the fees paid during the 1995 calendar
year to the directors of the Fund and the total compensation each director
received during that period from the Capstone Funds complex.

COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Compnsation
From
Aggregate Pension or Registrant
Compensation Retirement Estimated Annual and Fund
From Benefits Accrued Benefits Upon Complex Paid
Name of Person, Position Registrant* As Part of Fund Retirement to Trustees
------------------------ ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
James F. Leary, Director $2,625 $0 $0 $4,000(1)
John R. Parker, Director 2,500 0 0 3,750(1)
Philip C. Smith, Director 2,500 0 0 6,750(1)(2)(3)
Bernard J. Vaughan, Director 2,625 0 0 6,250(1)(2)
</TABLE>
______________
* Amounts do not include deferred compensation.
(1) Director of Capstone Fixed Income Series, Inc.
(2) Trustee of Capstone International Series Trust
(3) Director of Medical Research Investment Fund, Inc.

INVESTMENT ADVISER

Pursuant to the terms of an investment advisory agreement dated May
11, 1992 (the "Advisory Agreement"), the Fund employs Capstone Asset
Management Company (the "Adviser") to furnish investment advisory and
administrative services. The Adviser is a wholly-owned subsidiary of
Capstone Financial Services, Inc.

For its services, the Adviser receives an annual fee at the rate of
.75 of 1% per annum on the first

<PAGE> 34
$50 million of the Fund's net assets, .60 of 1% per annum on the next $150
million of the Fund's net assets, .50 of 1% per annum on the next $300
million of the Fund's net assets and .40 of 1% per annum on all of the Fund's
net assets in excess of $500 million. The fee is payable monthly at a rate
of 1/16th of 1% of the first $50 million of the Fund's net assets, 1/20th of
1% of the next $150 million of the Fund's net assets, 1/24th of 1% of the
next $300 million of the Fund's net assets and 1/30th of 1% of all of the
Fund's net assets in excess of $500 million, respectively. The Fund's net
assets are determined at the close of the last business day of each month.
The fee paid to the Adviser may be somewhat higher than that paid by other
investment companies. For the fiscal years ended October 31, 1995, 1994 and
1993, the Fund paid investment advisory fees in the amounts of $560,434,
$623,303 and $671,890, respectively. As a percentage of the average net
assets of the Fund, the investment advisory fee was .69%, .68% and 68%,
respectively, for each of those years.

The Adviser also performs for the Fund certain accounting and
recordkeeping services for which the Adviser receives a monthly fee to
reimburse the Adviser for its costs. The Adviser also receives a monthly
fee to reimburse the Adviser for its costs in making daily computation of
net asset value. These amounts are not intended to include any profit to
the Adviser and are in addition to the advisory fee described above.

The Advisory Agreement contains an expense limitation provision
pursuant to which the Adviser will contribute money to the Fund up to an
amount equal to its advisory fees or waive all or a portion of its advisory
fees to insure that the aggregate annual expenses of the Fund, including
the advisory fee, but excluding certain expenses such as brokerage
commissions, litigation costs and certain distribution plan expenses, do
not exceed the expense limitations of any state having jurisdiction over
the Fund. In such event, the annual advisory fees of the Adviser will be
reduced pro rata (but not below zero) to the extent necessary to comply
with such expense limitations. At the date of this Statement of Additional
Information, the strictest expense limitation applicable to the Fund is
2.5% of the first $30 million of the Fund's average net assets, 2.0% of the
next $70 million of average net assets and 1.5% of the remaining average
net assets for any fiscal year.

Pursuant to the Advisory Agreement, the Adviser pays the compensation
and expenses of all of its directors, officers and employees who serve as
officers and executive employees of the Fund (including the Fund's share of
payroll taxes), except expenses of travel to attend meetings of the Fund's
Board of Directors or committees or advisers to the Board. The Adviser
also agrees to make available, without expense to the Fund, the services of
its directors, officers and employees who serve as officers of the Fund.
The Fund pays all of its expenses not borne by the Adviser pursuant to the
Advisory Agreement including such expenses as (i) the advisory fee, (ii)
fees under the Service and Distribution Plan (see "Distributor"), (iii)
fees for legal, auditing, transfer agent, dividend disbursing, and
custodian services, (iv) the expenses of issue, repurchase, or redemption
of shares, (v) interest, taxes and brokerage commissions, (vi) membership
dues in the Investment Company Institute allocable to the Fund, (vii) the
cost of reports and notices to stockholders, and (viii) fees to directors
and salaries of any officers or employees who are not affiliated with the
Adviser, if any.

The Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the agreement relates except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under the
Advisory Agreement.

<PAGE> 35
The Advisory Agreement will remain in effect from year to year
provided its renewal is specifically approved at least annually (a) by the
Fund's Board of Directors or by vote of a majority of the Fund's
outstanding voting securities, and (b) by the affirmative vote of a
majority of the directors who are not parties to the agreement or
interested persons of any such party, by votes cast in person at a meeting
called for such purpose. The Advisory Agreement may be terminated (a) at
any time without penalty by the Fund upon the vote of a majority of the
directors or by vote of the majority of the Fund's outstanding voting
securities, upon 60 days' written notice to the Adviser or (b) by the
Adviser at any time without penalty, upon 60 days' written notice to the
Fund. The Advisory Agreement will also terminate automatically in the
event of its assignment (as defined in the 1940 Act).

The following individuals are affiliated persons of both the Fund and
the Adviser as defined in the 1940 Act: Albert P. Santa Luca, Dan E.
Watson, Edward L. Jaroski, Linda G. Giuffre, Iris R. Clay and Norma R.
Ybarbo. (For further information, reference is made to the caption herein
"Directors and Officers".)

DISTRIBUTOR

Capstone Asset Planning Company (the "Distributor") acts as the
principal underwriter of the Fund's shares pursuant to a written agreement
with the Fund dated May 11, 1992 (the "Distribution Agreement"). The
Distributor has the exclusive right (except for distributions of shares
directly by the Fund) to distribute shares of the Fund in a continuous
offering through affiliated and unaffiliated dealers. The Distributor's
obligation is an agency or "best efforts" arrangement under which the
Distributor is required to take and pay for only such Fund shares as may be
sold to the public. The Distributor is not obligated to sell any stated
number of shares. Except to the extent otherwise permitted by the Service
and Distribution Plan (see below), the Distributor bears the cost of
printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature,
promotion and advertising. Prior to August 21, 1995, the Distributor
received commissions from sales of shares of the Fund, which amounts were
not an expense of the Fund but represented the sales commission added to
the net asset value of shares purchased from the Fund. The sales charge
was paid to the Distributor, who reallowed a portion of the sales charge to
broker-dealers who had an agreement with the Distributor to participate in
the offering of the Fund's shares. During the fiscal year ended October
31, 1995 the Distributor earned $5,056 in commissions on the sale of Fund
shares. For the fiscal years ended October 31, 1994 and 1993 the
Distributor received $1,585 and $3,733, respectively, in commissions from
the sale of Fund shares.

The Distribution Agreement is renewable from year to year if approved
(a) by the Fund's Board of Directors or by a vote of a majority of the
Fund's outstanding voting securities and (b) by the affirmative vote of a
majority of directors who are not parties to the Distribution Agreement or
interested persons of any party, by votes cast in person at a meeting
called for such purpose. The Distribution Agreement provides that it will
terminate if assigned, and that it may be terminated without penalty by
either party on 60 days' written notice.

On March 1, 1992, the Fund adopted a Service and Distribution Plan
(the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940
which permits the Fund to absorb certain expenses in connection with the
distribution of its shares and provision of certain services to
stockholders. See "Management of the Fund - Distributor" in the Fund's
Prospectus. As required by Rule 12b-1, the Fund's

<PAGE> 36
Plan and related agreements were approved by a vote of the Fund's Board of
Directors, and by a vote of the directors who are not "interested persons"
of the Fund as defined under the 1940 Act and have no direct or indirect
interest in the operation of the Plan or any agreements related to the Plan
(the "Plan Directors"), and by the Fund's stockholders at the Annual Meeting
of Stockholders held February 18, 1992.

As required by Rule 12b-1, the directors will review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for
the expenditures. The Fund paid $272,568 in 12b-1 fees during the fiscal
year ended October 31, 1995. Of this amount less than 1% was paid to
outside Service Organizations and the balance was retained by the
Distributor as reimbursement of distribution-related expenses.

The Plan and related agreements may be terminated at any time by a
vote of the Plan Directors or by vote of a majority of the Fund's
outstanding voting securities. As required by Rule 12b-1, selection and
nomination of disinterested directors for the Fund is committed to the
discretion of the directors who are not "interested persons" as defined
under the 1940 Act.

Any change in the Plan that would materially increase the distribution
expenses of the Fund requires stockholder approval, but otherwise, the Plan
may be amended by the directors, including a majority of the Plan
Directors.

The Plan will continue in effect for successive one year periods
provided that such continuance is specifically approved by a majority of
the directors, including a majority of the Plan Directors. Continuance of
the Plan was last approved by a majority of directors and Plan Directors on
May 7, 1995. In compliance with the Rule, the directors, in connection
with both the adoption and continuance of the Plan, requested and evaluated
information they thought necessary to make an informed determination of
whether the Plan and related agreements should be implemented, and
concluded, in the exercise of reasonable business judgment and in light of
their fiduciary duties, that there is a reasonable likelihood that the Plan
and related agreements will benefit the Fund and its stockholders.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities
for the Fund and for the placement of its portfolio business and the
negotiation of the commissions paid on such transactions. It is the policy
of the Adviser to seek the best security price available with respect to
each transaction. In over-the-counter transactions, orders are placed
directly with a principal market maker unless it is believed that a better
price and execution can be obtained by using a broker. The Adviser seeks
the best security price at the most favorable commission rate. In
selecting dealers and in negotiating commissions, the Adviser considers the
firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm are believed to
meet these criteria, preference may be given to firms which also provide
research services to the Fund or the Adviser. In addition, the Adviser may
cause the Fund to pay a broker that provides brokerage and research
services a commission in excess of the amount another broker might have
charged for effecting a securities transaction. Such higher commission may
be paid if the Adviser determines in good faith that the amount paid is
reasonable in relation to the services received in terms of the particular
transaction or the Adviser's overall responsibilities to the Fund and the
Adviser's other clients. Such

<PAGE> 37
research services must provide lawful and appropriate assistance to the
Adviser in the performance of its investment decision-making
responsibilities and may include advice, both directly and in writing, as
to the value of the securities, the advisability of investing in, purchasing
or selling securities, and the availability of securities, or purchasers or
sellers of securities, as well as furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts.

From time to time, the Adviser effects securities transactions through
Capstone Asset Planning Company ("CAPCO"), TradeStar Investments, Inc. and
Williams McKay Jordan & Mills, Inc. ("WMJM"), broker-dealer affiliates of
the Adviser. WMJM is deemed to be an affiliated broker since one of the
principals of that firm serves as a director of Capstone Financial
Services, Inc., the parent company of the Adviser and CAPCO.

Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such
other policies as the Board of Directors may determine, the Adviser may
consider sales of shares of the Fund as a factor in the selection of
dealers to execute portfolio transactions for the Fund.

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by
the Adviser in servicing all of its accounts; not all of such services may
be used by the Adviser in connection with the Fund. In the opinion of the
Adviser, the benefits from research services to each of the accounts
(including the Fund) managed by the Adviser cannot be measured separately.

The Adviser seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by
the Fund and another advisory account. In some cases, this procedure could
have an adverse effect on the price or the amount of securities available
to the Fund. In making such allocations among the Fund and other advisory
accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same
or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.

During the fiscal year ended October 31, 1995, the Fund incurred
brokerage commissions of $311,645, which represented 0.39% of the Fund's
net assets. Securities transactions effected through brokers who furnished
the Fund with statistical, research and advisory information amounted to
$197,312,560 (100% of the aggregate dollar amount of transactions executed
with a commission), and commissions paid by the Fund on these trades
totaled $311,645 (100% of total commissions). The Fund also executed
trades in the amount of $36,779,500 in which a "mark-up" (the dealer's
profit) was included in the price of the securities.

During the fiscal years ended October 31, 1994 and 1993, the Fund paid
$108,908 and $216,759, respectively, in brokerage commissions on portfolio
trades. During these periods, CAPCO received no brokerage commissions.

<PAGE> 38
DETERMINATION OF NET ASSET VALUE

The net asset value per share is computed daily, Monday through
Friday, as of the close of regular trading on the New York Stock Exchange,
which is currently 4:00 p.m. Eastern Time, except that the net asset value
will not be computed on the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

The net asset value of Fund shares is computed by dividing the value
of all securities plus other assets, less liabilities, by the number of
shares outstanding, and adjusting to the nearest cent per share. Such
computation is made by (i) valuing securities listed on an exchange or
quoted on the NASDAQ national market system at the last reported sale
price, or if there has been no sale that day at the mean between the last
reported bid and asked prices, (ii) valuing other securities at the mean
between the last reported bid and asked prices and (iii) valuing any
securities for which market quotations are not readily available and any
other assets at fair value as determined in good faith by the Board of
Directors of the Fund.

However, debt securities (other than short-term obligations) including
listed issues, are 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.

During the period a financial futures contact is open, changes in the
value of the contract are recognized as unrealized gain or loss 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
received or made daily as unrealized gain or loss is 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.

HOW TO BUY AND REDEEM SHARES

Shares of the Fund are sold in a continuous offering without a sales
charge and may be purchased on any business day through authorized dealers,
including Capstone Asset Planning Company. Certain broker-dealers assist
their clients in the purchase of shares from the Distributor and may charge
a fee for this service in addition to the Fund's net asset value.

Shares will be credited to a stockholder's account at the net asset
value next computed after an order is received by the Distributor. Initial
purchases must be at least $200; however, this requirement may be waived by
the Distributor for plans involving continuing investments. There is no
minimum for subsequent purchases of shares. 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. See "Purchasing Shares" in the Prospectus.

<PAGE> 39
redemption methods are available. See "Redemption and Repurchase of
Shares" in the Prospectus.

DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to distribute to stockholders substantially all
of its investment company taxable income (which includes, among other
items, dividends, interest and the excess of net short-term capital gains
over net long-term capital losses) in annual dividends. The Fund intends
similarly to distribute to stockholders at least annually any net realized
capital gains (the excess of net long-term capital gains over net short-
term capital losses). All dividends and capital gain distributions are
reinvested in shares of the Fund at net asset value without sales
commission, except that any stockholder may otherwise instruct the Transfer
Agent in writing and receive cash. Stockholders are informed as to the
sources of distributions at the time of payment. Any dividend or
distribution paid shortly after a purchase of shares by an investor will
have the effect of reducing the per share net asset value of his shares by
the amount of the dividend or distribution. All or a portion of any such
dividend or distribution, although in effect a return of capital, may be
taxable, as set forth below.

TAXES

The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). Qualification and election to be
taxed as a regulated investment company involves no supervision of
management or investment policies or practices by any government agency.
To qualify as a regulated investment company, the Fund must, with respect
to each taxable year, distribute to stockholders at least 90% of its
investment company taxable income (which includes, among other items,
dividends, interest, certain foreign currency gains and the excess of net
short-term capital gains over net long-term capital losses) and meet
certain diversification of assets, source of income, and other requirements
of the Code.

As a regulated investment company, the Fund generally is not subject
to Federal income tax on its investment company taxable income and net
capital gain (net long-term capital gains in excess of net short-term
capital losses), if any, that it distributes to stockholders. The Fund
intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and net capital gain. Amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the tax, the Fund must distribute during each
calendar year (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses for the twelve-
month period ending on October 31 of the calendar year (reduced by certain
ordinary losses, as prescribed by the Code), and (3) all ordinary income
and capital gains for previous years that were not distributed during such
years. 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 on a record 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 the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement.

<PAGE> 40
If the Fund retains its net capital gains, although it has no plans to
do so, the Fund may elect to treat such amounts as having been distributed
to its stockholders. As a result, the stockholders would be subject to tax
on undistributed capital gain, would be able to claim their proportionate
share of the Federal income taxes paid by the Fund on such gain as a credit
against their own Federal income tax liabilities, and would be entitled to
an increase in their basis in their Fund shares.

DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income will be taxable to a stockholder as ordinary income.
Distributions of net capital gains, if any, designated by the Fund as
capital gain dividends, are taxable as long-term capital gains, regardless
of how long the stockholder has held the Fund's shares, and are not
eligible for the dividends received deduction.

Dividends received by corporate stockholders may qualify for the
dividends received deduction to the extent the Fund designates its
dividends as derived from dividends from domestic corporations. The amount
designated by the Fund as so qualifying cannot exceed the aggregate amount
of dividends received by the Fund from domestic corporations for the
taxable year. Since the Fund's income may not consist exclusively of
dividends eligible for the corporate dividends received deduction, its
distributions of investment company taxable income likewise may not be
eligible, in whole or in part, for that deduction. The alternative minimum
tax applicable to corporations may reduce the benefits of the dividends
received deduction. The dividends received deduction may be further
reduced if the shares of the Fund are debt-financed or are deemed to have
been held less than 46 days.

All distributions are taxable to the stockholder whether reinvested in
additional shares or received in cash. Stockholders receiving
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share received equal to the net asset
value of a share of the Fund on the reinvestment date. Stockholders will
be notified annually as to the Federal tax status of distributions paid to
them by the Fund.

Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a
stockholder's cost basis, such distribution nevertheless would be taxable
to the stockholder as ordinary income or capital gain as described above,
even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should be careful to consider
the tax implications of buying shares just prior to a distribution by the
Fund. The price of shares purchased at that time includes the amount of
the forthcoming distribution, but the distribution will generally be
taxable to them.

HEDGING AND OTHER TRANSACTIONS. Certain options and futures contracts
are "section 1256 contracts." Any gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by the Fund
at the end of each taxable year (and at other times prescribed pursuant to
the Code) are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or
loss is generally treated as 60/40 gain or loss.

Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In
addition, losses realized by the Fund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable year in
which such losses are realized. Because only a few regulations
implementing the straddle

<PAGE> 41
rules have been promulgated, the tax consequences to the Fund of hedging
transactions are not entirely clear. The hedging transactions may increase
the amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to stockholders.

The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules
that vary according to the election(s) made. The rules applicable under
certain of the elections may operate to accelerate the recognition of gains
or losses from the affected straddle positions.

Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a Fund that did not engage in such hedging
transactions.

Because the tax consequences of straddle transactions to the Fund are
not entirely clear, it may ultimately be determined that the Fund's tax
accounting procedures failed to conform to the straddle rules.
Consequently, the Fund may have inadvertently failed to satisfy one or more
of the requirements for qualification as a regulated investment company.
If the Fund has failed to satisfy the requirement that it distribute at
least 90% of its net investment company taxable income, the Fund may be
able to preserve its regulated investment company status by making a
"deficiency dividend" distribution. In addition, the Fund would have to
pay interest and a penalty on the amount of the deficiency dividend
distribution. If the Fund fails to satisfy one of the other requirements
for qualification as a regulated investment company, the Fund would be
taxed as an ordinary corporation, and its distributions, including net
capital gain distributions, would be taxable to stockholders as ordinary
dividends. Moreover, upon any requalification as a regulated investment
company, the Fund might be subject to a corporate-level tax on certain
gains.

Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to
which the Fund will be able to engage in transactions in options and
futures contracts.

DISPOSITION OF SHARES. Upon disposition (by redemption, repurchase,
sale or exchange) of Fund shares, a stockholder will realize a taxable gain
or loss depending upon his basis in his shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
stockholder's hands. Such gain or loss will generally be long-term or
short-term depending upon the stockholder's holding period for the shares.
However, a loss realized by a stockholder on the disposition of Fund shares
with respect to which capital gain dividends have been paid will, to the
extent of such capital gain dividends, be treated as long-term capital loss
if such shares have been held by the stockholder for six months or less.
Further, a loss realized on a disposition will be disallowed to the extent
the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) 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. Exchanges of Fund shares for shares of other funds
generally would be treated as taxable sales of the shares exchanged by the
stockholder.

Certain of the debt securities acquired by the Fund may be treated as
debt securities that were

<PAGE> 42
originally issued at a discount. Original issue discount can generally be
defined as the difference between the price at which a security was issued
and its stated redemption price at maturity. Although no cash income is
actually received by the Fund, original issue discount on a taxable debt
security earned in a given year generally is treated for Federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code.

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

OTHER TAXES. Distributions also may be subject to additional state,
local and foreign taxes depending on each stockholder's particular
situation. Foreign stockholders may be subject to U.S. tax rules that
differ significantly from those described above, including the likelihood
that ordinary income dividends to them would be subject to withholding of
U.S. tax at a rate of 30% (or at a lower rate under a tax treaty).
Stockholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 15, 1996, NationsBank, in its capacity as trustee of
the Tenneco Inc. Thrift Plan, owned approximately 34.5% of the outstanding
shares of common stock of the Fund. The address of NationsBank is 700
Louisiana, Houston, Texas 77002.

PLIFunds Investment Plans, 5847 San Felipe, Suite 4100, Houston, Texas
77057 on February 15, 1996 owned of record and beneficially 7.2% of the
outstanding shares of common stock of the Fund.

OTHER INFORMATION

CUSTODY OF ASSETS. All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in
the Fund's investment portfolio, are held by The Fifth Third Bank, 38
Fountain Square, Cincinnati, Ohio 45263, as custodian.

STOCKHOLDER REPORTS. Semi-annual statements are furnished to
stockholders, and annually such statements are audited by the independent
accountants.

INDEPENDENT ACCOUNTANTS. Tait, Weller & Baker, Two Penn Center Plaza,
Suite 700, Philadelphia, Pennsylvania 19102-1707, the independent
accountants for the Fund, performs annual audits of the Fund's financial
statements.

LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, DC 20005, is legal counsel to the Fund.