VICTORY PORTFOLIOS, 497, 1998-03-09

VICTORY PORTFOLIOS
497, 1998-03-09

Previous: TAPISTRON INTERNATIONAL INC, 10-Q, 1998-03-09

Next: DREYFUS NEW YORK INSURED TAX EXEMPT BOND FUND, N-30D, 1998-03-09

Rule 497(c)
Registration No. 33-8982

LOGO (R)
Victory Funds

PROSPECTUS

FUND FOR INCOME

GOVERNMENT MORTGAGE FUND

INTERMEDIATE INCOME FUND

INVESTMENT QUALITY BOND FUND

LIMITED TERM INCOME FUND

800-KEY-FUND(R) or 800-539-3863

March 1, 1998

THE VICTORY PORTFOLIOS

PROSPECTUS FOR:
FUND FOR INCOME
GOVERNMENT MORTGAGE FUND
INTERMEDIATE INCOME FUND
INVESTMENT QUALITY BOND FUND
LIMITED TERM INCOME FUND

800-KEY-FUND(R) 800-539-3863

The five Victory Funds discussed in this prospectus (the Funds) are a part of
The Victory Portfolios (Victory), an open-end investment management company. The
Funds are diversified mutual funds. This prospectus explains the objectives,
policies, risks, and strategies of the Funds. You should read this prospectus
before investing in one of these Funds and keep it for future reference. A
detailed Statement of Additional Information (SAI) describing each of the Funds
is also available for your review. The SAI has been filed with the Securities
and Exchange Commission (SEC), and is incorporated by reference into this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference into this Prospectus

<PAGE>

and the SAI, and other information regarding registrants that file
electronically with the SEC. If you would like a free copy of the SAI, please
request one by calling us at 800-KEY-FUND.

Shares of the Funds are:

Not insured by the FDIC;

Not deposits or other
obligations of, or guaranteed by,
any KeyBank, any of its affiliates,
or any other bank;

Subject to investment risks, including
possible loss of the principal amount invested.

These securities have not been approved or disapproved by the Securities and
Exchange Commission or any securities regulatory authority of any state,
nor has the Securities and Exchange Commission or any such state authority
passed upon the accuracy or adequacy of this prospectus. Any representation
to the contrary is a criminal offense.

March 1, 1998

TABLE OF CONTENTS

Introduction 2

AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights

Fund for Income 4
Government Mortgage Fund 6
Intermediate Income Fund 8
Investment Quality Bond Fund 10

<PAGE>

Limited Term Income Fund 12

Risk Factors 14

Investment Limitations 15

Investment Performance 15

Share Price 16

Dividends, Distributions, and Taxes 16

INVESTING WITH VICTORY 19

How to Purchase Shares 21
How to Exchange Shares 23
How to Redeem Shares 24

Organization and Management of the Funds 25

Additional Information 28

Other Securities and Investment Practices 29

KEY TO FUND INFORMATION

OBJECTIVE AND STRATEGY
The goals and the strategy
that a Fund plans to use in
pursuing its investment objective.

RISK FACTORS
The risks that you will assume as an investor in a Fund.

EXPENSES
The costs that you will pay as an investor in a Fund, including sales charges
and ongoing expenses.

FINANCIAL HIGHLIGHTS
A table that shows the
historical performance of a Fund
by share class. This table

<PAGE>

also summarizes previous operating expenses.

INVESTMENT OBJECTIVE AND STRATEGY

OBJECTIVE

The FUND FOR INCOME seeks to provide a high level of current income consistent
with preservation of shareholders' capital.

The GOVERNMENT MORTGAGE FUND seeks to provide a high level of current income
consistent with safety of principal.

The INTERMEDIATE INCOME FUND seeks to provide a high level of income.

The INVESTMENT QUALITY BOND FUND seeks to provide a high level of income.

The LIMITED TERM INCOME FUND seeks to provide income consistent with limited
fluctuation of principal.

STRATEGY

Each of the Funds pursues its objective by investing primarily in debt
securities. However, each of the Funds has unique investment strategies and its
own risk/reward profile. Please review the section about the Fund in which you
are interested in investing and "Other Securities and Investment Practices" for
an overview of the Funds.

RISK FACTORS

The Funds are not insured by the FDIC. In addition, there are other
potential risks, discussed in the section "Risk Factors."

WHO SHOULD INVEST

Investors seeking income

Investors seeking higher potential returns than
provided by money market funds

Investors willing to accept the risk of price
and dividend fluctuations

<PAGE>

FEES AND EXPENSES

All of the Funds in this prospectus offer only Class A shares. If you purchase
Class A shares of a Fund, you may pay a sales charge of up to 5.75% of the
offering price, depending on the Fund in which you invest and the amount you
invest. You also will incur expenses for investment advisory, administrative,
and shareholder services, all of which are included in a Fund's expense ratio.
See "Choosing a Share Class."

PURCHASES
The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. An initial investment
must be accompanied by a Fund's Account Application. Fund shares may
be purchased by check, Automated Clearing House, or wire. See "How
to Purchase Shares."

REDEMPTIONS
You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, a Fund
will redeem the shares and credit your bank account or send the proceeds
to the address designated on your Account Application. See "How to
Redeem Shares."

DIVIDENDS/DISTRIBUTIONS
Income is accrued daily and is declared and paid monthly. Any net capital gains
realized by a Fund are paid as dividends at least annually. A Fund can send your
dividends directly to you by mail, credit them to your bank account, reinvest
them in the Fund, or invest them in another fund of the Victory Group. The
"Victory Group" includes other funds of The Victory Portfolios. You can make
this choice when you fill out an Account Application. See "Dividends,
Distributions, and Taxes."

OTHER SERVICES
Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.

<PAGE>

GENERAL INFORMATION ABOUT EACH OF THE FUNDS

<TABLE>
<CAPTION>
Estimated Annual
Victory Fund Inception Expenses Maximum Newspaper
Date After Waivers Sales Charge Abbreviation<F1>
(as a % of net assets)
<S> <C> <C> <C> <C>
Fund for Income--
Class A 5/8/87 1.00% 2.00% Victory Incm

Government Mortgage Fund--
Class A 5/18/90 0.90% 5.75% Victory Gvt Mtg

Intermediate Income Victory
Fund--Class A 12/10/93 0.96% 5.75% IntmInc

Investment Quality Victory
Bond Fund--Class A 12/10/93 1.04% 5.75% InvQulBd

Limited Term Income
Fund--Class A 10/20/89 0.86% 2.00% Victory Ltd In
<FN>
<F1> All newspapers do not use the same abbreviation.
</FN>
</TABLE>

The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, expenses, and financial
history to determine which Fund will best suit your risk tolerance and
investment needs. You should also review the "Other Securities and Investment
Practices" section for additional information about the individual securities in
which the Funds can invest and the risks related to these investments.

FUND FOR INCOME

INVESTMENT OBJECTIVE
The Fund for Income seeks to provide a high level of current income consistent
with preservation of shareholders' capital.

INVESTMENT POLICIES AND STRATEGY
The Fund for Income pursues its investment
objective by investing at least 65% of the Fund's total assets in

<PAGE>

mortgage-related securities rated in the top two rating categories
by an NRSRO.*

Under normal conditions, the Fund for Income primarily invests in:

Mortgage-related securities issued by non-governmental entities

Collateralized mortgage obligations and real estate mortgage investment
conduits

Government mortgage-backed securities

Important Characteristics of the Fund for Income's Investments:
Quality: Mortgage-related securities rated AA or above at the time
of purchase by Standard & Poor's Corp. (S&P), Fitch, Moody's or another
NRSRO, or, if unrated, of comparable quality. For more information
on ratings, see the Appendix
to the SAI.

Maturity: The dollar weighted effective average maturity of the Fund for Income
generally will not exceed 10 years. Individual assets held by the Fund for
Income may vary from the average maturity of the Fund. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.

*An NRSRO is a nationally recognized statistical ratings organization like S&P,
Fitch, or Moody's which assigns credit ratings to securities based on the
borrower's ability to meet its obligation to make principal and interest
payments.

The Fund for Income may invest up to 35% of total assets in short-term
investment-grade corporate securities, commercial paper, obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and
short-term obligations of domestic or foreign branches of U.S.
banks.

The Fund for Income is subject to the risks common to mutual funds that invest
in debt securities: Interest rate risk, credit risk, reinvestment risk, and
inflation risk. It also is subject to the risks common to mortgage-related
securities, like prepayment risk and extension risk. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.

PORTFOLIO MANAGEMENT
Trenton T. Fletcher is the Portfolio Manager of the Fund for Income,

<PAGE>

a position he has held since January, 1998. A Portfolio Manager and Director of
Key Asset Management Inc., he has been working in the fixed income markets since
1989.

FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Fund for Income.

SHAREHOLDER TRANSACTION EXPENSES<F1> CLASS A SHARES
<S> <C>
Maximum Sales Charge Imposed on Purchases 2.00%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE

<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent
<F2>Except for investments of $1 million or more. See " Investing with Victory."
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Fund for Income.
These expenses are charged directly to the Fund for Income. Expenses include
management fees as well as the costs of maintaining accounts, administering the
Fund for Income, providing shareholder services, and other activities. The
expenses shown are estimated based on historical expenses of the Fund for Income
adjusted to reflect anticipated expenses.

<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES CLASS A SHARES
after expense waivers and reimbursements
(as a percentage of average daily net assets)
<S> <C>
Management Fees<F1> 0.03%
Other Expenses<F1>,<F2> 0.97%
Total Fund Operating Expenses<F1> 1.00%

<FN>
<F1>Some of these fees have been voluntarily reduced. Without this
waiver,

<PAGE>

the Management Fee would be .50%, other expnese would be 1.06%, and Total
Fund Operating Expenses would be 1.56%.

<F2>Other Expenses include an estimate of shareholder servicing fees
the Fund for Income expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Fund for Income.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $30 $51 $74 $140
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Fund for Income's returns and operating
expenses over time. This table shows the results of an investment in one share
of the Fund for Income for each of the periods indicated.

Fund for Income

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Year Period from Year
Ended Ended Ended Feb. 1, 1994 Ended
Oct. 31, Oct. 31, Oct. 31, to Oct. 31, Jan.31,
1997 1996 1995<F4> 1994<F3> 1994<F3>

<PAGE>

<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.77 $ 9.93 $ 9.43 $ 10.14 $ 10.57
------- ------- ------- ------- -------
Investment Activities
Net investment income 0.68 0.68 0.73 0.52 0.80

Net realized and
unrealized gains
(losses) on investments 0.03 (0.08) 0.43 (0.71) (0.41)
------- ------- ------- ------- -------
Total from
Investment Activities 0.71 0.60 1.16 (0.19) 0.39
------- ------- ------- ------- -------
Distributions
Net investment income (0.67) (0.68) (0.66) (0.51) (0.80)

In excess of net
investment income -- (0.03) -- (0.01) --

Net realized gains -- -- -- -- (0.02)

Tax return of capital -- (0.05) -- -- --
------- ------- ------- ------- -------
Total Distributions (0.67) (0.76) (0.66) (0.52) (0.82)
------- ------- ------- ------- -------
NET ASSET VALUE,
END OF PERIOD $ 9.81 $ 9.77 $ 9.93 $ 9.43 $ 10.14
======= ======= ======= ======= =======
Total Return (excludes
sales charge) 7.58% 6.35% 12.75% (1.99%)<F1> 3.75%

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $22,101 $20,816 $22,756 $29,358 $46,632

Ratio of expenses to
average net assets 0.99% 1.02% 1.12% 1.12%<F2> 1.13%

Ratio of net investment income
to average net assets 6.98% 7.05% 7.62% 7.21%<F2> 7.65%

Ratio of expenses to
average net assets<F5> 1.63% 1.73% 1.58% 1.26%<F2> <F7>

Ratio of net investment income

<PAGE>

to average net assets<F5> 6.34% 6.34% 7.16% 7.07%<F2> <F7>

Portfolio turnover 26% 25% 35% 18% 47%

The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995,
1996, and 1997 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Fund for Income's most recent
Annual Report to shareholders, which is incorporated by reference in the SAI. If
you would like a copy of the Annual Report, write or call us at 800-KEY-FUND.
<FN>
<F1> Not annualized.
<F2> Annualized.
<F3> Audited by other auditors.
<F4> Effective June 5, 1995, the Victory Fund for Income Portfolio became the
Fund For Income.
<F5> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F6> Information for the year ended January 31, 1988 is presented from
May 8, 1987, the date registration became effective under the Investment
Company Act of 1940, as amended.
<F7> There were no voluntary fee reductions during the period.
</FN>
</TABLE>

<TABLE>
<CAPTION>
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
Jan. 31, Jan. 31, Jan. 31, Jan. 31, Jan.31, Jan. 31,
1993<F3> 1992<F3> 1991<F3> 1990<F3> 1989<F3> 1988<F3><F6>

<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.55 $ 10.19 $ 9.90 $ 9.73 $ 9.95 $10.00
------- ------- ------- ------- ------- ------
Investment Activities
Net investment income 0.80 0.85 0.91 0.93 0.94 0.66

Net realized and
unrealized gains
(losses) on investments 0.06 0.36 0.29 0.17 (0.22) (0.05)
------- ------- ------- ------- ------- ------
Total from
Investment Activities 0.86 1.21 1.20 1.10 0.72 0.61
------- ------- ------- ------- ------- ------

<PAGE>

Distributions
Net investment income (0.80) (0.85) (0.91) (0.93) (0.94) (0.66)

In excess of net
investment income -- -- -- -- -- --

Net realized gains (0.04) -- -- -- -- --

Tax return of capital -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.84) (0.85) (0.91) (0.93) (0.94) (0.66)
------- ------- ------- ------- ------- -------
NET ASSET VALUE,
END OF PERIOD $ 10.57 $ 10.55 $ 10.19 $ 9.90 $ 9.73 $ 9.95
======= ======= ======= ======= ======= =======
Total Return (excludes
sales charge) 8.45% 12.34% 12.75% 11.77% 7.58% --

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $55,075 $58,055 $44,097 $35,788 $22,664 $6,221

Ratio of expenses to
average net assets 1.12% 0.92% 0.50% 0.29% 0.22% 0.12%

Ratio of net investment income
to average net assets 7.56% 8.18% 9.15% 9.34% 9.53% 6.72%

Ratio of expenses to
average net assets<F5> <F7> <F7> <F7> <F7> <F7> <F7>

Ratio of net investment income
to average net assets<F5> <F7> <F7> <F7> <F7> <F7> <F7>

Portfolio turnover 23% 24% 5% 5% 15% 20%

<PAGE>

<F2> Annualized.
<F3> Audited by other auditors.
<F4> Effective June 5, 1995, the Victory Fund for Income Portfolio became the
Fund For Income.
<F5> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F6> Information for the year ended January 31, 1988 is presented from
May 8, 1987, the date registration became effective under the Investment
Company Act of 1940, as amended.
<F7> There were no voluntary fee reductions during the period.
</FN>
</TABLE>

GOVERNMENT MORTGAGE FUND

INVESTMENT OBJECTIVE
The Government Mortgage Fund seeks to provide a high level of current income
consistent with safety of principal.

INVESTMENT POLICIES AND STRATEGY
The Government Mortgage Fund pursues its investment objective by investing
exclusively in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. Under normal market conditions, at least 80% of
the total assets of the Government Mortgage Fund will be invested in U.S.
Government mortgage-backed securities.

The Government Mortgage Fund may also invest in the following:

Receipts, and strips,* which are sold as zero coupon securities

Collateralized mortgage obligations

Futures contracts and put and call options on futures contracts

Treasury notes and agencies

IOs and POs

Important Characteristics of the Government Mortgage Fund's Investments:

Quality: Securities purchased by the Government Mortgage Fund are
considered to be of the highest quality. For more information on ratings,
see the Appendix to the SAI.

<PAGE>

Maturity: The dollar-weighted effective average maturity of the Government
Mortgage Fund generally will not exceed 12 years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.

* Separately Traded Registered Interest and Principal Securities (STRIPS),
Interest Only (IOs), and Principal Only (POs) are derivatives of bonds.
Securities dealers separate the interest or principal payments from a bond or
mortgage-backed security and sell only that portion as one of the above
securities.

Up to 20% of the Government Mortgage Fund's total assets may be invested in
short-term notes, commercial paper, and short-term obligations of domestic and
foreign branches of U.S. banks. The Government Mortgage Fund's higher portfolio
turnover rate may result in higher expenses and taxable capital gain
distributions.

The Government Mortgage Fund is subject to the risks common to mutual funds that
invest in debt securities: interest rate risk, credit risk, reinvestment risk,
and inflation risk. It also is subject to the risks common to mortgage-related
securities, like prepayment risk and extension risk. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.

PORTFOLIO MANAGEMENT
Trenton T. Fletcher is the Portfolio Manager of the Government Mortgage Fund, a
position he has held since January, 1998. A Portfolio Manager and Director of
Key Asset Management Inc., he has been working in the fixed income markets since
1989.

FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Government Mortgage Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 5.75%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
<F2>Except for investments of $1 million or more. See " Investing with Victory."
</FN>
</TABLE>
<PAGE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Government
Mortgage Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE GOVERNMENT MORTGAGE
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the Government Mortgage Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical expenses of the Government Mortgage Fund adjusted to reflect
anticipated expenses.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES
(as a percentage of average daily net assets)
<S> <C>
Management Fees<F1> .36%
Other Expenses<F2> .54%
Total Fund Operating Expenses<F1> .90%
<FN>

<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50%, and the Total Operating Expenses would be
1.04%.

<F2> Other Expenses includes an estimate of shareholder servicing fees
the Government Mortgage Fund expects to pay. See "Organization and
Management of the Funds -- Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Government Mortgage
Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $66 $85 $104 $162

</TABLE>

<PAGE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Government Mortgage Fund's returns and
operating expenses over time. The following table shows the results of an
investment in one share of the Government Mortgage Fund for each of the periods
indicated.

GOVERNMENT MORTGAGE FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Year Year Year Year Year May 18,
Ended Ended Ended Ended Ended Ended Ended 1990 to
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct.31, Oct. 31, Oct. 31, Oct. 31,
1997 1996 1995 1994 1993 1992 1991 1990<F1>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning
of Period $ 10.76 $ 10.86 $ 10.33 $ 11.36 $ 11.07 $ 10.73 $ 10.18 $ 10.00
-------- -------- -------- -------- -------- ------- ------- -------
Investment Activities
Net investment income 0.69 0.70 0.72 0.68 0.66 0.74 0.80 0.35

Net realized and
unrealized gains
(losses) on
investments 0.16 (0.12) 0.62 (1.02) 0.32 0.34 0.55 0.18
-------- -------- -------- -------- -------- ------- ------- -------
Total from
Investment Activities 0.85 0.58 1.34 (0.34) 0.98 1.08 1.35 0.53
-------- -------- -------- -------- -------- ------- ------- -------
Distributions
Net investment income (0.68) (0.67) (0.71) (0.67) (0.66) (0.74) (0.80) (0.35)

<PAGE>

Net realized gains -- -- -- (0.02) (0.03) --

In excess of net
realized gains -- -- (0.08) -- -- --

Tax return of capital <F6> (0.01) (0.02) -- -- --
-------- -------- -------- -------- -------- ------- ------- -------
Total Distributions (0.68) (0.68) (0.81) (0.69) (0.69) (0.74) (0.80) (0.35)
-------- -------- -------- -------- -------- ------- ------- -------
NET ASSET VALUE,
END OF PERIOD $10.93 $ 10.76 $ 10.86 $ 10.33 $ 11.36 $ 11.07 $ 10.73 $ 10.18
======== ======== ======== ======== ======== ======= ======= =======
Total Return
(excludes sales charge) 8.22% 5.54% 13.55% (3.01%) 9.05% 10.34% 13.77% 5.37%<F3>

RATIOS/SUPPLEMENTAL
DATA:
Net Assets,
End of
Period (000) $103,761 $125,992 $136,103 $148,168 $132,738 $73,660 $42,616 $31,972

Ratio of expenses
to average net assets 0.85% 0.89% 0.77% 0.76% 0.75% 0.77% 0.78% 0.82%<F2>

Ratio of net
investment income to
average net assets 6.32% 6.46% 6.81% 6.38% 5.92% 6.82% 7.68% 7.98%<F2>

Ratio of expenses to
average net assets<F4> <F5> 0.90% 0.79% 0.96% 0.76% <F5> <F5> <F5>

Ratio of net
investment income to
average net assets<F4> <F5> 6.45% 6.80% 6.18% 5.92% <F5> <F5> <F5>

Portfolio turnover 115% 127% 59% 132% 50% 11% 21%

The financial highlights were audited by Coopers & Lybrand L.L.P.

<PAGE>

This information should be read in conjunction with the Government Mortgage
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.
<FN>

<F1> Period from commencement of operations.
<F2> Annualized.
<F3> Not annualized.
<F4> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
<F5> There were no voluntary fee reductions during the period.
<F6> Amount rounds to less than $0.01.
</FN>
</TABLE>

INTERMEDIATE INCOME FUND

INVESTMENT OBJECTIVE
The Intermediate Income Fund seeks to provide a high level of income.

INVESTMENT POLICIES AND STRATEGY
The Intermediate Income Fund pursues its investment objective by investing in
debt securities. Some of these debt securities are issued by corporations, the
U.S. Government and its agencies and instrumentalities. "Investment grade"
obligations are rated within the top four rating categories by an NRSRO.

Under normal conditions, the Intermediate Income Fund will invest at least 65%
of its total assets in:

Investment grade corporate securities, including bonds, debentures, and notes,
asset-backed securities, convertible, or exchangeable debt securities

Mortgage-related securities

First mortgage loans and participation certificates in pools
of mortgages issued or guaranteed by the U.S. Government

Important Characteristics of the Intermediate Income Fund's Investments:

Quality: Investment grade corporate securities rated in
the top four rating categories at the time of purchase by

<PAGE>

S&P, Fitch, Moody's or another NRSRO,* or if unrated, of comparable quality.

Maturity: The dollar-weighted effective average maturity of the Intermediate
Income Fund generally will range from 3 to 10 years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.

*An NRSRO is a nationally recognized statistical ratings organization like
Standard & Poor's Corp. (S&P), Fitch, or Moody's which assigns credit ratings
to securities based on the borrower's ability to meet its obligation to make
principal and interest payments.

Up to 35% of the Intermediate Income Fund's total assets may be invested in
high-quality, short-term debt. In addition, up to 20% of total assets may be
invested in preferred and convertible preferred stock and separately traded
interest and principal component parts of U.S. Treasury obligations. The
Intermediate Income Fund's higher portfolio turnover rate may result in higher
expenses and taxable capital gain distributions.

The Intermediate Income Fund also is permitted to invest in international bonds,
foreign securities, and future contracts and options related to these
securities. Some of the securities in which the Intermediate Income Fund invests
may have warrants or options attached. These investments tend to be riskier than
some of the other investments of the Intermediate Income Fund. The Intermediate
Income Fund is subject to the risks common to mutual funds that invest in debt
securities: interest rate risk, credit risk, reinvestment risk, inflation risk,
and foreign issuer risk. It also is subject to the risks common to
Mortgage-related securities, like prepayment risk and extension risks. PLEASE
READ "RISK FACTORS" CAREFULLY BEFORE INVESTING. It is also subject to the risks
common to mortgage related securities, like prepayment risk and extension risk.

PORTFOLIO MANAGEMENT
Michael R. Vandenbossche is the Portfolio Manager of the Intermediate Income
Fund, a position he has held since January, 1998. A Portfolio Manager of Key
Asset Management Inc., he has been in the investment advisory business since
1991.

FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Intermediate Income Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>

<PAGE>

Maximum Sales Charge Imposed on Purchases 5.75%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
<F2>Except for investments of $1 million or more. See " Investing with Victory."
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Intermediate
Income Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE INTERMEDIATE INCOME
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the Intermediate Income Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical expenses of the Intermediate Income Fund adjusted to reflect
anticipated expenses.

<TABLE>
<CAPTION>
Annual Operating Expenses Class A Shares
After expense waivers and reimbursements
(as a percentage of average daily net assets)
<S> <C>
Management Fees<F1> .47%
Other Expenses<F2> .49%

Total Fund Operating Expenses<F1> .96%
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .75% and Total Fund Operating Expenses as a
percentage of average daily net assets would be 1.24%.
<F2> These amounts include an estimate of the shareholder servicing fees
the Intermediate Income Fund expects to pay. See "Organization and
Management of the Fund -- Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the

<PAGE>

Intermediate Income Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $67 $86 $108 $169
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Intermediate Income Fund's returns and
operating expenses over time. The following table shows the results of an
investment in one share of the Intermediate Income Fund for each of the periods
indicated.

INTERMEDIATE INCOME FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Year December 10,
Ended Ended Ended 1993 to
October 31, October 31, October 31, October 31,
1997 1996 1995 1994<F1>
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.56 $ 9.69 $ 9.25 $ 10.00
-------- -------- -------- --------
Investment Activities
Net investment income 0.56 0.56 0.60 0.52

Net realized and unrealized gains

<PAGE>

(losses) from investments 0.05 (0.13) 0.44 (0.76)
-------- -------- -------- --------
Total from Investment Activities 0.61 0.43 1.04 (0.24)
-------- -------- -------- --------
Distributions
Net investment income (0.56) (0.56) (0.60) (0.51)
-------- -------- -------- --------
Total Distributions (0.56) (0.56) (0.60) (0.51)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.61 $ 9.56 $ 9.69 $ 9.25
======== ======== ======== ========
Total Return (excludes sales charge) 6.62% 4.56% 11.65% (2.48%)<F2>

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $248,841 $272,087 $163,281 $112,923

Ratio of expenses to average net assets 0.96% 0.94% 0.82% 0.79%<F3>

Ratio of net investment income
to average net assets 5.87% 5.81% 6.32% 6.23%<F3>

Ratio of expenses to
average net assets<F4> 1.09% 1.11% 1.06% 1.25%<F3>

Ratio of net investment income
to average net assets<F4> 5.74% 5.64% 6.08% 5.77%<F3>

Portfolio turnover 195% 164% 98% 55%

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Intermediate Income Fund's
most recent Annual Report to shareholders, which is incorporated by reference in
the SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.
<FN>

<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated
</FN>
</TABLE>

<PAGE>

INVESTMENT QUALITY BOND FUND

INVESTMENT OBJECTIVE
The Investment Quality Bond Fund seeks to provide a high level of income.

INVESTMENT POLICIES AND STRATEGY
The Investment Quality Bond Fund pursues its investment objective by investing
primarily in investment-grade bonds issued by corporations and the U.S.
Government and its agencies or instrumentalities. "Investment grade" obligations
are rated within the top four rating categories by an NRSRO.

Under normal conditions, the Investment Quality Bond Fund will invest at least
80% of its total assets in the following securities:

Investment grade corporate securities, including asset-backed securities
and convertible and exchangeable debt securities

Mortgage-related securities issued by non-governmental entities

Obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities

Government mortgage-backed securities

Important Characteristics of the Investment Quality Bond Fund's Investments:

Quality: All instruments will be rated, at the time of purchase, within the four
highest rating categories by S&P, Fitch, Moody's, or another NRSRO,* or, if
unrated, be of comparable quality. For more information on ratings, see the
Appendix to the SAI.

Maturity: The dollar-weighted effective average maturity of the Investment
Quality Bond Fund will range from 5 to 15 years. Individual assets held by the
Investment Quality Bond Fund may vary from the average maturity of the Fund.
Under certain market conditions, the Portfolio Manager may go outside these
boundaries.

<PAGE>

Up to 20% of the Investment Quality Bond Fund's total assets may be invested in
preferred and convertible preferred stocks, and separately traded interest and
principal component parts of U.S. Treasury obligations. Up to 35% of the Fund's
total assets may be invested in high quality, short-term debt. The Investment
Quality Bond Fund's higher portfolio turnover rate may result in higher expenses
and taxable capital gain distributions.

The Investment Quality Bond Fund also may invest in international bonds, foreign
securities, futures contracts and options related to these securities. These
investments tend to be riskier than some of the other investments of the
Investment Quality Bond Fund. The Investment Quality Bond Fund is subject to the
risks common to mutual funds that invest in debt securities: interest rate risk,
credit risk, reinvestment risk, inflation risk and foreign issuer risk. It also
is subject to the risks common to Mortgage-related securities, like prepayment
risk and extension risks. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
It is also subject to the risks common to mortgage related securities, like
prepayment risk and extension risk.

PORTFOLIO MANAGEMENT
Richard T. Heine is the Portfolio Manager of the Investment Quality Bond Fund, a
position he has held since its inception in 1993. A Portfolio Manager and
Director with Key Asset Management Inc., he has been in the investment advisory
business since 1977.

FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Investment Quality Bond Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 5.75%
(as a percentage of the offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent
<F2>Except for investments of $1 million or more. See " Investing with Victory."
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Investment
Quality Bond Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE INVESTMENT

<PAGE>

QUALITY BOND FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the Investment Quality Bond Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical expenses of the Investment Quality Bond Fund adjusted to
reflect anticipated expenses.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES
After expense waivers and reimbursements
(as a percentage of average daily net assets)
<S> <C>
Management Fees<F1> .50%
Other Expenses<F2> .54%
Total Fund Operating Expenses<F1> 1.04%
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .75% and Total Fund Operating Expenses as a
percentage of average daily net assets would be 1.29%.
<F2> These amounts include an estimate of the shareholder servicing fees the
Investment Quality Bond Fund expects to pay (see "Organization and
Management of the Fund--Shareholder Servicing Plan.")
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Investment Quality Bond
Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $67 $89 $112 $177
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION.

<PAGE>

ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Investment Quality Bond Fund's returns and
operating expenses over time. The following table shows the results of an
investment in one share of the Investment Quality Bond Fund for each of the
periods indicated.

INVESTMENT QUALITY BOND FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Year December 10,
Ended Ended Ended 1993 to
October 31, October 31, October 31, October 31,
1997<F6> 1996 1995<F4> 1994<F1>
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.63 $ 9.76 $ 9.10 $ 10.00
-------- -------- -------- --------
Investment Activities
Net investment income 0.57 0.57 0.62 0.53

Net realized and
unrealized gains
(losses) on investments 0.14 (0.13) 0.67 (0.92)
-------- -------- -------- --------
Total from Investment
Activities 0.71 0.44 1.29 (0.39)
-------- -------- -------- --------
Distributions
Net investment income (0.56) (0.56) (0.62) (0.51)
In excess of net
investment income -- -- (0.01) --
Tax return of capital -- (0.01) -- --
-------- -------- -------- --------
Total Distributions (0.56) (0.57) (0.63) (0.51)
-------- -------- -------- --------
NET ASSET VALUE,

<PAGE>

END OF PERIOD $ 9.78 $ 9.63 $ 9.76 $ 9.10
======== ======== ======== ========
Total Return
(excludes sales charge) 7.67% 4.65% 14.63% (3.92%)<F2>

RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $181,007 $150,807 $125,248 $ 94,685
Ratio of expenses to
average net assets 1.04% 1.01% 0.88% 0.79%<F3>
Ratio of net
investment income
to average net assets 5.90% 5.99% 6.59% 6.33%<F3>
Ratio of expenses to
average net assets<F5> 1.17% 1.14% 1.10% 1.25%<F3>
Ratio of net
investment income
to average net assets<F5> 5.77% 5.86% 6.37% 5.87%<F3>
Portfolio turnover 249% 182% 160% 90%

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Investment Quality Bond
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Corporate Bond Portfolio merged into
the Investment Quality Bond Fund. Financial highlights for the periods
prior to June 5, 1995 represent the Investment Quality Bond Fund.
<F5> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
<F6> Effective June 13, 1997, the Victory Government Bond Fund merged into the
Investment Quality Bond Fund. Financial highlights for the periods prior to
June 13, 1997 represent the Investment Quality Bond Fund.
</FN>
</TABLE>

LIMITED TERM INCOME FUND

<PAGE>

INVESTMENT OBJECTIVE
The Limited Term Income Fund seeks to provide income consistent with limited
fluctuation of principal.

INVESTMENT POLICIES AND STRATEGY
The Limited Term Income Fund pursues its investment objective by investing in a
portfolio of high grade, fixed income securities with a dollar-weighted average
maturity of one to five years, based on remaining maturities.

Under normal conditions, the Limited Term Income Fund primarily invests in:

Investment-grade corporate securities, including asset-backed securities
and convertible and exchangeable debt securities

Obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities

Mortgage-backed securities issued by government agencies and non-governmental
entities

Commercial Paper

Important Characteristics of the Limited Term Income Fund's Investments:

Quality: The Limited Term Income Fund will only invest in high-grade debt
securities rated in one of the top four rating categories at the time of
purchase by S&P, Fitch, Moody's, or another NRSRO,* or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the SAI.

Maturity: The dollar-weighted effective average maturity of the Limited Term
Income Fund will generally range from one to five years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.

Up to 20% of the Limited Term Income Fund's total assets may be invested in
preferred and convertible preferred stock, and separately traded interest and
principal component parts of U.S. Treasury obligations. The Limited Term Income
Fund's higher portfolio turnover rate may result in higher expenses and taxable
capital gain distributions.

<PAGE>

The Limited Term Income Fund is also permitted to invest in international bonds,
foreign securities, futures contracts, separately traded interest and principal
component parts of U.S. Treasury obligations. Some of the securities in which
the Limited Term Income Fund invests may have warrants or options attached.
These investments tend to be riskier than some of the other investments of the
Limited Term Income Fund. The Limited Term Income Fund is subject to the risks
common to mutual funds that invest in debt securities: interest rate risk,
credit risk, reinvestment risk, inflation risk, and foreign issuer risk. It also
is subject to the risks common to Mortgage-related securities, like prepayment
risk and extension risks. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
It is also subject to the risks common to mortgage related securities, like
prepayment risk and extension risk.

PORTFOLIO MANAGEMENT
Robert H. Fernald is the Portfolio Manager of the Limited Term Income Fund, a
position he has held since January, 1995. A Portfolio Manager and Director of
Key Asset Management Inc., he has been working in the fixed income markets for
over 20 years.

FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Limited Term Income Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 2.00%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent
<F2>Except for investments of $1 million or more. See " Investing with Victory."
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Limited Term
Income Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE LIMITED TERM INCOME
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the Limited Term Income Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical expenses of the Limited Term

<PAGE>

Income Fund adjusted to reflect anticipated expenses.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES
(as a percentage of average daily net assets)
<S> <C>
Management Fees<F1> .34%
Other Expenses<F2> .52%
Total Fund Operating Expenses<F1> .86%
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50% and the Total Fund Operating Expenses would be
1.02%.
<F2> Other Expenses include an estimate of the shareholder servicing fees
the Limited Term Income Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Limited Term Income
Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $29 $47 $67 $124
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS
The Financial Highlights describe the Limited Term Income Fund's returns and
operating expenses over time.

<PAGE>

The following table shows the results of an investment in one share of the
Limited Term Income Fund for each of the periods indicated.

LIMITED TERM INCOME FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Year Year Year Year Year Year Oct. 20,
Ended Ended Ended Ended Ended Ended Ended Ended 1989 to
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1997 1996 1995<F4> 1994 1993 1992 1991 1990 1989<F1>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF PERIOD $ 10.01 $ 10.15 $ 9.88 $ 10.53 $ 10.45 $ 10.33 $ 10.02 $ 10.04 $ 10.00
------- ------- -------- ------- ------- ------- ------- ------- -------
Investment
Activities
Net investment
income 0.61 0.63 0.57 0.54 0.57 0.64 0.73 0.76 0.02

Net realized and
unrealized gains
(losses)
from investments (0.07) (0.14) 0.27 (0.61) 0.08 0.13 0.31 (0.01) 0.02
------- ------- -------- ------- -------- ------- ------- ------- -------
Total from
Investment
Activities 0.54 0.49 0.84 (0.07) 0.65 0.77 1.04 0.75 0.04
------- ------- -------- ------- -------- ------- ------- ------- -------
Distributions
Net investment
income (0.61) (0.62) (0.57) (0.54) (0.57) (0.64) (0.73) (0.77) --

In excess of net

<PAGE>

investment income -- (0.01) -- -- -- -- -- -- --

Net realized gains -- -- -- (0.04) -- (0.01) -- -- --
------- ------- -------- ------- ------- ------- ------- ------- -------
Total
Distributions (0.61) (0.63) (0.57) (0.58) (0.57) (0.65) (0.73) (0.77) --
------- ------- -------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
END OF PERIOD $ 9.94 $ 10.01 $ 10.15 $ 9.88 $ 10.53 $ 10.45 $ 10.33 $ 10.02 $ 10.04
======= ======= ======== ======= ======= ======= ======= ======= =======
Total Return
(excludes
sales
charge) 5.57% 4.94% 8.77% (0.66%) 6.39% 7.77% 10.82% 7.75% 0.40%<F3>

RATIOS/
SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $81,913 $90,019 $172,002 $79,150 $81,771 $55,565 $43,763 $31,303 $29,834

Ratio of expenses to
average net assets 0.85% 0.86% 0.78% 0.79% 0.77% 0.78% 0.80% 0.82% 0.64%<F2>

Ratio of net
investment income
to average
net assets 6.06% 5.90% 5.77% 5.29% 5.49% 6.18% 7.20% 7.63% 7.56%<F2>

Ratio of expenses
to average
net assets<F5> 0.87% 0.89% 0.79% 0.97% 0.78%

Ratio of net
investment income
to average net
assets<F5> 6.04% 5.87% 5.76% 5.10% 5.48%

Portfolio turnover 139% 221% 97% 41% 50% 15% 10%

The financial highlights were audited by Coopers & Lybrand L.L.P.

<PAGE>

This information should be read in conjunction with the Limited Term Income
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.
<F2> Annualized.
<F3> Not annualized.
<F4> Effective June 5, 1995, the Victory Short-Term Government Income Portfolio
merged into the Limited Term Income Fund. Financial highlights for the
periods prior to June 5, 1995 represent the Limited Term Income Fund.
<F5> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
</FN>
</TABLE>

RISK FACTORS
It is important to keep in mind one basic principle of investing:
the greater the risk, the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential
reward.

This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Funds' investments are described in the section that follows. "Other
Securities and Investment Practices" at the end of this prospectus provides
additional information on the securities mentioned in the overview of each of
the Funds. As with any mutual fund, there is no guarantee that a Fund will earn
income or show a positive total return over time. A Fund's price, yield, and
total return will fluctuate. You may lose money if a Fund's investments do not
perform well.

The following risks are common to all mutual funds:

MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for it or less than the security was worth at an earlier time.
Market risk may affect a single issuer,

<PAGE>

an industry, a sector of the economy, or the entire market and is
common to all investments.

MANAGER RISK is the chance that a Fund's Portfolio Manager may use a strategy
that does not produce the intended result.

The following risks are common to mutual funds that invest in debt securities:

INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. Therefore, when interest
rates go up, the value of a fixed-rate security typically goes down. When
interest rates go down, the value of these securities typically goes up.
Generally, the market values of securities with longer maturities are more
sensitive to changes in interest rates.

INFLATION RISK is the risk that inflation will erode the purchasing power of the
cash flows generated by debt securities held by a Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt securities.

REINVESTMENT RISK is the risk that when interest income is reinvested, interest
rates will have declined so that income must be reinvested at a lower interest
rate. Generally, interest rate risk and reinvestment risk have offsetting
effects.

CREDIT RISK (OR DEFAULT RISK) is the risk that an issuer of a debt security will
be unable to make timely payments of interest or principal. Although the Funds
generally invest only in high-quality securities, the interest or principal
payments may not be insured or guaranteed on all securities. Credit risk is
measured by NRSROs such as S&P, Fitch or Moody's.

The following risks are common to mutual funds that invest in mortgage-related
securities:

<PAGE>

rate tends to decrease, lengthening the average life of a pool of
mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool of
mortgage-related securities. Prepayment risk is the risk that, because
prepayments generally occur when interest rates are falling, a Fund may have to
reinvest the proceeds from prepayments at lower interest rates.

EXTENSION RISK is the risk that anticipated payments on principal may not occur,
typically because of a rise in interest rates, and the expected maturity of the
security will increase. During periods of rapidly rising interest rates, the
anticipated maturity of a security may be extended past what the Fund's
Portfolio Manager anticipated that it would be, affecting the maturity and
volatility of a Fund.

The following risk is common to mutual funds that invest in foreign securities:

FOREIGN ISSUER RISK. Compared to U.S. and Canadian companies, there generally is
less publicly available information about foreign companies and there may be
less governmental regulation and supervision of foreign stock exchanges,
brokers, and listed companies. Foreign issuers may not be subject to the uniform
accounting, auditing, and financial reporting standards and practices used by
domestic issuers. In addition, foreign securities markets may be less liquid,
more volatile, and less subject to governmental supervision than in the U.S.
Investments in foreign countries could be affected by factors not present in the
U.S., including expropriation, confiscation of property, and difficulties in
enforcing contracts. All of these factors can make foreign investments,
especially those in developing countries, more volatile than U.S.
investments.

INVESTMENT LIMITATIONS

The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.

<PAGE>

illiquid securities. Certain limitations can be changed only with the approval
of shareholders. Victory's Board of Trustees can change other investment
limitations without shareholder approval. See "Other Securities and Investment
Practices" and the SAI for more information.

Each Fund limits to 25% of total assets the amount it may invest in any single
industry (other than U.S. Government obligations). Each Fund limits its
borrowing to 33 1/3% of total assets, other than Fund for Income, which will
limit borrowing to 5% of total assets. Borrowing may be in the form of selling a
security and agreeing to repurchase that security later at a higher price. The
Funds will not borrow for leverage purposes.

DIVERSIFICATION REQUIREMENTS

SEC Requirement: Each Fund is "diversified" according to certain federal
securities provisions regarding the diversification of its assets. Generally,
under these provisions, a Fund must invest at least 75% of its total assets so
that no more than 5% of its total assets are invested in the securities of any
one issuer.

IRS REQUIREMENT: Each Fund also intends to comply with certain federal tax
requirements regarding the diversification of its assets, which generally are
less restrictive than the securities provisions. These diversification
provisions and requirements are discussed in the SAI.

INVESTMENT PERFORMANCE

Past performance does not guarantee future results. You may obtain
the current 30-day yield by calling 800-KEY-FUND. Our Shareholder
Servicing representatives are available from 8:00 a.m. to
8:00 p.m. Eastern Time Monday through Friday.

Victory may advertise the performance of a Fund by comparing it to other mutual
funds with similar objectives and policies. Performance information may also
appear in various publications. Any fees charged by Investment Professionals may
not be reflected in these performance calculations. Performance information is
contained in the annual and semi-annual reports. You may obtain a copy free of
charge by calling 800-KEY-FUND.

The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to

<PAGE>

earn the same net interest income throughout that year. To calculate 30-day
yield, a Fund's net investment income per share for the most recent 30 days is
divided by the maximum offering price per share for Class A shares.

To calculate "total return," a Fund starts with the total number of shares that
you could buy for $1,000 at the beginning of the period. Then the Fund adds all
dividends and distributions paid as if they were reinvested in additional
shares. (This takes into account the Fund's dividend distributions, if any.) The
total number of shares is multiplied by the net asset value on the last day of
the period and the result is divided by the initial $1,000 investment to
determine the percentage gain or loss. For periods of more than one year, the
cumulative total return is adjusted to get an average annual total return.

YIELD is a measure of net interest income.

AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend income
plus capital appreciation. It is the sum of all parts of a Fund's investment
return for periods greater than one year.

TOTAL RETURN is the sum of all parts of a Fund's investment return.

Whenever you see information on a Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in a Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.

SHARE PRICE

The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own, gives you the dollar amount and value of your
investment.

Each Fund's share price, called its net asset value (the NAV), is calculated
each business day as of the close of regular trading on the New York Stock
Exchange (normally at 4:00 p.m. Eastern Time). Shares are purchased, exchanged,
and redeemed at the next share price calculated after your investment
instructions are received and accepted. A business day is a day on which the New
York Stock Exchange is open

<PAGE>

for trading or any day in which enough trading has occurred in the securities
held by a Fund to affect the NAV materially. If your account is established with
an Investment Professional or a bank, you may not be able to purchase or sell
shares on other holidays when the Federal Reserve Bank of Cleveland is closed,
but the New York Stock Exchange is open.

The NAV is calculated by adding up the total value of a Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund:

Total Assets--Liabilities
NAV = ---------------------------------
Number of Shares Outstanding

Each Fund's net asset value can be found daily in The Wall Street Journal and
other local newspapers.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-KEY-FUND.

As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of dividends. Dividend distributions are the net interest earned on
investments after expenses. If a Fund makes a capital gain distribution, it is
paid once a year. As with any investment, you should consider the tax
consequences of an investment in a Fund.

Ordinarily, net income earned on securities owned by a Fund accrues
daily and is declared and paid monthly. The Fund pays any net capital
gains realized as dividends at least annually.

<PAGE>

Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a fund shortly before it makes a distribution, some
of your investment may come back to you as a taxable distribution.

Distributions can be received in one of the following ways:

REINVESTMENT OPTION

You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, this
option will be assigned to you automatically.

CASH OPTION
You will be mailed a check no later than 7 days after the pay date.

INCOME EARNED OPTION
Dividends can be automatically reinvested in the Fund in which you have invested
and your capital gains can be paid in cash; or capital gains can be reinvested
and dividends paid in cash.

DIRECTED DIVIDENDS OPTION

You can have distributions automatically reinvested in the same class of shares
of another fund of the Victory Group. If distributions are reinvested in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.

DIRECTED BANK ACCOUNT OPTION
In most cases, distributions can be automatically transferred to your bank
checking or savings account. Under normal circumstances, dividends will be
transferred within 7 days of the dividend payment date. The bank account must
have a registration identical to that of your Fund account.

IMPORTANT INFORMATION ABOUT TAXES
Each Fund intends to continue to qualify as a regulated investment company, in
which case it will pay no federal income tax on the earnings it distributes to
its shareholders.

<PAGE>

Ordinary dividends from a Fund are taxable as ordinary income; dividends from a
Fund's long-term capital gain are taxable as capital gain.

Dividends are treated in the same manner for federal income tax purposes whether
you receive them in cash or in additional shares. They may also be subject to
state and local taxes.

Dividends from the Fund that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income taxes.
The extent to which ordinary dividends are attributable to U.S. Government
obligations will be provided with tax statements you receive from a Fund.

Certain dividends paid to you in January will be taxable as if they had been
paid to you the previous December.

Tax statements will be mailed from a Fund every January showing the amounts and
tax status of distributions made to you.

Because your tax treatment depends on your purchase price and tax position, you
should keep your regular account statements for use in determining your tax.

You should review the more detailed discussion of federal income tax
considerations in the SAI.

THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN A FUND.

INVESTING WITH VICTORY
If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
sections that follow will serve as a guide

<PAGE>

to your investments with Victory. The following sections will describe how to
open an account, how to access information on your account, and how to purchase,
exchange, and redeem shares of the Fund. We want to make it simple for you to do
business with us. If you have questions about any of this information, please
call your Investment Professional or one of our customer service representatives
at 800-KEY-FUND. They will be happy to assist you.

All you need to do to get started is to fill out an application.

The Funds in this prospectus offer only Class A shares. Class A shares have a
front-end sales charge of 2.00% to 5.75%, depending upon which Fund you invest
in. Please look at the "Fund Expenses" section of the Fund in which you are
investing to find the sales charge.

For historical expense information,
see the "Financial Highlights" in the Fund overviews earlier in this
prospectus.

CALCULATION OF SALES CHARGES--CLASS A
Class A shares are sold at their public offering price, which includes the
initial sales charge. The sales charge as a percentage of your investment
decreases as the amount you invest increases. The current sales charge rates and
commissions paid to Investment Professionals are as follows:

<TABLE>
<CAPTION>
Your Investment in:

Government Mortgage Fund

Intermediate Income Fund
Sales Charge Sales Charge Dealer Reallowance
Investment Quality as a % of as a % of as a % of the
Bond Fund Offering Price Your Investment Offering Price
<S> <C> <C> <C>
Up to $50,000 5.75% 6.10% 5.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.50% 2.56% 2.00%

<PAGE>

$500,000 up to $1,000,000 2.00% 2.04% 1.75%
$1,000,000 and above<F1> 0.00% 0.00% <F1>
<FN>
<F1>There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to .50% of the
purchase price will be charged to the shareholder if shares are redeemed in
the first year after purchase, or at .50% within two years of the purchase.
This charge will be based on either the cost of the shares or net asset
value at the time of redemption, whichever is lower. There will be no CDSC
on reinvested distributions. Investment Professionals may be paid at a rate
of up to .50% of the purchase price
</FN>
</TABLE>

<TABLE>
<CAPTION>
Your Investment in:

Fund for Income
Sales Charge Sales Charge Dealer Reallowance
Limited Term as a % of as a % of as a % of the
Income Fund Offering Price Your Investment Offering Price
<S> <C> <C> <C>
Up to $50,000 2.00% 2.04% 1.50%
$50,000 up to $100,000 1.75% 1.78% 1.25%
$100,000 up to $250,000 1.50% 1.52% 1.00%
$250,000 up to $500,000 1.25% 1.27% 0.75%
$500,000 up to $1,000,000 1.00% 1.01% 0.50%
$1,000,000 and above<F1> 0.00% 0.00% <F1>
<FN>
<F1>There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed in
the first year after purchase, or at .50% within two years of the purchase.
This charge will be based on either the cost of the shares or net asset
value at the time of redemption, whichever is lower. There will be no CDSC
on reinvested distributions. Investment Professionals may be paid at a rate
of up to 1.00% of the purchase price
</FN>
</TABLE>

The Distributor reserves the right to pay the entire commission to

<PAGE>

dealers. If that occurs, the dealer may be considered an "underwriter"
under federal securities laws.

SALES CHARGE REDUCTIONS AND WAIVERS

There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.

You may qualify for reduced sales charges in the following cases:

1. A Letter of Intent lets you purchase Class A shares of a fund over a 13-month
period and receive the same sales charge as if all shares had been purchased
at one time. You must start with a minimum initial investment of 5% of the
total amount.

2. Rights of Accumulation allow you to add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.

3. You can combine Class A shares of
multiple Victory Funds (excluding the money market funds) for purposes of
calculating the sales charge. The combination privilege also allows you to
combine the total investments from the accounts of household members of your
immediate family (spouse and children under 21) for a reduced sales charge at
the time of purchase.

4. Waivers for certain investors:

a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers"*, and
dealers who have an agreement with the Distributor and any trade
organization to which the Adviser or the Administrator belong.

b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.

c. Investors who reinvest a distribution from a deferred compensation plan,
agency, trust, or custody account that was maintained by KeyBank National
Association or its affiliates, the Victory Group, or invested in a fund of
the Victory Group.

d. Investors who reinvest shares from another mutual fund complex

<PAGE>

or the Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.

e. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, selling brokers, and their sales
representatives.

*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.

HOW TO PURCHASE SHARES

Shares can be purchased in a number of different ways. You can send in your
investment by check, wire transfer, exchange from another fund of the Victory
Group, or through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by the Funds.

All you need to do to get started is to fill out an application.

Make your check payable to:
The Victory Funds

Keep the following addresses handy for purchases, exchanges, or redemptions.

REGULAR U.S. MAIL ADDRESS

Send a completed Account Application with your check, bank draft, or money order
to:

The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527

OVERNIGHT MAIL ADDRESS

<PAGE>

Use the following address ONLY for overnight packages.

The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND

WIRE ADDRESS

The Transfer Agent does not charge a
wire fee, but your originating bank may charge a fee. Always call
the Transfer Agent at 800-KEY-FUND BEFORE wiring funds to obtain a
confirmation number.

State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1

For Further Credit to Account #
(insert account number, name,
and confirmation number assigned
by the Transfer Agent)

TELEPHONE
800-KEY-FUND
800-539-3863

FAX Number:
800-529-2244

Telecommunication Device for the Deaf (TDD):
800-970-5296

ACH

After your account is set up, your purchase amount can be transferred
by Automated Clearing House (ACH). Only domestic member banks may
be used. It takes about 15 days to set up the ACH feature. Currently,
the Funds do not charge a fee for ACH transfers.

<PAGE>

STATEMENTS AND REPORTS

You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, account activity will be detailed in their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Funds. By January 31 of each year, you will
be mailed an IRS form reporting distributions for the previous year, which will
also be filed with the IRS.

SYSTEMATIC INVESTMENT PLAN
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank account information and the amount
and frequency of your investment. You can select monthly, quarterly,
semi-annual, or annual investments. You should attach a voided personal check so
the proper information can be obtained. You must first meet the minimum
investment requirement of $500, then we will make automatic withdrawals of the
amount you indicate ($25 or more) from your bank account and invest it in shares
of a Fund.

RETIREMENT PLANS

You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Fund for
details regarding an IRA or other retirement plan that works best for your
financial situation.

If you would like to make additional investments after your account is already
established, use the Investment Stub attached to your statement and send it with
your check to the address indicated.

All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion.

<PAGE>

If your check is returned for any reason, you may be charged for any resulting
fees and/or losses. Third party checks will not be accepted. You may only invest
or exchange into fund shares legally available in your state. If your account
falls below $500, we may ask you to re-establish the minimum investment. If you
do not do so within 60 days, we may close your account and send you the value of
your account.

HOW TO EXCHANGE SHARES

An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. (See Item 3 below for the exception.)

You can obtain a list of funds available for exchange by calling the Transfer
Agent at 800-KEY-FUND.

You can exchange shares of the Funds by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Funds, you should keep the
following in mind:

Shares of the fund selected for exchange must be available for sale in your
state of residence.

The Fund whose shares you want to exchange and the fund whose shares you want to
buy must offer the exchange privilege.

Shares of a Fund may be exchanged at relative net asset value. This means that
if you own Class A shares of a Fund, you can only exchange them for Class A
shares of another fund and not pay a sales charge. If you exchange into a fund
with a higher sales charge, you pay the percentage-point difference between that
fund's sales charge and any sales charge you have previously paid in connection
with the shares you are exchanging. If you exchange from the Fund for Income or
the Limited Term Income Fund to purchase Class A shares of another fund in the
Victory Group that has a 5.75% sales charge, you would pay the 3.75% difference
in sales charge.

<PAGE>

You must meet the minimum purchase requirements for the fund you purchase by
exchange.

The registration and tax identification numbers of the two accounts must be
identical.

You must hold the shares you buy when you establish your account for at least 7
days before you can exchange them; after the account is open 7 days, you can
exchange shares on any business day.

Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.

HOW TO REDEEM SHARES
If we receive your request by 4:00 p.m. Eastern Time, your redemption will be
processed the same day.

There are a number of convenient ways to redeem shares of the Funds. You can use
the same mailing addresses listed for purchases. You will earn dividends up to
the date your redemption request is processed.

BY TELEPHONE
The easiest way to redeem shares is by calling 800-KEY-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to redeem, call us and tell us which one
of the following options you would like to use:

Mail a check to the address of record;

Wire funds to a domestic financial institution;

Mail to a previously designated alternate address; or

Electronically transfer the funds via ACH.

All telephone calls are recorded for your
protection and measures are taken to verify the identity of the caller.
If we properly act on telephone instructions and follow reasonable

<PAGE>

procedures to ensure against unauthorized transactions, neither Victory nor its
servicing agents, the Adviser, nor the Transfer Agent will be responsible for
any losses. If these procedures are not followed, the Transfer Agent may be
liable to you for losses resulting from unauthorized instructions.

If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.

BY WIRE
If you want to redeem funds by wire, you must establish a Fund account which
will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time, your
funds will be wired on the next business day.

BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. All account owners must sign. A signature
guarantee is required for the following redemption requests:

Redemptions over $10,000;

Your account registration has changed within the last 15 days;

The check is not being mailed
to the address on your account;

The check is not being made payable
to the owner of the account; or

If the redemption proceeds are being
transferred to another Victory Group account with a different registration.

A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.

BY ACH

Normally, your redemption will be processed on the same day or the next day if
your instructions are received after 4:00 p.m. Eastern Time. It will be
transferred by ACH as long as the transfer is to a domestic bank.

<PAGE>

Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends declared will be included with the redemption proceeds.

Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to you or the person you designate.
The minimum withdrawal is $25, and you must have an account value of $5,000 or
more to start withdrawals. Once again, we will need a voided personal check to
activate this feature. You should be aware that your account eventually may be
depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your account value falls below $500, we may ask
you to bring the account back to the $500 minimum. If you decide not to increase
your account to the minimum balance, your account may be closed and the proceeds
mailed to you.

ORGANIZATION AND MANAGEMENT OF THE FUNDS

We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service the shareholders. They are paid a fee for their services.

ABOUT VICTORY

Each Fund is a member of the Victory Funds, a group of 30 distinct investment
portfolios, organized as a Delaware business trust. Some of the Victory Funds
have been operating since 1983.

The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.

THE INVESTMENT ADVISER

<PAGE>

On February 28, 1997, KAM became the surviving corporation after the
reorganization of four indirect investment adviser subsidiaries of KeyCorp.
Affiliates of the Adviser manage approximately $60 billion for a limited number
of individual and institutional clients.

The Advisory Agreement allows the Adviser to hire employees of its affiliates.
It also allows KAM to choose brokers or dealers to handle the purchases and
sales of a Fund's securities. Subject to Board approval, Key Investments, Inc.
(KII) and/or Key Clearing Corporation (KCC) may act as clearing broker for the
Funds' security transactions in accordance with procedures adopted by the Funds,
and receive commissions or fees in connection with their services to the Funds.
Both KII and KCC are wholly-owned indirect subsidiaries of KeyCorp and are
affiliates of the Adviser.

Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser
and Society Asset Management, Inc. (formerly the adviser) was the sub-adviser to
each of the Funds. During the fiscal year ended October 31, 1997, the Adviser
was paid an advisory fee at an annual rate based on a percentage of the average
daily net assets of each Fund (after waivers) as follows:

<TABLE>
<CAPTION>
ADVISORY
FUND FEES
<S> <C>
Fund for Income .03%
Government Mortgage Fund .50%
Intermediate Income Fund .62%
Investment Quality Bond Fund .62%
Limited Term Income Fund .48%
</TABLE>

MANAGEMENT OF THE FUNDS

<PAGE>

TRUSTEES

Supervise each Fund's activities.

INVESTMENT ADVISER

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Manages each Fund's business and investment activities.

THE ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT

BISYS Fund Services is the Administrator and the Distributor. The Fund pays
BISYS a fee as the Administrator at the following annual rate based on each
Fund's average daily net assets:

.15% for portfolio assets of $300
million and less,

.12% for the next $300 million through $600 million of portfolio
assets; and

.10% for portfolio assets greater
than $600 million.

The Funds are supervised by the Board of Trustees, who monitor the services
provided to investors.

Under a Sub-Administration Agreement, BISYS pays KAM a fee at the annual rate of
up to .05% of each Fund's average daily net assets to perform some of the
administrative duties for the Funds. The Funds do not pay BISYS a fee for its
services as Distributor, although BISYS receives the sales charge. Each Fund
pays BISYS Fund Services Ohio,

<PAGE>

Inc. a fee for serving as the Funds' Accountant.

The Distributor may provide sales support, including cash or other compensation
to dealers for selling shares of a Fund. Payments may be in the form of trips,
tickets, and/or merchandise offered through sales contests. It does this at its
own expense, and not at the expense of a Fund or its shareholders.

SHAREHOLDER SERVICING PLAN

The Funds have adopted a Shareholder Servicing Plan for each class of shares of
the Funds. The shareholder servicing agent performs a number of services for its
customers who are shareholders of a Fund. It establishes and maintains accounts
and records, processes dividend payments, arranges for bank wires, assists in
transactions, and changes account information. For these services a Fund pays a
fee at an annual rate of up to .25% of the average daily net assets of the Fund
serviced by the agent. The Funds may enter into agreements with various
shareholder servicing agents, including KeyBank National Association and its
affiliates, other financial institutions, and securities brokers. The Funds may
pay a servicing fee to broker-dealers and others who sponsor "no transaction
fee" or similar programs for the purchase of shares. Shareholder servicing
agents may waive all or a portion of their fee periodically.

DISTRIBUTION PLAN
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Fund for Income. Class A Shares of the
Funds currently do not pay expenses under this plan.

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as independent accountants to the
Funds.

LEGAL COUNSEL
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.

HOW THE FUNDS ARE ORGANIZED

SHAREHOLDERS

FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS

Advise current and prospective

<PAGE>

shareholders on their Fund investments.

TRANSFER AGENT/SERVICING AGENT

State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholders' accounts.

FUND ACCOUNTANT

BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219

Calculates the value of Fund shares and keeps certain Fund records.

CUSTODIAN

Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114

Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.

DISTRIBUTOR AND ADMINISTRATOR

BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219

As Distributor, markets the Fund and distributes shares through

<PAGE>

Investment Professionals. As Administrator, handles the day-to-day operations of
the Fund.

SUB-ADMINISTRATOR

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Handles some day-to-day operations of the Fund.

ADDITIONAL INFORMATION
Some additional information you should know about the Funds.

SHARE CLASSES

The Funds offer only the class of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.

YOUR RIGHTS AS A SHAREHOLDER
All shareholders have equal voting, liquidation, and other rights. As a
shareholder of a Fund, you have rights and privileges similar to those enjoyed
by other corporate shareholders. Delaware Trust law limits the liability of
shareholders.

If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of a Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.

CODE OF ETHICS
Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to the Funds must conform.
Investment personnel must refrain from certain trading

<PAGE>

practices and are required to report certain personal investment activities.
Violations of the Code of Ethics can result in penalties, suspension, or
termination of employment.

BANKING LAWS
Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment adviser, transfer agent, custodian, or shareholder servicing
agent. They may also purchase shares of such a company for their customers and
pay third parties for performing these functions. Should these laws change in
the future, the Trustees would consider selecting another qualified firm so that
all services would continue.

SHAREHOLDER COMMUNICATIONS
You will receive unaudited Semi-Annual Reports and audited Annual Reports on a
regular basis from each Fund. In addition, you will also receive updated
prospectuses or supplements to this prospectus. In order to eliminate duplicate
mailings to an address at which two or more shareholders with the same last name
reside, the Funds will send only one copy of the above communications.

The securities described in this prospectus and the SAI are not offered in any
state in which they may not be sold lawfully.
No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this prospectus and the SAI.

If you would like to receive additional copies of any materials, please call the
Funds at 800-KEY-FUND.

OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities each of the Funds may
choose to purchase under normal market conditions. The majority of the portfolio
for each of the Funds is made up of mortgage-backed securities and corporate
debt obligations. However, the Funds are also permitted to invest in the
securities in the table below and in the SAI.

<PAGE>

List of Allowable Fund Government Intermediate Investment Limited Term
Investments and for Mortgage Income Quality Income
Investment Practices Income Fund Fund Bond Fund Fund
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES.
Notes and bonds issued
or guaranteed by the U.S.
government, its agencies
or instrumentalities. Some are
direct obligations of
the U.S. Treasury; others are
obligations only of the
U.S. agency. <F1> 20% <F1> <F1> <F1>

CORPORATE DEBT OBLIGATIONS.
Debt instruments issued by
public corporations. They may
be secured or unsecured. 35% 20% <F1> <F1> <F1>

ASSET BACKED SECURITIES. Debt
securities backed by
loans or accounts receivable
originated by banks, credit
card companies, or other
providers of credit. These
securities may be enhanced
by a bank letter of credit
or by insurance coverage
provided by a third party. 35% 35% 35% 35% 35%

CONVERTIBLE OR EXCHANGEABLE
CORPORATE DEBT OBLIGATIONS.
Debt instruments which may be
exchanged or converted to
other securities. 35% 20% <F1> <F1> <F1>

PREFERRED AND CONVERTIBLE
PREFERRED STOCK OF
U.S. CORPORATIONS. none none 20% 20% 20%

MORTGAGE-BACKED SECURITIES.
Instruments secured by a 80-100%
mortgage or pools of mortgages. 65-100% (U.S. Gov't.) <F1> <F1> <F1>

<PAGE>

<F2>COLLATERALIZED MORTGAGE
OBLIGATIONS. Debt
obligations that are
secured by mortgage-
backed certificates.
Some are issued by
U.S. government agencies 80-100%
and instrumentalities. 65-100% (U.S. Gov't.) <F1> <F1> <F1>

SHORT-TERM DEBT OBLIGATIONS.
Includes bankers' acceptances,
certificates of deposit, prime
quality commercial paper,
Eurodollar obligations,
variable and floating rate 20%
notes, cash, and cash (commercial
equivalents. 35% paper only) 35% 35% <F1>

WHEN-ISSUED AND DELAYED-
DELIVERY SECURITIES.
A security that is
purchased for delivery at
a later time. The market
value may change before
the delivery date, and the
value is included in the
NAV of the Fund. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

ZERO COUPON BONDS. These
securities are purchased
at a discount from the face
value. The face value is
received at maturity, with
no interest payments
before then. These may be
subject to greater risks (U.S.Gov't.)
of price fluctuation. 20% 20% 20% 20% 20%

<F2>VARIABLE & FLOATING RATE
SECURITIES. Investment
grade instruments, some
of which may be derivatives
and illiquid, with
interest rates that reset (U.S. Gov't.)
periodically. 35% 20% <F1> <F1> <F1>

<PAGE>

YANKEE SECURITIES. Debt
instruments issued by
non-domestic issuers and
traded in U.S. currency. none none 20% 20% 20%

FOREIGN SECURITIES. Debt
securities of foreign issuers
including international bonds
denominated in foreign
or domestic currencies
traded in the United States
and abroad. none none 20% 20% 20%

<F2>RECEIPTS. Separately
traded interest or
principal components
of U.S. Government
securities. none 20% 20% 20% 20%

REPURCHASE AGREEMENTS. An
agreement to sell and
repurchase a security at
a stated price plus interest.
The seller's obligation to
the Fund is secured with
collateral. Subject to the
receipt of exemptive relief
from the SEC, the Adviser
may combine repurchase
transactions among one or
more Victory Funds into a
single transaction. 35% 20% 35% 35% 35%

TAX, REVENUE, AND BOND
ANTICIPATION NOTES. Issued in
expectation of future revenues. 35% 20% <F1> <F1> <F1>

ILLIQUID SECURITIES.
Investments that cannot be
readily sold within seven
days in the usual course of
business at approximately

<PAGE>

the price at which a Fund 15% of net 15% of net 15% of net 15% of net 15%
of net values them. assets assets assets assets assets

RESTRICTED SECURITIES.
Securities that are not
registered under
federal securities
laws but that may be traded
among qualified institutional
investors and the Fund.
Some of these securities
may be illiquid. 35% 20% <F1> <F1> <F1>

<F2>FUTURES CONTRACTS AND
OPTIONS ON FUTURES
CONTRACTS. Contracts
involving the right or
obligation to deliver
or receive assets or
money depending on the
performance of one or
more assets or a
securities index. To
reduce the effects of 5% in 5% in 5% in 5% in
leverage, liquid assets margins and margins and margins and margins and
equal to the contract premiums; premiums; premiums; premiums;
commitment are set aside 33 1/3% 33 1/3% 33 1/3% 33 1/3%
to cover the commitment. none subject to subject to subject to subject to
The Funds may invest in futures or futures or futures or futures or
futures in an effort to options on options on options on options on
hedge against market risk. futures futures futures futures

BORROWING, REVERSE REPURCHASE
AGREEMENTS. The borrowing of
money from banks (up to 5%
of total assets) or through
reverse repurchase
agreements (up to 33 1/3% of
total assets). The Funds
will not use borrowing to 5% 5% 5% 5% 5%
create leverage. 33 1/3% 33 1/3% 33 1/3% 33 1/3%

SECURITIES LENDING. To

<PAGE>

generate additional income, a
Fund may lend its portfolio
securities. A Fund will
receive collateral for the
value of the security plus
any interest due. A Fund only
will enter into securities
lending arrangements with
entities that the Adviser has
determined are credit-
worthy. Subject to the
receipt of exemptive relief
from the SEC, Key Trust
Company of Ohio, N.A., the
Funds' Custodian and lending
agent, may earn a fee based
on the amount of income
earned on the investment of
collateral.

none 33 1/3% 33 1/3% 33 1/3% 33 1/3%

DOLLAR WEIGHTED EFFECTIVE
AVERAGE MATURITY. Based on
the value of a Fund's
investments in securities
with different maturity
dates. This measures the
sensitivity of a debt
security's value to changes
in interest rates. Longer
term debt securities are more
volatile than shorter term
debt securities because their
prices are more sensitive to
interest rate changes.
Therefore, the NAV of a fund
with a longer dollar weighted
effective average maturity
may fluctuate more.
less than less than 3-10 years 5-15 years 1-5 years
10 years 12 years

INVESTMENT COMPANY SECURITIES.
Shares of other mutual
funds with similar investment
objectives. The following
limitations apply: (1) no more
than 5% of a Fund's total

<PAGE>

assets may be invested in one mutual fund, (2) a Fund and its affiliates may not
own more than 3% of the securities of any one mutual fund, and (3) no more than
10% of a Fund's total assets 5% 5% 5% 5% 5%
may be invested in combined 3% 3% 3% 3% 3%
mutual fund holdings. 10% 10% 10% 10% 10%

<FN>
% Percentage of total assets.
<F1>No limitation of usage; Fund may be using currently.
<F2>Indicates a "derivative security," whose value is linked to, or
derived from, another security, instrument or index.

For temporary defensive purposes the Funds may hold up to 100% of their total
assets in cash or short-term obligations. For more information on ratings and
detailed descriptions of each of the above investment vehicles, see the SAI.
</FN>
</TABLE>

This page is intentionally left blank.

Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469

LOGO (R)
VICTORY FUNDS

PRINTED ON RECYCLED PAPER VF/TXFI-PRO (3/98)

<PAGE>

LOGO (R)
Victory Funds

PROSPECTUS

FINANCIAL
RESERVES
FUND

OHIO
MUNICIPAL
MONEY
MARKET FUND

PRIME
OBLIGATIONS
FUND

TAX-FREE
MONEY MARKET
FUND

U.S. GOVERNMENT
OBLIGATIONS FUND

800-KEY-FUND(R) or 800-539-3863

March 1, 1998

THE VICTORY PORTFOLIOS

PROSPECTUS FOR:

FINANCIAL RESERVES FUND
OHIO MUNICIPAL MONEY MARKET FUND
PRIME OBLIGATIONS FUND
TAX-FREE MONEY MARKET FUND
U.S. GOVERNMENT OBLIGATIONS FUND

800-KEY-FUND(R) 800-539-3863

The five Victory Funds discussed in this prospectus (the Funds) are a part

<PAGE>

of The Victory Portfolios (Victory), an open-end investment management company.
The Ohio Municipal Money Market Fund is a non-diversified money market mutual
fund. The other four Funds are diversified money market mutual funds. This
prospectus explains the objectives, policies, risks, and strategies of the
Funds. You should read this prospectus before investing in one of these Funds
and keep it for future reference. A detailed Statement of Additional Information
(SAI) describing each of the Funds is also available for your review. The SAI
has been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference into this prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
into this Prospectus and the SAI, and other information regarding registrants
that file electronically with the SEC. If you would like a free copy of the SAI,
please request one by calling us at 800-KEY-FUND.

An investment in a Fund is
neither insured nor guaranteed
by the U.S. Government. There can
be no assurance that a Fund will be
able to maintain a stable net asset
value of $1.00 per share.

Shares of the Funds are:

Not insured by the FDIC;

Not deposits or other obligations
of, or guaranteed by, any KeyBank,
any of its affiliates, or any other bank;

Subject to investment risks, including possible loss of the principal amount
invested.

These securities have not
been approved or disapproved
by the Securities and Exchange
Commission or any securities

<PAGE>

regulatory authority of any state, nor has the Securities and Exchange
Commission or any such state authority passed upon the accuracy or adequacy of
this prospectus. Any representation to the contrary is a criminal offense.

March 1, 1998

TABLE OF CONTENTS

Introduction 2

AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights

Financial Reserves Fund 4
Ohio Municipal Money Market Fund 6
Prime Obligations Fund 8
Tax-Free Money Market Fund 10
U.S. Government Obligations Fund 12

Risk Factors 14

Investment Limitations 15

Investment Performance 15

Share Price 16

Dividends, Distributions, and Taxes 16

INVESTING WITH VICTORY 18

How to Purchase Shares 18
How to Exchange Shares 20
How to Redeem Shares 21

<PAGE>

Organization and
Management of the Funds 23

Additional Information 26

Other Securities and
Investment Practices 27

KEY TO
FUND INFORMATION

OBJECTIVE AND STRATEGY The goals and the strategy that a Fund plans to use in
pursuing its investment objective.

RISK FACTORS The risks that you may assume as an investor in the Fund.

EXPENSES
The costs that you will pay as an investor in the Fund, including sales charges
and ongoing expenses.

FINANCIAL HIGHLIGHTS A table that shows a Fund's historical performance. This
table also summarizes previous operating expenses.

Investment Objective and Strategy

OBJECTIVE

THE FINANCIAL RESERVES FUND seeks to provide as high a level of current income
as is consistent with preserving capital and providing liquidity.

The OHIO MUNICIPAL MONEY MARKET FUND seeks to provide current income exempt from
federal regular income tax and the personal income taxes imposed by the State of
Ohio and Ohio municipalities consistent with

<PAGE>

stability of principal.

The PRIME OBLIGATIONS FUND seeks to provide current income consistent with
liquidity and stability of principal.

The TAX-FREE MONEY MARKET FUND seeks to provide current interest income free
from federal income taxes consistent with relative liquidity and stability of
principal.

The U.S. GOVERNMENT OBLIGATIONS FUND seeks to provide current income consistent
with liquidity and stability of principal.

STRATEGY

Each of the Funds pursues its investment objective by investing in a diversified
portfolio of high-quality, short-term U.S. dollar-denominated money market
instruments. However, each of the Funds has unique investment strategies and its
own risk/reward profile. The Funds seek to maintain a constant net asset value
of $1.00 per share, and shares are offered at net asset value. Please review the
section about the Fund in which you are interested in investing and "Other
Securities and Investment Practices" for an overview of the Funds.

RISK FACTORS

The Funds are not insured by the FDIC, and while each Fund attempts to maintain
a $1.00 per share price, there is no guarantee that it will be able to do so.
The Ohio Municipal Money Market Fund primarily invests in securities issued by
the State of Ohio and its municipalities. This could make the Ohio Municipal
Money Market Fund more susceptible to economic, political, or credit risks than
a fund that invests in a more diversified geographic area. In addition, there
are other potential risks which are discussed in the section "Risk Factors."

WHO SHOULD INVEST

Investors seeking relative safety and easy access to investments

Investors with a low risk tolerance

Investors seeking preservation of capital

Investors willing to accept lower potential returns in return for safety

Fees and Expenses

<PAGE>

NO LOAD or sales commission is charged to investors in the Funds. You will,
however, incur expenses for investment advisory, administrative, and shareholder
services, all of which are included in a Fund's expense ratio. The U.S.
Government Obligations Fund offers two classes of shares: Investor Shares and
Select Shares. The Financial Reserves Fund and the Investor Shares of the U.S.
Government Obligations Fund are available to certain institutions or individuals
that meet minimum investment requirements and are not subject to a shareholder
servicing fee. The Select Shares are available through certain financial
institutions that provide additional services to their customers who are
shareholders of the Fund. The Select Shares Class pays a shareholder servicing
fee at an annual rate of up to .25% of the average daily net assets of that
class. See "Organization and Management of the Funds--Shareholder Servicing
Plan."

PURCHASES

The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. An initial investment
must be accompanied by a Fund's Account Application. Fund shares may
be purchased by check, Automated Clearing House, or wire. See "How
to Purchase Shares."

REDEMPTIONS

You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, a Fund
will redeem the shares and credit your bank account or send the proceeds
to the address designated on your Account Application. See "How to
Redeem Shares."

DIVIDENDS/DISTRIBUTIONS

Income is accrued and declared daily by each Fund and is paid monthly. Any net
capital gains realized by a Fund are paid as dividends annually. A Fund can send
your dividends directly to you by mail, credit them to your bank account,
reinvest them in the Fund, or invest them in another fund of the Victory Group.
The "Victory Group" includes other funds of The Victory Portfolios. You can make
this choice when you fill out an Account Application. See "Dividends,
Distributions, and Taxes."

<PAGE>

Other Services

Victory offers a number of other services to better serve shareholders including
exchange privileges, automated investment and withdrawal plans, and free check
writing services for certain funds (minimum $100 per check). See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.

General Information About Each of the Funds
<TABLE>
<CAPTION>

Estimated Annual
Inception Expenses Newspaper
Victory Fund Date After Waivers Abbreviation<F1>
(as a % of net assets)
<S> <C> <C> <C>

Financial Reserves Fund 4/4/83 .67% Victory FRF
Ohio Municipal Money Market Fund 7/3/85 .80% Victory OH
Prime Obligations Fund 11/18/86 .90% Victory PrOb
Tax-Free Money Market Fund 8/24/88 .80% Victory TF
U.S. Government Obligations
Fund--Investor Shares 1/8/97 .60% VictryUSGvI
U.S. Government Obligations
Fund--Select Shares 11/18/86 .85% VictryUSGvS

<FN>

<F1> All newspapers do not use the same abbreviation.
</FN>

</TABLE>

FINANCIAL RESERVES FUND

<PAGE>

INVESTMENT OBJECTIVE

The Financial Reserves Fund seeks to provide as high a level of current income
as is consistent with preserving capital and providing liquidity.

INVESTMENT POLICIES AND STRATEGY

The Financial Reserves Fund pursues its investment objective by investing
primarily in a portfolio of high-quality U.S. dollar-denominated money market
instruments.

UNDER NORMAL MARKET CONDITIONS, THE FINANCIAL RESERVES FUND PRIMARILY INVESTS
IN:

Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. banks and U.S. branches of foreign banks

Short-term corporate obligations, such as commercial paper, notes,
and bonds

Repurchase Agreements

Other debt obligations such as master demand notes, short-term funding
agreements, variable and floating rate securities, and private placement
investments

U.S. Treasury obligations and obligations of government sponsored
agencies such as GNMA, FNMA, SLMA, FFCB, FHL, and FHLMC

When-issued or delayed-delivery securities

Eurodollar debt obligations

IMPORTANT CHARACTERISTICS OF THE FINANCIAL RESERVES FUND'S INVESTMENTS:

QUALITY: The Financial Reserves Fund invests only in instruments that are rated
at the time of purchase in the highest category by two or more NRSROs,* or in
the highest category if rated by only one NRSRO, or if unrated, determined to be
of equivalent quality. The Board of Trustees has established policies to ensure
that the Financial Reserves Fund invests in high quality, liquid instruments.
For more information on ratings, see the Appendix to the SAI.

MATURITY: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from

<PAGE>

one day to 397 days.

*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.

The Financial Reserves Fund is subject to credit risk, interest rate
risk, inflation risk, and market risk. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Financial Reserves Fund. You will
note in the table that you do not pay fees of any kind when you purchase,
exchange, or redeem shares of the Financial Reserves Fund.

<TABLE>

Shareholder Transaction Expenses<F1>

<S> <C>

Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE

<FN>

<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>

</TABLE>

<PAGE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Financial
Reserves Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE FINANCIAL RESERVES
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the Financial Reserves Fund, and other activities. The
expenses shown are estimated based on historical expenses of the Financial
Reserves Fund adjusted to reflect anticipated expenses.

<TABLE>

Annual Fund Operating Expenses
After expense waivers and reimbursements

(as a percentage of average daily net assets)

<S> <C>

Management Fee<F1> .48%
Other Expenses .19%
-------
Total Fund Operating Expenses<F1> .67%
=======
<FN>

<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50%, and Total Fund Operating Expenses would be .69%.
</FN>

</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Financial Reserves
Fund.

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

<PAGE>

<TABLE>

1 Year 3 Years 5 Years 10 Years

Financial
Reserves Fund $7 $21 $37 $83

</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FOR MORE INFORMATION ABOUT OTHER SECURITIES IN WHICH THE FINANCIAL RESERVES FUND
CAN INVEST, SEE "OTHER SECURITIES AND INVESTMENT PRACTICES" AND THE SAI.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Financial Reserves Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Financial Reserves Fund for each of the periods indicated.

<PAGE>

<TABLE>

FINANCIAL RESERVES FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]
<CAPTION>

Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1997 1996 1995<F4> 1994<F3> 1993<F2><F3>

<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------

Investment Activities
Net investment income 0.049 0.049 0.054 0.035 0.030

Distributions
Net investment income (0.049) (0.049) (0.054) (0.035) (0.030)
-------- -------- -------- -------- --------

NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========

Total Return 5.04% 5.00% 5.50% 3.57% 2.81%

RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $800,642 $767,990 $762,870 $433,266 $457,872

Ratio of expenses to
average net assets 0.67% 0.67% 0.60% 0.57% 0.55%

Ratio of net investment
income to average
net assets 4.94% 4.89% 5.40% 3.48% 2.78%

Ratio of expenses to
average net assets<F1> 0.71% 0.75% 0.76% 0.73% 0.70%

Ratio of net investment
income to average
net assets<F1> 4.90% 4.81% 5.24% 3.32% 2.63%

The Financial Highlights were audited by Coopers & Lybrand L.L.P. for the years
ended October 31, 1995, 1996, and 1997, and by other auditors for all earlier
periods. This information should be read in conjunction with the Financial
Reserves Fund's most recent Annual Report to shareholders, which is incorporated
by reference in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.

<PAGE>

<FN>
<F1>During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.

<F2>Effective May 16, 1991, Ameritrust Company National Association became
investment adviser to the Fund. Effective March 16, 1992, Ameritrust was
acquired by Society Corporation and merged into Society National Bank, a
wholly-owned subsidiary of Society Corporation, on July 13, 1992. On January
7, 1993, Society Asset Management, Inc., a wholly-owned subsidiary of
Society Corporation, was named investment adviser to the Fund.

<F3>Audited by other auditors.

<F4>Effective June 5, 1995, the Victory Financial Reserves Portfolio
became the Financial Reserves Fund.
</FN>
</TABLE>

FINANCIAL HIGHLIGHTS

<PAGE>

<TABLE>

FINANCIAL RESERVES FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]
<CAPTION>

Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1992<F2><F3> 1991<F2><F3> 1990<F3> 1989<F3> 1988<F3>

<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------

Investment Activities
Net investment income 0.040 0.060 0.080 0.090 0.070

Distributions
Net investment income (0.040) (0.060) (0.080) (0.090) (0.070)
-------- -------- -------- -------- --------

NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========

Total Return 3.76% 6.28% 8.12% 9.14% 7.13%

Ratios/Supplemental Data:
Net Assets,
End of Period (000) $523,889 $412,542 $432,905 $369,582 $409,440

Ratio of expenses to
average net assets 0.55% 0.55% 0.55% 0.56% 0.54%

Ratio of net investment
income to average
net assets 3.67% 6.12% 7.84% 8.77% 6.92%

Ratio of expenses to
average net assets<F1> 0.70% 0.62%

Ratio of net investment
income to average
net assets<F1> 3.52% 6.05%

<PAGE>

<FN>
<F1>During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.

<F3>Audited by other auditors.

<F4>Effective June 5, 1995, the Victory Financial Reserves Portfolio
became the Financial Reserves Fund.
</FN>

</TABLE>

OHIO MUNICIPAL MONEY MARKET FUND

INVESTMENT OBJECTIVE

The Ohio Municipal Money Market Fund seeks to provide current income exempt from
federal regular income tax and the personal income taxes imposed by the State of
Ohio and Ohio municipalities consistent with stability of principal.

INVESTMENT POLICIES AND STRATEGY

The Ohio Municipal Money Market Fund pursues its investment objective by
investing at least 80% of its total assets in short-term municipal securities.
The interest income on these securities is exempt from federal regular income
tax. Federal regular income tax does not include the individual or corporate
federal alternative minimum tax. The Ohio Municipal Money Market Fund expects to
invest at least 65% of its total assets in debt securities that pay interest
which is also exempt from Ohio state income tax.

UNDER NORMAL MARKET CONDITIONS, THE OHIO MUNICIPAL MONEY MARKET FUND PRIMARILY
INVESTS IN:

Short-term municipal obligations, such as commercial paper, notes,
and bonds

Tax, revenue, and bond anticipation notes

<PAGE>

Variable rate demand notes, municipal bonds, and participation interests
in any of the above obligations

IMPORTANT CHARACTERISTICS OF THE OHIO MUNICIPAL MONEY MARKET FUND'S
INVESTMENTS:

QUALITY: The Ohio Municipal Money Market Fund invests only in instruments that
are rated at the time of purchase in the highest category by two or more
NRSROs,* in the highest category if rated by only one NRSRO, or if unrated,
determined to be of equivalent quality. The Board of Trustees has established
policies to ensure that the Ohio Municipal Money Market Fund invests in high
quality, liquid instruments. For more information on ratings, see the Appendix
to the SAI.

MATURITY: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.

The Ohio Municipal Money Market Fund primarily invests in securities issued by
the State of Ohio and its municipalities. This could make the Ohio Municipal
Money Market Fund more susceptible to economic, political, or credit risks than
a fund that invests in a more diversified geographic area. The SAI explains the
risks specific to investments in Ohio securities. A large portion of the
securities held by the Ohio Municipal Money Market Fund are supported by letters
of credit from banks and other financial institutions. Changes in the credit
quality of these institutions could cause losses to the Ohio Municipal Money
Market Fund and affect its share price. The Ohio Municipal Money Market Fund is
subject to credit risk, interest rate risk, inflation risk, and market risk. The
Ohio Municipal Money Market Fund is also subject to the risks common to mutual
funds that invest in municipal debt securities, i.e., tax-exempt status risk,
concentration risk, and diversification risk. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Ohio Municipal Money Market Fund.
You will note in the table that you do not pay fees of

<PAGE>

any kind when you purchase, exchange, or redeem shares of the Ohio Municipal
Money Market Fund.

<TABLE>

Shareholder Transaction Expenses<F1>

<S> <C>

Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE

<FN>

<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>

</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Ohio Municipal
Money Market Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE OHIO MUNICIPAL
MONEY MARKET FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the Ohio Municipal Money Market Fund,
providing shareholder services, and other activities. The expenses shown are
estimated based on historical expenses of the Ohio Municipal Money Market Fund
adjusted to reflect anticipated expenses.

<PAGE>

<TABLE>

Annual Fund Operating Expenses After expense waivers and reimbursements (as a
percentage of average daily net assets)

<S> <C>

Management Fee<F1> .35%
Other Expenses<F1><F2> .45%
-----

Total Fund Operating Expenses<F1> .80%
=====
<FN>

<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50%, and Total Fund Operating Expenses would be
.95%.

<F2>Other Expenses includes an estimate of the shareholder servicing
fees the Ohio Municipal Money Market Fund expects to pay. See "Organization
and Management of the Funds--Shareholder Servicing Plan."
</FN>

</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Ohio Municipal Money
Market Fund.

Example: You would pay the following expenses on a $1,000 investment
in the Ohio Municipal Money Market Fund, assuming: (1) a 5% annual
return and (2) redemption at the end of each time period.

<TABLE>

1 Year 3 Years 5 Years 10 Years

Ohio Municipal
Money Market Fund $8 $26 $44 $99

</TABLE>

<PAGE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FOR MORE INFORMATION ABOUT OTHER SECURITIES IN WHICH THE OHIO MUNICIPAL MONEY
MARKET FUND CAN INVEST, SEE "OTHER SECURITIES AND INVESTMENT PRACTICES" AND THE
SAI.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Ohio Municipal Money Market Fund's returns
and operating expenses over time. This table shows the results of an investment
in one share of the Ohio Municipal Money Market Fund for each of the periods
indicated.

OHIO MUNICIPAL MONEY MARKET FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Two Months Year Year Year
Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Aug. 31, Aug.31, Aug. 31,
1997 1996 1995 1995<F2> 1994<F3> 1993<F1><F3>
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- --------

Investment Activities
Net investment income 0.030 0.030 0.006 0.033 0.021 0.021

Distributions
Net investment income (0.030) (0.030) (0.006) (0.033) (0.021) (0.021)
-------- -------- -------- -------- -------- --------

NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000

<PAGE>

Total Return 3.01% 3.11% 0.55%<F4> 3.33% 2.10% 2.14%

RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $650,978 $561,131 $510,632 $502,453 $318,132 $262,681

Ratio of expenses to
average net assets 0.75% 0.67% 0.64%<F5> 0.63% 0.65% 0.65%

Ratio of net interest
income to average
net assets 2.97% 3.03% 3.31%<F5> 3.33% 2.08% 2.12%

Ratio of expenses
to average
net assets<F6> 0.94% 0.97% 0.92%<F5> 0.94% 0.76% 0.72%

Ratio of net interest
income to average
net assets<F6> 2.78% 2.73% 3.03%<F5> 3.02% 1.97% 2.05%

The Financial Highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Ohio Municipal Money Market
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.

<FN>

<F1> Effective February 27, 1991, Ameritrust Company National Association
became investment adviser to the Fund. Effective March 16, 1992,
Ameritrust was acquired by Society Corporation, and merged into Society
National Bank, a wholly-owned subsidiary of Society Corporation on July
13, 1992. Effective February 3, 1993, Society Asset Management, Inc., a
wholly-owned subsidiary of Society Corporation, was named investment
adviser to the Fund.

<F2> Effective June 5, 1995, the Victory Ohio Municipal Money Market Portfolio
became the Ohio Municipal Money Market Fund.

<F3> Audited by other auditors.

<F4> Not annualized.

<PAGE>

<F5> Annualized.

<F6> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
</FN>

</TABLE>

<TABLE>

Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1992<F1><F3> 1991<F1><F3> 1990<F3> 1989<F3> 1988<F3> 1987<F3>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- --------

Investment Activities
Net investment income 0.031 0.046 0.053 0.056 0.044 0.036

Distributions
Net investment income (0.031) (0.046) (0.053) (0.056) (0.044) (0.036)
-------- -------- -------- -------- -------- --------

NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ========

Total Return 3.18% 4.67% 5.50% 5.76% 4.50% 3.75%

RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $252,705 $253,177 $297,845 $278,337 $257,002 $223,677

Ratio of expenses to
average net assets 0.65% 0.64% 0.65% 0.65% 0.63% 0.62%

Ratio of net interest

<PAGE>

income to average
net assets 3.13% 4.59% 5.36% 5.60% 4.41% 3.71%

Ratio of expenses
to average
net assets<F6> 0.68% 0.66% 0.66%

Ratio of net interest
income to average
net assets<F6> 3.10% 4.57% 4.38%

<FN>

<F2> Effective June 5, 1995, the Victory Ohio Municipal Money Market Portfolio
became the Ohio Municipal Money Market Fund.

<F3> Audited by other auditors.

<F4> Not annualized.

<F5> Annualized.

<F6> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
</FN>
</TABLE>

<PAGE>

PRIME OBLIGATIONS FUND

Investment Objective

The Prime Obligations Fund seeks to provide current income consistent with
liquidity and stability of principal.

INVESTMENT POLICIES AND STRATEGY

The Prime Obligations Fund pursues its investment objective by investing
primarily in short-term, high-quality debt instruments.

UNDER NORMAL MARKET CONDITIONS, THE PRIME OBLIGATIONS FUND PRIMARILY INVESTS IN:

Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. banks and U.S. branches of foreign banks

Short-term corporate obligations, such as commercial paper, notes,
and bonds

Repurchase Agreements

Other debt obligations such as master demand notes, short-term funding
agreements, variable and floating rate securities, and private placement
investments

U.S. Treasury obligations and obligations of government sponsored
agencies, such as GNMA, FNMA, SLMA, FFCB, FHL, and FHLMC

When-issued or delayed-delivery securities

Eurodollar debt obligations

IMPORTANT CHARACTERISTICS OF THE PRIME OBLIGATIONS FUND'S INVESTMENTS:

QUALITY: The Prime Obligations Fund invests only in instruments that are rated
at the time of purchase in the highest category by two or more NRSROs,* or in
the highest category if rated by only one NRSRO, or if unrated, determined to be
of equivalent quality. The Board of Trustees has established policies to ensure
that the Prime Obligations Fund invests in high quality, liquid instruments. For
more information on ratings, see the Appendix to the SAI.

MATURITY: Weighted average maturity of 90 days or less. Individual

<PAGE>

investments may be purchased with remaining maturities ranging from
one day to 397 days.

* An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.

The Prime Obligations Fund is subject to credit risk, interest rate
risk, inflation risk, and market risk. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Prime Obligations Fund. You will
note in the table that you do not pay fees of any kind when you purchase,
exchange, or redeem shares of the Prime Obligations Fund.

<TABLE>

Shareholder Transaction Expenses<F1>

<S> <C>

Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE

<FN>

<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>

</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Prime Obligations
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE PRIME

<PAGE>

OBLIGATIONS FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the Prime Obligations Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical expenses of the Prime Obligations Fund adjusted to reflect
anticipated expenses.

<TABLE>

Annual Fund Operating Expenses

<S> <C>
(as a percentage of average daily net assets)
Management Fee .35%
Other Expenses<F1> .55%
- ------

Total Fund Operating Expenses .90%
======
<FN>

<F1> Other Expenses includes an estimate
of the shareholder servicing
fees the Prime Obligations Fund expects to pay. See "Organization
and Management of the Funds--Shareholder Servicing Plan."
</FN>

</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Prime Obligations Fund.

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

<TABLE>

1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Prime
Obligations Fund $9 $29 $50 $111

<PAGE>

</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FOR MORE INFORMATION ABOUT OTHER SECURITIES IN WHICH THE PRIME OBLIGATIONS FUND
CAN INVEST, SEE "OTHER SECURITIES AND INVESTMENT PRACTICES" AND THE SAI.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Prime Obligations Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Prime Obligations Fund for each of the periods indicated.

<TABLE>

<CAPTION>
PRIME OBLIGATIONS FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

Year Year Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct.31, Oct. 31,
1997 1996 1995 1994 1993 1992 1991 1990<F2> 1989<F2> 1988

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------

<PAGE>

Investment
Activities
Net investment
income 0.048 0.047 0.051 0.035 0.030 0.037 0.061 0.078 0.087 0.068

Net realized
losses
from investment
transactions -- -- -- (0.003) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------

Total from
Investment
Activities 0.048 0.047 0.051 0.032 0.030 0.037 0.061 0.078 0.087 0.068

Distributions
Net investment
income (0.048) (0.047) (0.051) (0.035) (0.030) (0.037) (0.061) (0.078) (0.087) (0.068)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------

Capital transactions -- -- -- 0.003<F1> -- -- -- -- -- --

NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== ======== ======== ========

Total Return 4.89% 4.81% 5.26% 3.57% 3.05% 3.77% 6.32% 8.06% 9.02% 0.00%

RATIOS/SUPPLEMENTAL
DATA:
Net Assets,
End of Period (000) $736,449 $496,019 $456,266 $782,303 $720,024 $524,338 $442,263 $444,238 $304,186 $215,342

Ratio of expenses to
average net assets 0.85% 0.87% 0.74% 0.62% 0.60% 0.61% 0.62% 0.62% 0.61% 0.59%

Ratio of net
investment income
to average net
assets 4.79% 4.72% 5.09% 3.52% 2.96% 3.68% 6.14% 7.76% 8.69% 6.81%

<PAGE>

Ratio of expenses to
average net assets <F2> <F2> <F2> 0.79%<F3> <F2> <F2> <F2> <F2> <F2> <F2>

Ratio of net
investment income
to average net
assets <F2> <F2> <F2> 3.35%<F3> <F2> <F2> <F2> <F2> <F2> <F2>

The Financial Highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Prime Obligations Fund's most
recent Annual Report to shareholders, which is incorporated by reference in the
SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>

<F1> During 1994, KeyCorp made a capital contribution of approximately
$2,506,000 for losses realized from the disposition of certain securities.

<F2> There were no voluntary fee reductions during the period.

<F3> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
</FN>
</TABLE>

TAX-FREE MONEY MARKET FUND

INVESTMENT OBJECTIVE

The Tax-Free Money Market Fund seeks to provide current interest income free
from federal income taxes consistent with relative liquidity and stability of
principal.

INVESTMENT POLICIES AND STRATEGY

The Tax-Free Money Market Fund pursues its investment objective by

<PAGE>

investing at least 80% of its total assets in short-term, high-quality municipal
securities issued by or on behalf of U.S. states, territories, and possessions.
The interest income on these securities is exempt from federal regular income
tax and alternative minimum tax.

UNDER NORMAL MARKET CONDITIONS, THE TAX-FREE MONEY MARKET FUND PRIMARILY INVESTS
IN:

Short-term municipal obligations such as commercial paper, notes,
and bonds

Tax, revenue, and bond anticipation notes

Variable rate demand notes and municipal bonds, and participation
interests in any of these obligations

IMPORTANT CHARACTERISTICS OF THE TAX-FREE MONEY MARKET FUND'S INVESTMENTS:

QUALITY: The Tax-Free Money Market Fund invests only in instruments that are
rated at the time of purchase in the highest category by two or more NRSROs* or
in the highest category if rated by only one NRSRO, or if unrated, determined to
be of equivalent quality. The Board of Trustees has established policies to
ensure that the Tax-Free Money Market Fund invests in high quality, liquid
instruments. For more information on ratings, see the Appendix to the SAI.

MATURITY: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.

A large portion of the securities held by the Tax-Free Money Market Fund are
supported by letters of credit from banks and other financial institutions.
Changes in the credit quality of these institutions could cause losses to the
Tax-Free Money Market Fund and affect its share price. The Tax-Free Money Market
Fund is subject to credit risk, interest rate risk, inflation risk, and market
risk. The Tax-Free Money Market Fund is also subject to the risks common to
mutual funds that invest in municipal debt securities, i.e., tax-exempt status
risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.

<PAGE>

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Tax-Free Money Market Fund. You
will note in the table that you do not pay fees of any kind when you purchase,
exchange, or redeem shares of the Tax-Free Money Market Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1>

<S> <C>
Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>

The Annual Fund Operating Expense table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Tax-Free Money
Market Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE TAX-FREE MONEY MARKET
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the Tax-Free Money Market Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical expenses of the Tax-Free Money Market Fund adjusted to reflect
anticipated expenses.

<PAGE>

Annual Fund Operating Expenses

<S> <C>
(as a percentage of average daily net assets)
Management Fee .35%
Other Expenses<F1> .45%
-----
Total Fund Operating Expenses .80%
=====
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing fees
the Tax-Free Money Market Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>

</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Tax-Free Money Market
Fund.

Example: You would pay the following expenses on a $1,000 investment
in the Tax-Free Money Market Fund, assuming: (1) a 5% annual return
and (2) redemption at the end of each time period.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Tax-Free Money
Market Fund $8 $26 $44 $99
</TABLE>

<PAGE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FOR MORE INFORMATION ABOUT OTHER SECURITIES IN WHICH THE TAX-FREE MONEY MARKET
FUND CAN INVEST, SEE "OTHER SECURITIES AND INVESTMENT PRACTICES" AND THE SAI.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Tax-Free Money Market Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Tax-Free Money Market Fund for each of the periods indicated.

<PAGE>

<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year toal return.]

Year Year Year Year Year Year Year Year Year Aug. 24, 1988
Ended Ended Ended Ended Ended Ended Ended Ended Ended to
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct.31, Oct. 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988<F5>

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------

Investment
Activities
Net investment
income 0.030 0.030 0.034 0.021 0.020 0.027 0.043 0.054 0.059 0.010

Distributions
Net investment
income (0.030) (0.030) (0.034) (0.021) (0.020) (0.027) (0.043) (0.054) (0.059) (0.010)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------

Total Return 3.07% 3.04% 3.42% 2.17% 2.06% 2.77% 4.44% 5.48% 6.04% 1.00%<F3>

RATIOS/
SUPPLEMENTAL DATA:
Net Assets,
End of Period(000) $412,224 $344,796 $307,726 $198,561 $189,351 $151,012 $129,601 $134,652 $ 85,556 $ 67,169

Ratio of expenses
to average net
assets 0.73% 0.78% 0.61% 0.60% 0.59% 0.61% 0.62% 0.63% 0.58% 0.42%<F4>

Ratio of net
investment income
to average
net assets 3.03% 2.97% 3.36% 2.14% 2.04% 2.70% 4.29% 5.32% 5.88% 5.32%<F4>

Ratio of expenses
to average net
assets<F1> 0.74% 0.80% 0.62% 0.79% 0.60% <F2> <F2> <F2> 0.67% 0.62%<F4>

Ratio of net
investment income
to average
net assets<F1> 3.02% 2.95% 3.35% 1.95% 2.02% <F2> <F2> <F2> 5.79% 5.12%<F4>

The Financial Highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Tax-Free Money Market Fund's
most recent Annual Report to shareholders, which is

<PAGE>

incorporated by reference into the SAI. If you would like a copy of
the Annual Report, write or call us at 800-KEY-FUND.
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.

<F2> There were no voluntary fee waivers during the period.

<F3> Not annualized.

<F4> Annualized.

<F5> Period of commencement of operations.

</FN>
</TABLE>

U.S. GOVERNMENT OBLIGATIONS FUND

INVESTMENT OBJECTIVE

The U.S. Government Obligations Fund seeks to provide current income consistent
with liquidity and stability of principal.

INVESTMENT POLICIES AND STRATEGY

The U.S. Government Obligations Fund pursues its investment objective by
investing only in short-term U.S. Government securities backed by the full faith
and credit of the U.S. Treasury, and repurchase agreements collateralized by
these securities.

UNDER NORMAL MARKET CONDITIONS, THE U.S. GOVERNMENT OBLIGATIONS FUND PRIMARILY
INVESTS IN:

U.S. Treasury bills, notes, and other obligations issued or guaranteed
by the U.S. Government

Repurchase Agreements collateralized by obligations of the U.S. Government

IMPORTANT CHARACTERISTICS OF THE U.S. GOVERNMENT OBLIGATIONS FUND'S
INVESTMENTS:

QUALITY: The U.S. Government Obligations Fund invests only in obligations
of the U.S. Government. The Board of Trustees has established policies
to ensure that the U.S. Government Obligations Fund invests in high

<PAGE>

quality, liquid instruments and repurchase agreements. For more information
on ratings, see the Appendix to the SAI.

MATURITY: Weighted average maturity of 90 days or less. Individual investments
may be purchased with remaining maturities ranging from one day to 397 days. The
U.S. Government Obligations Fund intends to maintain a weighted average maturity
of 60 days or less.

The U.S. Government Obligations Fund is subject to interest rate risk, inflation
risk, and market risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.

FOR MORE INFORMATION ABOUT OTHER SECURITIES IN WHICH THE U.S. GOVERNMENT
OBLIGATIONS FUND CAN INVEST, SEE "OTHER SECURITIES AND INVESTMENT
PRACTICES" AND THE SAI.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the U.S. Government Obligations Fund.
You will note in the table that you do not pay fees of any kind when you
purchase, exchange, or redeem shares of the U.S.
Government Obligations Fund.

<TABLE>
<CAPTION>
Shareholder Investor Select
Transaction Shares Shares
Expenses<F1>

<S> <C> <C>
Sales Charge Imposed NONE NONE
on Purchases
Sales Charge Imposed NONE NONE
on Reinvested Dividends
Deferred Sales Charge NONE NONE
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
Redemption Fees NONE NONE
Exchange Fees NONE NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the U.S. Government
Obligations Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE U.S. GOVERNMENT
OBLIGATIONS FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the U.S. Government Obligations Fund,
providing shareholder services, and other activities. The expenses shown are
estimated based on historical expenses of the U.S. Government Obligations Fund
adjusted to reflect anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Investor Select
Operating Expenses Shares Shares

<S> <C> <C>
(as a percentage of
average daily net assets)
Management Fee .35% .35%
Other Expenses .25% .50%<F1>
----- -----
Total Fund Operating
Expenses .60% .85%
===== =====
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing fees
the U.S. Government Obligations Fund expects to pay. See "Organization
and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

<PAGE>

The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the
U.S. Government Obligations Fund.

Example: You would pay the following expenses on a $1,000 investment
in the U.S. Government Obligations Fund, assuming: (1) a 5% annual
return and (2) redemption at the end of each time period.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Investor Shares $6 $19 $33 $75
Select Shares $9 $27 $47 $105
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the U.S. Government Obligations Fund's returns
and operating expenses over time. This table shows the results of an investment
in one share of the U.S. Government Obligations Fund for each of the periods
indicated.

<PAGE>

<TABLE>
<CAPTION>
U.S. Government Obligations Fund

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

INVESTOR SELECT
SHARES SHARES SELECT SHARES
Period Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1997<F2> 1997<F2> 1996 1995<F3> 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- --------- -------- ------- ------- ------- -------

Investment
Activities
Net
investment
income 0.041 0.047 0.049 0.052 0.032 0.026 0.036 0.060

Distributions
Net
investment
income (0.041) (0.047) (0.049) (0.052) (0.032) (0.026) (0.036) (0.060)
-------- -------- --------- -------- ------- ------- ------- -------

NET ASSET
VALUE,
END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======= ======= ======= =======

Total Return 4.19%<F4> 4.75% 4.96% 5.38% 3.30% 2.62% 3.66% 6.14%

Year Year Year
Ended Ended Ended
Oct. 31, Oct.31, Oct. 31,
1990 1989 1988

<C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000
------- -------- -------

Investment
Activities
Net
investment
income 0.076 0.081 0.063

Distributions
Net
investment
income (0.076) (0.081) (0.063)
------- -------- -------

NET ASSET
VALUE,
END OF
PERIOD $ 1.000 $ 1.000 $ 1.000
======= ======== =======

Total Return 7.83% 8.44% 0.00%

<PAGE>

Total Return 4.19%<F4> 4.75% 4.96% 5.38% 3.30% 2.62% 3.66% 6.14%

RATIOS/
SUPPLEMENTAL
DATA:
Net Assets,
End of
Period
(000) $456,133 $1,235,475 $1,357,817 $964,929 $412,048 $515,734 $579,836 $430,248

Ratio of
expenses
to average
net assets 0.56%<F5> 0.74% 0.61% 0.58% 0.63% 0.60% 0.60% 0.60%

Ratio of net
investment
income to
average
net assets 4.95%<F5> 4.75% 4.84% 5.28% 3.20% 2.57% 3.50% 5.92%

Ratio of
expenses
to average
net
assets<F1> <F6> <F6> <F6> 0.60% 0.80% <F6> <F6> <F6>

Ratio of net
investment
income to
average
net
assets<F1> <F6> <F6> <F6> 5.26% 3.03% <F6> <F6> <F6>

Total Return 7.83% 8.44% 0.00%

RATIOS/
SUPPLEMENTAL
DATA:
Net Assets,
End of
Period
(000) $376,021 $152,718 $105,430

Ratio of
expenses
to average
net assets 0.62% 0.62% 0.61%

Ratio of net
investment
income to
average
net assets 7.56% 8.16% 6.26%

Ratio of
expenses
to average
net
assets<F1> <F6> <F6> <F6>

Ratio of net
investment
income to
average
net
assets<F1> <F6> <F6> <F6>

The financial highlights were audited by Coopers & Lybrand L.L.P.
There is no information on Investor Shares, since they were not sold
prior to January 8, 1997. This information should be read in conjunction
with the U.S. Government Obligations Fund's most recent Annual Report
to shareholders, which is incorporated by reference in the SAI. If

<PAGE>

you would like a copy of the Annual Report, write or call us at 800-KEY-FUND.

<FN>
<F1> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.

<F2> Effective January 8, 1997, the Fund designated the existing shares as
Select Shares and commenced offering Investor Shares.

<F3> Effective June 5, 1995, the Victory U.S. Treasury Money Market Portfolio
merged into the U.S. Government Obligations Fund. Financial highlights
for the periods prior to June 5, 1995 represent the U.S. Government
Obligations Fund.

<F4> Not annualized.

<F5> Annualized.

<F6> There were no voluntary fee reductions during the period.
</FN>
</TABLE>

RISK FACTORS

It is important to keep in mind one basic principle of investing:
the greater the risk, the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential
reward.

This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk you can create your own customized investment plan. Some limitations on the
Funds' investments are described in the section that follows. "Other Securities
and Investment Practices" at the end of this prospectus provides additional
information about the securities mentioned in the overview of each of the Funds.
As with any mutual fund, there is no guarantee that a Fund will earn income or
show a positive total return over time. Over time, money market mutual funds
have offered investors the least amount of principal risk; therefore, the
potential return usually is lower than for other types of investments.

<PAGE>

THE FOLLOWING RISK IS COMMON TO ALL MUTUAL FUNDS:

THE FOLLOWING RISKS ARE COMMON TO ALL MONEY MARKET MUTUAL FUNDS:

CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security will be
unable to make timely payments of interest or principal. Although the Funds
invest only in high-quality securities, the interest or principal payments are
not insured or guaranteed. This risk does not apply to the U.S. Government
Obligations Fund. Credit risk is measured by NRSROs such as S&P, Fitch, or
Moody's.

The following risk is common to mutual funds that invest in municipal debt
securities:

TAX-EXEMPT STATUS RISK is the risk that a municipal debt security issued as a
tax-exempt security may be declared taxable by the Internal Revenue Service.

<PAGE>

The following risk is common to mutual funds that invest in the securities of a
single state:

CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited number of
high-quality securities of a particular type may be available. Concentration and
diversification risk is greater for Funds that invest primarily in the
securities of a single state.

INVESTMENT LIMITATIONS

The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.

To help reduce risk and maintain its $1.00 per share price, the Funds have
adopted limitations on some investment policies. These limits involve a Fund's
ability to borrow money and the amount it can invest in various types of
securities, including illiquid securities. Certain limitations can be changed
only with the approval of shareholders. Victory's Board of Trustees can change
other investment limitations without shareholder approval. See "Other Securities
and Investment Practices" and the SAI for more information.

Each Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations and U.S. banks). Each
Fund limits its borrowing to 33 1/3% of its total assets. Borrowing may be in
the form of selling a security that it owns and agreeing to repurchase that
security later at a higher price. The Funds do not intend to borrow for
leveraging purposes.

DIVERSIFICATION REQUIREMENTS

SEC REQUIREMENT: Each Fund, except the Ohio Municipal Money Market Fund, is
"diversified" according to certain federal securities provisions regarding the
diversification of its assets. Generally, under those provisions, a Fund must
invest at least 75% of its total assets so that no more than 5% of its total
assets are invested in the securities of any one issuer.

IRS REQUIREMENT: Each Fund, including the Ohio Municipal Money Market

<PAGE>

Fund, intends to comply with certain federal tax requirements regarding the
diversification of its assets, which generally are less restrictive than the
securities provisions.

SEC MONEY MARKET MUTUAL FUND REQUIREMENT: Each Fund also intends to comply with
certain more stringent federal securities diversification provisions for money
market funds. Generally, to comply with those provisions, no Fund (except Ohio
Municipal Money Market Fund) will invest more than 5% of its total assets in the
securities of any one issuer at the time of purchase. The Ohio Municipal Money
Market Fund must invest at least 75% of its total assets so that no more than 5%
of its total assets are invested in the securities of any one issuer at the time
of purchase. These diversification provisions and requirements are discussed in
the SAI.

INVESTMENT PERFORMANCE

Past performance is not a guarantee of future results. You may obtain
the current 7-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 8:00 p.m. Eastern
Time Monday through Friday.

The "7-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to earn the same net interest
income throughout that year. To calculate 7-day yield, net investment income per
share for the most recent 7 days is multiplied by 52 (52 weeks/year), then
divided by the NAV ($1.00) to get a percentage, which is the 7-day yield.

YIELD is a measure of net interest income.

<PAGE>

EFFECTIVE YIELD is similar to yield, except it is assumed that dividends are
reinvested and compounded.

TAX-EQUIVALENT YIELD shows the taxable yield you would have to earn before taxes
to receive a yield equal to an investment in one of the tax-free funds.

AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend income
plus capital appreciation. It is the sum of all parts of your investment return
for periods greater than one year.

TOTAL RETURN is the sum of all parts of a Fund's investment return.

SHARE PRICE

Each Fund's share price, called its net asset value (NAV), is calculated each
business day (normally at 2:00 p.m. Eastern Time). The Ohio Municipal Money
Market Fund's NAV is normally calculated at 12:00 p.m. Eastern Time. Shares are
purchased, exchanged, and redeemed at the next share price calculated after your
investment instructions are received and accepted. A business day is a day on
which the Federal Reserve Bank of Cleveland and the New York Stock Exchange are
open for trading or any day in which enough trading has occurred in the
securities held by a Fund to affect the NAV materially. If your account is
established with an Investment Professional or a bank, you may not be able to
purchase or sell shares on other holidays when the Federal Reserve Bank of
Cleveland is closed, but the New York Stock Exchange is open.

The Funds seek to maintain a $1.00 NAV, although there is no guarantee that they
will be able to do so. The Funds use the "Amortized Cost Method" to value
securities. You can read about this method in the SAI.

<PAGE>

Each Fund's performance can be found once a week in The Wall Street Journal and
other newspapers.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-KEY-FUND.

As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of dividends. Dividend distributions are the net interest earned on
investments after expenses. Money market funds usually don't realize capital
gains; however, if a Fund does make a capital gain distribution, it is paid once
a year. As with any investment, you should consider the tax consequences of an
investment in a Fund.

Ordinarily, net income earned on securities owned by a Fund accrues daily, is
declared daily, and is paid monthly. Distributions can be received in one of the
following ways:

REINVESTMENT OPTION

CASH OPTION

A check will be mailed to you no later than 7 days after the pay date.

DIRECTED DIVIDENDS OPTION

You can have distributions automatically reinvested in the same class of

<PAGE>

shares of another fund of the Victory Group. If distributions are reinvested in
a different class of another fund, you may pay a sales charge on the reinvested
distributions.

DIRECTED BANK ACCOUNT OPTION

In most cases, you can have distributions automatically transferred to your bank
checking or savings account. Under normal circumstances, a dividend will be
transferred within 7 days of the dividend payment date. The bank account must
have a registration identical to that of your Fund account.

IMPORTANT INFORMATION ABOUT TAXES

Each Fund intends to continue to qualify as a regulated investment company, in
which case it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders.

Ordinary dividends from a Fund are generally taxable as ordinary income, if
taxable; dividends from a Fund's long-term capital gain are taxable as capital
gain.

Dividends are treated in the same manner for federal income tax purposes whether
you receive them in cash or in additional shares. They may also be subject to
state and local taxes.

Certain dividends paid to you in January will be taxable as if they had been
paid to you in December of the previous year.

When you sell (redeem) or exchange shares of a Fund, you must recognize any gain
or loss. However, as long as the Fund's NAV per share does not deviate from
$1.00, there will be no gain or loss.

Tax statements will be mailed from the Fund every January showing the amounts
and tax status of distributions made to you.

Certain dividends from the Tax-Free Money Market Fund and the Ohio Municipal
Money Market Fund will be exempt from federal regular income tax.

<PAGE>

Certain dividends from the Ohio Municipal Money Market Fund will be exempt from
Ohio state and local taxes.

Because your tax treatment depends on your purchase price and tax position, you
should keep your regular account statements for use in determining your tax.

You should review the more detailed discussion of federal income tax
considerations in the SAI.

THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE FUND.

INVESTING WITH VICTORY

All you need to do to get started is to fill out an application.

If you are looking for a convenient way to open an account for yourself or to
add money to an existing account, Victory can help. The following sections will
describe how to open an account, how to access information on your account, and
how to purchase, exchange, and redeem shares of a Fund. We want to make it
simple for you to do business with us. The sections that follow will serve as a
guide to your investments with Victory. If you have questions about any of this
information, please call one of our customer service representatives at
800-KEY-FUND. They will be happy to assist you.

HOW TO PURCHASE SHARES

When you buy shares of a Fund, your cost will be $1.00 per share.

Shares of the Funds can be purchased in a number of different ways. All you need
to do to get started is to fill out an application. You can send in your
investment by check, wire transfer, exchange from another fund of the Victory
Group, or through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by a Fund.

<PAGE>

The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust or advisory
accounts set up through KeyCorp or its affiliates. The U.S. Government
Obligations Fund offers Investor Shares and Select Shares. The Investor Shares
are available to certain institutions or individuals that meet minimum
investment requirements, and are not subject to a shareholder servicing fee. The
Select Shares are available through certain financial institutions that provide
additional services to their customers who are shareholders of the Fund. Select
Shares are subject to a shareholder servicing fee of up to .25% of the net
assets of that class.

Make your check payable to:
The Victory Funds

Keep the following addresses handy for purchases, exchanges, or redemptions.

REGULAR U.S. MAIL ADDRESS

Send a completed Account Application with your check, bank draft, or money order
to:

The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527

OVERNIGHT MAIL ADDRESS

Use the following address ONLY for overnight packages.

The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

<PAGE>

PHONE: 800-KEY-FUND

WIRE ADDRESS

The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a confirmation number.

State Street Bank and Trust Co.
ABA #011000028

For Credit to DDA
Account #9905-201-1

For Further Credit to Account #
(insert account number, name,
and confirmation number assigned
by the Transfer Agent)

Telephone Number:

800-KEY-FUND
800-539-3863

FAX Number:

800-529-2244

Telecommunication Device for the Deaf (TDD):

800-970-5296

ACH

After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up the ACH feature. Currently, the Funds do not charge a
fee for ACH transfers.

STATEMENTS AND REPORTS

<PAGE>

You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, account activity will be detailed in their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Funds. By January 31 of each year, you will
be mailed an IRS form reporting dividends for the previous year, which will also
be filed with the IRS.

SYSTEMATIC INVESTMENT PLAN

To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank account information and the amount
and frequency of your investment. You can select monthly, quarterly,
semi-annual, or annual investments. You should attach a voided personal check so
the proper information can be obtained. You must first meet the minimum
investment requirement of $500, then we will make automatic withdrawals of the
amount you indicate ($25 or more) from your bank account and invest in shares of
a Fund.

RETIREMENT PLANS

You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional for details
regarding an IRA or other retirement plan that works best for your financial
situation. Generally, funds that pay tax-free dividends are not appropriate
investments for retirement accounts.

All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you may be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest or exchange
into fund shares legally available in your state. If your account falls below
$500, we may ask you to re-establish the minimum investment. If you do not do so
within 60

<PAGE>

days, we may close your account and send you the value of your account.

If you would like to make additional investments after your account is already
established, use the Investment Stub attached to your statement and send it with
your check to the address indicated.

HOW TO EXCHANGE SHARES

You can obtain a list of funds available for exchange by calling the Transfer
Agent at 800-KEY-FUND.

You can exchange shares of a Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of a Fund, you should keep the following
in mind:

Shares of the fund selected for exchange must be available for sale in your
state of residence.

The Fund whose shares you want to exchange and the fund whose shares you want to
buy must offer the exchange privilege.

Shares of the Funds may be exchanged at relative net asset value. However, if
you exchange into a fund with a sales charge, you pay the percentage-point
difference between that fund's sales charge and any sales charge you have
previously paid in connection with the shares you are exchanging. Since the
money market funds do not have a sales charge, if you were to purchase another
fund in the Victory Group that has a 5.75% sales charge, you may pay up to a
5.75% sales charge.

You must meet the minimum purchase requirements for the fund you purchase by
exchange.

<PAGE>

The registration and tax identification numbers of the two accounts must be
identical.

You must hold the shares you buy when you establish your account for at least 7
days before you can exchange them; after the account is open 7 days, you can
exchange shares on any business day.

Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.

HOW TO REDEEM SHARES

There are a number of convenient ways to redeem shares of a Fund. You can use
the same mailing addresses listed for purchases. You will earn dividends up to
the date your redemption request is processed.

If we receive your request by 2:00 p.m. Eastern Time (12:00 p.m. for Ohio
Municipal Money Market Fund), your redemption will be processed the same day.

BY TELEPHONE

The easiest way to redeem shares is by calling 800-KEY-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to redeem, call us and tell us which one
of the following options you would like to use:

Mail a check to the address of record;

Wire funds to a domestic financial institution;

Mail to a previously designated alternate address; or

Electronically transfer the funds via ACH.

All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, nor the Transfer Agent
will be responsible for any losses. If these procedures are not followed, the
Transfer Agent may be liable to you for losses resulting from unauthorized
instructions.

If there is an unusual amount of market activity and you cannot reach

<PAGE>

the Transfer Agent by telephone, consider placing your order by mail.

BY MAIL

Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. All account owners must sign. A signature
guarantee is required for the following redemption requests:

Redemptions over $10,000;

Your account registration has changed within the last 15 days;

The check is not being mailed to the address on your account;

The check is not being made payable to the owner of the account; or

If the redemption proceeds are being transferred to another Victory Group
account with a different registration.

A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.

BY WIRE

If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 2:00 p.m.
Eastern Time (12:00 p.m. for Ohio Municipal Money Market Fund), your
funds will be wired on the same business day.

BY ACH

Normally, your redemption will be processed on the same day or the
next day if your instructions are received after 2:00 p.m. Eastern
Time (12:00 p.m. for Ohio Municipal Money Market Fund). It will be
transferred by ACH as long as the transfer is to a domestic bank.

Under certain emergency circumstances, the right of redemption may
be suspended. Redemption proceeds from the sale of shares purchased

<PAGE>

by a check may be held until the purchase check has cleared. If you request a
complete redemption, any dividends accrued will be included with the redemption
proceeds.

CHECK WRITING

Shareholders of the following Funds may withdraw funds by writing a check for
$100.00 or more:

Ohio Municipal Money Market Fund
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund

In order to activate the check writing option on your account, you must sign a
signature card. After your completed signature card is received, an initial
supply of checks will be mailed to you in about three weeks. There is no charge
for checks; however, you will be charged for stopping payment of a check or for
insufficient funds. You may not close your account by writing a check. Please
call 800-KEY-FUND to request a signature card.

SYSTEMATIC WITHDRAWAL PLAN

If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to you or the person you designate.
The minimum withdrawal is $25, and you must have an account value of $5,000 or
more to start withdrawals. Once again, we will need a voided personal check to
activate this feature. You should be aware that your account eventually may be
depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your account value falls below $500, we may ask
you to bring the account back to the $500 minimum. If you decide not to increase
your account to the minimum balance, your account may be closed and the proceeds
mailed to you.

ORGANIZATION AND MANAGEMENT OF THE FUNDS

We want you to know who plays what role in your investment and how
they are related. This section discusses the organizations employed

<PAGE>

by the Funds to service their shareholders. They are paid a fee for
their services.

ABOUT VICTORY

Each Fund is a member of the Victory Funds, a group of 30 distinct investment
portfolios, and is organized as a Delaware business trust. Some of the Victory
Funds have been operating since 1983.

The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.

THE INVESTMENT ADVISER

One of a Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation registered as
an investment adviser with the SEC. KAM is a subsidiary of KeyBank National
Association, a wholly-owned subsidiary of KeyCorp. On February 28, 1997, KAM
became the surviving corporation after the reorganization of four indirect
investment adviser subsidiaries of KeyCorp. Affiliates of the Adviser manage
approximately $60 billion for a limited number of individual and institutional
clients.

The Advisory Agreement allows the Adviser to hire employees of its affiliates.
It also allows KAM to choose brokers or dealers to handle the purchases and
sales of the Fund's securities. Subject to Board approval, Key Investments, Inc.
(KII) and/or Key Clearing Corporation (KCC) may act as clearing broker for the
Funds' security transactions in accordance with procedures adopted by the Funds,
and receive commissions or fees in connection with their services to the Funds.
Both KII and KCC are wholly-owned indirect subsidiaries of KeyCorp and are
affiliates of the Adviser.

Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser
and Society Asset Management, Inc. (formerly the adviser) was the sub-adviser to
each of the Funds. During the fiscal year ended October 31, 1997, KeyCorp Mutual
Fund Advisers, Inc. was paid an advisory fee at an annual rate based on the
average daily net assets of each Fund as follows:

<PAGE>

<TABLE>
<CAPTION>
Advisory
Fund Fees (after waivers)

<S> <C>
Financial Reserves Fund .46%
Ohio Municipal Money
Market Fund .37%
Prime Obligations Fund .35%
Tax-Free Money Market Fund .34%
U.S. Government
Obligations Fund .35%
</TABLE>

MANAGEMENT OF THE FUNDS

TRUSTEES

Supervise each Fund's activities.

INVESTMENT ADVISER

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Manages each Fund's business and investment activities.

The Funds are supervised by the Board of Trustees, who monitor the services
provided to investors.

THE ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT

<PAGE>

BISYS Fund Services is the Administrator and the Distributor. The Funds pay
BISYS a fee as the Administrator at the following annual rate based on each
Fund's average daily net assets:

.15% for portfolio assets of $300 million and less,

.12% for the next $300 million through $600 million of portfolio assets;
and

.10% for portfolio assets greater than $600 million.

Under a Sub-Administration Agreement, BISYS pays KAM a fee at the annual rate of
up to .05% of each Fund's average daily net assets to perform some of the
administrative duties for the Funds. The Funds do not pay BISYS a fee for its
services as Distributo. Each Fund pays BISYS Fund Services Ohio, Inc. a fee for
serving as the Funds' Accountant.

The Distributor may provide sales support, including cash or other compensation,
to dealers for selling shares of the Funds. Payments may be in the form of
trips, tickets, and/or merchandise offered through sales contests. It does this
at its own expense, and not at the expense of a Fund or its shareholders.

SHAREHOLDER SERVICING PLAN

The Funds have adopted a Shareholder Servicing Plan for shares of the following
funds:

Ohio Municipal Money Market Fund
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund--Select Shares

<PAGE>

The shareholder servicing agent performs a number of services for its customers
who are shareholders of a Fund. It establishes and maintains accounts and
records, processes dividend and distribution payments, arranges for bank wires,
assists in transactions, and changes account information. For these services the
Funds pay a fee at an annual rate of up to .25% of the average daily net assets
of the appropriate class of shares serviced by the agent. The Funds may enter
into agreements with various shareholder servicing agents, including KeyBank
National Association and its affiliates, other financial institutions, and
securities brokers. The Funds may pay a servicing fee to broker-dealers and
others who sponsor "no transaction fee" or similar programs for the purchase of
shares. Shareholder servicing agents may waive all or a portion of their fee
periodically.

DISTRIBUTION PLAN

Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Financial Reserves Fund, the Ohio
Municipal Money Market Fund, and the Investor Shares of the U.S. Government
Obligations Fund. The shares of these Funds currently do not pay expenses under
this plan.

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P. serves as independent accountants to the Funds.

LEGAL COUNSEL

Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.

HOW THE FUNDS ARE ORGANIZED

SHAREHOLDERS

FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS

Advise current and prospective

<PAGE>

shareholders on their Fund investments.

TRANSFER AGENT/SERVICING AGENT

State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholders' accounts.

DISTRIBUTOR AND ADMINISTRATOR

BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219

As Distributor, markets the Fund,
distributes shares through Investment
Professionals. As Administrator, handles the day-to-day operations
of the Fund.

SUB-ADMINISTRATOR

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Handles some day-to-day operations of the Fund.

FUND ACCOUNTANT

BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219

Calculates the value of Fund shares and keeps certain Fund records.

<PAGE>

CUSTODIAN

Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114

Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.

ADDITIONAL INFORMATION

Some additional information you should know about the Funds.

SHARE CLASSES

The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.

YOUR RIGHTS AS A SHAREHOLDER

All shareholders of each class have equal voting, liquidation, and other rights.
As a shareholder of a Fund, you have rights and privileges similar to those
enjoyed by other corporate shareholders. Delaware Trust law limits the liability
of shareholders.

<PAGE>

CODE OF ETHICS

Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to each Fund must conform.
Investment personnel must refrain from certain trading practices and are
required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.

BANKING LAWS

Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment adviser, transfer agent, custodian, or shareholder servicing
agent. They may also purchase shares of such a company and pay third parties for
performing these functions for their customers. Should these laws change in the
future, the Trustees would consider selecting another qualified firm so that all
services would continue.

SHAREHOLDER COMMUNICATIONS

You will receive unaudited Semi-Annual Reports and audited Annual Reports on a
regular basis from each Fund. In addition, you will also receive updated
prospectuses or supplements to this prospectus. In order to eliminate duplicate
mailings to an address at which two or more shareholders with the same last name
reside, the Funds will send only one copy of the above communications.

If you would like to receive additional copies of any materials, please call the
Funds at 800-KEY-FUND.

The securities described in this prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this prospectus and the SAI.

OTHER SECURITIES AND INVESTMENT PRACTICES

The following table lists some of the types of securities each of the Funds may
choose to purchase under normal market conditions. The majority of the portfolio
for each of the Funds other than the tax-exempt Funds is made up of repurchase
agreements, short-term debt obligations, and U.S. Government obligations, while
the tax-exempt Funds are made up of municipal securities. However, the Funds are
also permitted

<PAGE>

to invest in other securities as shown in the table below. For temporary
defensive purposes, each Fund may hold up to 100% of its total assets in cash or
short-term money market instruments. For more information on ratings and
detailed descriptions of each of the investments below, see the SAI.

List of Allowable Financial Ohio Municipal Prime Tax-Free U.S.Government
Investments and Reserves Money Market Obligations Money Market Obligations
Investment Practices Fund Fund Fund Fund Fund

<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER. Short-term
obligations issued by
banks, corporations,
broker dealers, and
other entities <F1> <F1>
to finance their current (20% 20%
operations. <F1> taxable) <F1> taxable) none

REPURCHASE AGREEMENTS.
An agreement to sell and
repurchase a security at a
stated price plus interest.
The seller's obligation to
the Fund is secured by
collateral. Subject to the
receipt of an exemptive order
from the SEC, the Adviser
may combine repurchase <F1>
transactions among one Collateralized
or more Victory funds by U.S. Treasury
into a single transaction. <F1> 20% <F1> 20% obligations

CERTIFICATES OF DEPOSIT.
A commercial bank's
obligations to repay
funds deposited with it,

<PAGE>

earning specified rates
of interest over given
periods.<F3> <F1> 20% <F1> 20% none

MASTER DEMAND NOTES.
Unsecured obligations
that permit the investment
of fluctuating amounts by
the Funds at varying
interest rates. <F1> 20% <F1> 20% none

SHORT-TERM FUNDING Agreements. Similar to guaranteed investment contracts, or
"GIC's," and issued by insurance companies. The Funds invest cash for a
specified period and guaranteed amount of interest as stated in the contract.
(Contracts cannot be sold and may be
considered illiquid.) 10% none 10% none none

U.S. GOVERNMENT SECURITIES.
Securities issued or
guaranteed by the U.S.
Government, its agencies,
or instrumentalities. Some
are direct obligations of
the U.S. Treasury; others
are obligations only of Only direct
the U.S. agency or U.S. Treasury
instrumentality.<F3> <F1> 20% <F1> 20% obligations

RESTRICTED SECURITIES.
Securities that are not
registered under federal
securities laws but that
may be traded among
qualified institutional
investors and the Fund. <F1> <F1>
Some of these securities (20% (20%
may be illiquid. <F1> taxable) <F1> taxable) none

<PAGE>

TIME DEPOSITS.
Non-negotiable deposits
in banks that pay a
specified rate of interest
over a set period of
time.<F3> <F1> 20% <F1> 20% none

TAX AND BOND ANTICIPATION
Notes. Issued in expectation
of future revenues. none <F1> none <F1> none

<F2>VARIABLE AND FLOATING RATE
SECURITIES. Investment
grade instruments, some
of which may be derivatives
or illiquid, with interest
rates that reset periodically <F1> <F1> <F1> <F1> none

<FN>
% Percentage of total assets

<F1> No limitation of usage; Fund may be using currently.

<F2> Indicates a -derivative security,- whose value is linked to, or derived
from, another security, instrument , or index.

<F3> The Funds may concentrate their investments in government securities and
certain instruments issued by domestic banks, unless subject to other
restrictions.
</FN>
</TABLE>

List of Allowable Financial Ohio Municipal Prime Tax-Free U.S. Government
Investments and Reserves Money Market Obligations Money Market Obligations
Investment Practices Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>

<PAGE>

TAX-EXEMPT COMMERCIAL
PAPER. Short-term
obligations that are
exempt from state and/or
federal income tax. <F1> 80-100% <F1> 0-100% none

EURODOLLAR OBLIGATIONS.
Obligations of foreign
branches of U.S. Banks
and domestic branches
of foreign banks. Subject
to 25% concentration
by industry. 25% 20% 25% 20% none

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that is purchased for
delivery at a later time. The market value may change before the delivery
date, and the value is included in
the NAV. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

ZERO COUPON BONDS. These
securities are purchased at
a discount from the face
value. The face value is
received at maturity, with
no interest payments
before then. These may be
subject to greater risks of
price fluctuation than Only U.S.
securities that periodically <F1> <F1> Treasury
pay interest. <F1> tax-exempt <F1> tax-exempt obligations

<F2>MORTGAGE-BACKED SECURITIES.
Instruments secured
by a pool of mortgages.

U.S. Government. Issued or
guaranteed by the U.S.
Government or its
agencies; i.e., GNMAs,

<PAGE>

FNMAs, SLMAs.<F4>

Non-U.S. Government. Only U.S.
Secured by <F1> <F1> Treasury
non-government entities. <F1> tax-exempt <F1> tax-exempt obligations

INVESTMENT COMPANY
SECURITIES. Shares of
other mutual funds with
similar investment
objectives. The
following limitations
apply: (1) No more than
5% of a Fund's total
assets may be invested
in one mutual fund, (2)
a Fund and its
affiliates may not own
more than 3% of the
securities of any one
mutual fund, and (3) no
more than 10% of a
Fund's total assets
may be invested in 5% 5% 5% 5% 5%
combined mutual 3% 3% 3% 3% 3%
fund holdings. 10% 10% 10% 10% 10%

ILLIQUID SECURITIES.
Investments that cannot
be readily sold within seven
days in the usual course
of business at
approximately the price
at which a Fund values 10% of 10% of 10% of 10% of
them. net assets net assets net assets net assets none

with respect
SECURITIES OF ANY ONE ISSUER. no more to 75%, no no more no more no more
than 5% more than 5% than 5% than 5% than 5%

BORROWING, REVERSE
REPURCHASE AGREEMENTS.
The borrowing of money
from banks (up to 5% of

<PAGE>

total assets) or through
reverse repurchase
agreements (up to 33 1/3%
of total assets). The
Funds will not use
borrowing to create. 5% 5% 5% 5% 5%
leverage 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

SECURITIES LENDING. To generate additional income, a Fund may lend its portfolio
securities. A Fund will receive collateral for the value of the security plus
any interest due. A Fund only will enter into securities lending arrangements
with entities that the Adviser has determined are creditworthy. Subject to the
receipt of an exemptive order from the SEC, Key Trust Company of Ohio, N.A., the
Funds' Custodian and lending agent, may earn a fee based on the amount of
income earned on the
investment of collateral. 33 1/3% none 33 1/3% none 331/3%
% Percentage of total assets.

<FN>
<F1> No limitation of usage; Fund may be using currently.

<F2> Indicates a "derivative security," whose value is linked to, or derived
from, another security, instrument, or index.

<F3> The Funds may concentrate their investments in government securities and
certain instruments issued by domestic banks, unless subject to other
restrictions

<F4> Obligations of entities such as the Government National Mortgage
Association (GNMA) and the Export-Import Bank of the U.S. are backed
by the full faith and credit of the U.S. Treasury. Others, such as
</FN>
</TABLE>

<PAGE>

the Federal National Mortgage Association (FNMA) are supported by the right
of the issuer to borrow from the U.S. Treasury. Still others, such as the
Student Loan Marketing Association (SLMA), Federal Farm Credit Bank (FFCB),
Federal Home Loan Bank (FHL), and the Federal Home Loan Mortgage
Corporation (FHLMC) are supported only by the credit of the federal agency.

This page is intentionally left blank.

Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469

LOGO(R)
Victory Funds

(R)PRINTED ON RECYCLED PAPER

VF/MMMF-PRO (3/98)

<PAGE>

LOGO (R)

VICTORY FUNDS

PROSPECTUS

NATIONAL
MUNICIPAL
BOND FUND

NEW YORK
TAX-FREE FUND

OHIO MUNICIPAL
BOND FUND

800-KEY-FUND(R) or 800-539-3863

March 1, 1998

THE VICTORY PORTFOLIOS
PROSPECTUS FOR:
NATIONAL MUNICIPAL BOND FUND
NEW YORK TAX-FREE FUND
OHIO MUNICIPAL BOND FUND

800-KEY-FUND(R) 800-539-3863

The three Victory Funds discussed in this prospectus (the Funds) are a part of
The Victory Portfolios (Victory), an open-end investment management company. The
Funds are non-diversified mutual funds. This prospectus explains the objectives,
policies, risks, and strategies of the Funds. You should read this prospectus
before investing in one of these Funds and keep it for future reference. A
detailed Statement of Additional Information (SAI) describing each of the Funds
is also available for your review. The SAI has been filed with the Securities
and Exchange Commission (SEC), and is incorporated by reference into this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains

<PAGE>

the SAI, material incorporated by reference into this Prospectus and the SAI,
and other information regarding registrants file electronically with the SEC. If
you would like a free copy of the SAI, please request one by calling us at
800-KEY-FUND.

Shares of the Funds are: Not insured by the FDIC;

Not deposits or other obligations of, or guaranteed by, any KeyBank, any of its
affiliates, or any other bank;

Subject to investment risks, including possible loss of the principal amount
invested.

These securities have not been approved or disapproved by the Securities and
Exchange Commission or any securities regulatory authority of any state, nor has
the Securities and Exchange Commission or any such state authority passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.

March 1, 1998

<PAGE>

TABLE OF CONTENTS

Introduction 2

AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights

National Municipal Bond Fund 4
New York Tax-Free Fund 6
Ohio Municipal Bond Fund 8

Risk Factors 10

Investment Limitations 11

Investment Performance 12

Share Price 12

Dividends,
Distributions, and Taxes 13

INVESTING WITH VICTORY 15

Choosing a Share Class 15
How to Purchase Shares 18
How to Exchange Shares 20
How to Redeem Shares 21

Organization and Management of the Funds 22

Additional Information 25

Other Securities and Investment Practices 26

KEY TO
FUND INFORMATION

OBJECTIVE AND STRATEGY
The goals and the strategy that a Fund plans to use in pursuing its investment
objective.

RISK FACTORS
The risks that you may assume as an investor in a Fund.

EXPENSES
The costs you will pay as an investor in a Fund, including sales charges and
ongoing expenses.

FINANCIAL HIGHLIGHTS

<PAGE>

A table that shows a Fund's historical performance by share class. This table
also summarizes previous operating expenses.

INVESTMENT OBJECTIVE AND STRATEGY

OBJECTIVE
The NATIONAL MUNICIPAL BOND FUND seeks to provide a high level of current
interest income exempt from federal income tax, as is consistent with the
preservation of capital.

The NEW YORK TAX-FREE FUND seeks to provide a high level of current income
exempt from federal, New York State, and New York City income taxes, consistent
with the preservation of shareholders' capital.

The OHIO MUNICIPAL BOND FUND seeks to provide a high level of current interest
income which is exempt from both federal income tax and Ohio personal income
tax.

STRATEGY
Each of the Funds pursues its investment objective by investing primarily in
general obligation bonds and revenue bonds. However, each of the Funds has
unique investment strategies and its own risk/reward profile. Please review the
section about the Fund in which you are interested in investing and "Other
Securities and Investment Practices" for an overview of the Funds.

RISK FACTORS

The Funds are not insured by the FDIC. The New York Tax-Free Fund and Ohio
Municipal Bond Fund generally limit their investments to a single state.
Therefore, an investment in one of these Funds may involve additional risks,
including economic, political, or credit risks specific to that state. In
addition, there are other potential risks, which are discussed in the section
"Risk Factors."

WHO SHOULD INVEST

Investors in higher tax brackets seeking tax-exempt income
Investors seeking income over the long term
Investors with moderate risk tolerance
Investors seeking higher potential returns than are provided by money market
funds Investors willing to accept price and dividend fluctuations

<PAGE>

FEES AND EXPENSES

The National Municipal Bond Fund and New York Tax-Free Fund offer two classes of
shares: Class A and Class B. The Ohio Municipal Bond Fund offers only Class A
shares. If you purchase Class A shares of a Fund, you may pay a sales charge of
up to 5.75% of the offering price, depending on the amount you invest. If you
purchase Class B shares of a Fund, you will not pay an initial sales charge;
however, you may pay a deferred sales charge if you sell (redeem) your shares
within six years of purchase, and you will pay additional distribution expenses.
In either case, you also will incur expenses for investment advisory,
administrative, and shareholder services, all of which are included in a Fund's
expense ratio. See "Choosing a Share Class."

PURCHASES
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. The initial investment must be
accompanied by a Fund's Account Application. Fund shares may be purchased by
check, Automated Clearing House, or wire. See "How to Purchase Shares."
Generally, municipal bond funds are not appropriate investments for IRA
accounts.

DIVIDENDS/DISTRIBUTIONS
Income is accrued daily and is declared and paid monthly. Any net
capital gains realized by a Fund are paid as dividends annually. A

<PAGE>

Fund can send your dividends directly to you by mail, credit them to your bank
account, reinvest them in the Fund, or invest them in another fund of the
Victory Group. The "Victory Group" includes other funds of The Victory
Portfolios. You can make this choice when you fill out an Account Application.
See "Dividends, Distributions, and Taxes."

GENERAL INFORMATION ABOUT EACH OF THE FUNDS

<TABLE>
<CAPTION>
Estimated
Victory Fund Inception Annual Expenses Maximum Newspaper
Date After Waivers Sales Charge Abbreviation<F1>
(as a % of net assets)

<S> <C> <C> <C> <C>
National Municipal
Bond Fund -- Class A 2/3/94 .65% 5.75% Victory
NatMunA

National Municipal
Bond Fund -- Class B 9/26/94 1.89% 5.00% Victory
NatMunB

New York Tax-Free
Fund -- Class A 2/11/91 .95% 5.75% Victory
NYTxFA

New York Tax-Free
Fund -- Class B 9/26/94 2.19% 5.00% Victory

<PAGE>

NYTxFB

Ohio Municipal
Bond Fund -- Class A 5/18/90 .90% 5.75% Victory
OH Muni

<FN>
<F1> All newspapers do not carry the same abbreviation.
</FN>
</TABLE>

The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, expenses, and financial
history to determine which Fund will best suit your risk tolerance and
investment needs. You also should review the "Other Securities and Investment
Practices" section for additional information about the individual securities in
which the Funds can invest and the risks related to these investments.

NATIONAL MUNICIPAL BOND FUND

INVESTMENT OBJECTIVE

The National Municipal Bond Fund seeks to provide a high level of current
interest income exempt from federal income tax, as is consistent with the
preservation of capital. The National Municipal Bond Fund's higher portfolio
turnover rate may result in higher expenses and taxable capital gain
distributions.

INVESTMENT POLICIES AND STRATEGY

The National Municipal Bond Fund pursues its investment objective by primarily
investing in municipal bonds. The interest on these bonds is exempt from federal
income tax. Under normal circumstances, at least 80% of the National Municipal
Bond Fund's income distributions will be exempt from federal income taxes,
including the alternative minimum tax.

Under normal market conditions, the National Municipal Bond Fund primarily
invests in:

Municipal securities with fixed, variable, or floating interest rates

Zero coupon, tax, revenue, and bond anticipation notes

<PAGE>

Tax-exempt commercial paper

Important Characteristics of the National Municipal Bond Fund's Investments:

Quality: Municipal securities rated A or above at the time of purchase by
Standard & Poor's (S&P), Fitch, Moody's, or another NRSRO,* or if unrated, of
comparable quality. For more information on ratings, see the Appendix to the
SAI.

Maturity: The dollar-weighted effective average maturity of the Fund generally
will range from 5 to 11 years. Under certain market conditions, the Portfolio
Manager may go outside these boundaries.

Municipal securities are issued to raise money for public purposes. General
obligation bonds are backed by the taxing power of a state or municipality. This
means the issuing authority can raise taxes to cover the payments. Revenue bonds
are backed by revenues from a specific tax, project, or facility. Principal and
interest payments on some municipal securities are insured by private insurance
companies. The National Municipal Bond Fund's higher portfolio turnover may
result in higher expenses and taxable capital gain distributions.

*An NRSRO is a nationally recognized statistical ratings organization such as
S&P, Fitch, or Moody's which assigns credit ratings to securities based on the
borrower's ability to meet its obligation to make principal and interest
payments.

RISK

The National Municipal Bond Fund primarily invests in municipal securities from
several states, rather than from a single state. The National Municipal Bond
Fund is subject to the risks common to all mutual funds and mutual funds that
invest in debt securities, that is, interest rate risk, credit risk,
reinvestment risk, and inflation risk. It is also subject to the risks common to
mutual funds that invest in municipal debt securities. These include the risk
that certain investments could lose their tax-exempt status. It is also subject
to the risks common to mortgage related securities, like prepayment risk and
extension risk. Please read "Risk Factors" carefully before investing.

PORTFOLIO MANAGEMENT
Paul A. Toft has served as the Portfolio Manager for the National Municipal Bond
Fund since September, 1994. He is a Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment business since 1986.

FUND EXPENSES

This section will help you understand the costs and expenses you would

<PAGE>

pay, directly or indirectly, if you invest in the National Municipal
Bond Fund.

<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares

<S> <C> <C>
Maximum Sales Charge 5.75% NONE
Imposed on Purchases
(as a percentage of offering price)

Sales Charge Imposed NONE NONE
on Reinvested Dividends

Deferred Sales Charge NONE<F2> 5.00%<F3>

Redemption Fees NONE NONE

Exchange Fees NONE NONE

<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
<F2>Except for investments of $1 million or more. See " Investing with Victory."
<F3> 5% in the first year, declining to 1% in the sixth year, with no charge
after the sixth year.
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the National
Municipal Bond Fund. These expenses are charged directly to the National
Municipal Bond Fund. Expenses include management fees as well as the costs of
maintaining accounts, administering the National Municipal

<PAGE>

Bond Fund, providing shareholder services, and other activities. The expenses
shown are estimated based on historical expenses of the National Municipal Bond
Fund adjusted to reflect anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Class B
After expense waivers and reimbursements Shares Shares
(as a percentage of average daily net assets)
<S> <C> <C>
Management Fees<F1> NONE NONE

Rule 12b-1 Distribution Fees NONE .75%

Other Expenses<F1>, <F2> .65% 1.14%
---- ----

Total Fund Operating Expenses<F1> .65% 1.89%
==== ====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .55%; and the Total Fund Operating Expenses would
be 1.20% for Class A Shares, and would be 2.44% for Class B Shares.
<F2> Other Expenses includes an estimate of shareholder servicing fees
the National Municipal Bond Fund expects to pay. See "Organization
and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the National Municipal Bond
Fund.

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

<PAGE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $64 $77 $92 $134
Class B Shares $69 $89 $122 $188
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

NATIONAL MUNICIPAL BOND FUND

The Financial Highlights describe the National Municipal Bond Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the National Municipal Bond Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total review.]

<PAGE>

<TABLE>
<CAPTION>
CLASS B
---------------------------------------------
Year Year Six Sept. 26,
Ended Ended Months 1994
Oct. 31, Oct. 31, Ended to
1997 1996 Oct. 31, April 30,
1995<F4> 1995<F1>

<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.16 $10.07 $ 9.59 $ 9.53
------ ------ ------ ------

Investment Activities
Net investment income 0.33 0.35 0.20 0.28

Net realized and unrealized
gains (losses) from investments 0.34 0.13 0.47 0.05
------ ------ ------ ------

Total from Investment Activities 0.67 0.48 0.67 0.33
------ ------ ------ ------

Distributions
Net investment income (0.32) (0.35) (0.19) (0.27)

In excess of net investment income -- (0.01) -- --

In excess of net realized gains -- (0.03) -- --
------ ------ ------ ------

Total Distributions (0.32) (0.39) (0.19) (0.27)
------ ------ ------ ------

NET ASSET VALUE, END OF PERIOD $10.51 $10.16 $10.07 $ 9.59
====== ====== ====== ======

Total Return (excludes sales charges) 6.74% 4.85% 6.99%<F2> 3.54%<F2>

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $2,288 $1,808 $ 456 $ 147

Ratio of expenses to
average net assets 1.60% 1.20% 0.96%<F3> (0.05%)<F3>

Ratio of net investment income
(loss) to average net income 3.18% 3.50% 4.15%<F3> 4.35%<F3>

Ratio of expenses to
average net assets<F7> 2.62% 2.17% 3.67%<F3> 2.63%<F3>

Ratio of net investment income
(loss) to average net assets<F7> 2.16% 2.53% 1.44%<F3> 1.67%<F3>

Portfolio turnover<F6> 154% 143% 72% 52%

<FN>
<F1> Period from commencement of operations.

<PAGE>

<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory National Municipal Bond
Portfolio became the National Municipal Bond Fund.
<F5> Effective September 26, 1994, the National Municipal Bond Fund
designated the existing shares as Class A Shares and commenced
offering Class B Shares.
<F6> Portfolio turnover is calculated on the basis of the National
Municipal Bond Fund as a whole without distinguishing between the
classes of shares issued.
<F7> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
</FN>
</TABLE>

<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
Year Year Six Year Feb. 3,
Ended Ended Months Ended 1994
Oct. 31, Oct. 31, Ended April 30, to
1997 1996 Oct. 31, 1995<F5> April 30,
1995<F4> 1994<F1>

<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.16 $ 10.06 $ 9.59 $ 9.64 $ 10.00
------- ------- ------- ------ -------

Investment Activities
Net investment income 0.45 0.44 0.24 0.44 0.08

Net realized and unrealized
gains (losses) from investments 0.35 0.13 0.46 (0.05) (0.36)
------- ------- ------- ------ -------

Total from Investment Activities 0.80 0.57 0.70 0.39 (0.28)
------- ------- ------- ------ -------

Distributions
Net investment income (0.45) (0.44) (0.23) (0.44) (0.08)

<PAGE>

In excess of net investment income -- -- -- -- --

In excess of net realized gains -- (0.03) -- -- --
------- ------- ------- ------ -------

Total Distributions (0.45) (0.47) (0.23) (0.44) (0.08)
------- ------- ------- ------ -------

NET ASSET VALUE, END OF PERIOD $ 10.51 $ 10.16 $ 10.06 $ 9.59 $ 9.64
======= ======= ======= ====== =======

Total Return (excludes sales charges) 8.10% 5.83% 7.39%<F2> 4.21% (2.82%)<F2>
------- ------- ------- ------ -------

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $47,705 $36,958 $11,964 $5,118 $ 494

Ratio of expenses to
average net assets 0.36% 0.29% 0.02%<F3> 0.20% 0.65%<F3>

Ratio of net investment income
(loss) to average net income 4.43% 4.37% 5.11%<F3> 5.01% 3.15%
------- ------- ------- ------ -------<F3>

Ratio of expenses to
average net assets<F7> 1.27% 1.35% 2.57%<F3> 3.95% 26.10%<F3>
------- ------- ------- ------ -------

Ratio of net investment income
(loss) to average net assets<F7> 3.52% 3.31% 2.56%<F3> 1.26%
(22.30%)<F3>

Portfolio turnover<F6> 154% 143% 72% 52% 13%

<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory National Municipal Bond
Portfolio became the National Municipal Bond Fund.

<PAGE>

<F5> Effective September 26, 1994, the National Municipal Bond Fund
designated the existing shares as Class A Shares and commenced
offering Class B Shares.
<F6> Portfolio turnover is calculated on the basis of the National
Municipal Bond Fund as a whole without distinguishing between the
classes of shares issued.
<F7> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
</FN>
</TABLE>

NEW YORK TAX-FREE FUND

INVESTMENT OBJECTIVE

The New York Tax-Free Fund seeks to provide a high level of current income
exempt from federal, New York State, and New York City income taxes, consistent
with the preservation of shareholders' capital.

INVESTMENT POLICIES AND STRATEGY

The New York Tax-Free Fund pursues its investment objective by investing at
least 80% of its total assets in securities that have interest income that is
exempt from federal income tax, including the federal alternative minimum tax.
At least 65% of the portfolio will be invested in insured municipal securities
that pay interest exempt from New York State and New York City income taxes.

Under normal market conditions, the New York Tax-Free Fund primarily invests in:

Municipal securities with fixed, variable, and floating interest rates

Zero coupon, tax, and revenue anticipation notes

Tax-exempt commercial paper

Important Characteristics of the New York Tax-Free Fund's Investments:
Quality: Municipal securities rated A or above at the time of purchase
by S&P, Fitch, Moody's, or another NRSRO, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the SAI.

<PAGE>

Maturity: The dollar-weighted effective average maturity of the New York
Tax-Free Fund at the time of purchase generally will range from 20 to 30 years.
Under certain market conditions, the Portfolio Manager may go outside these
boundaries.

Insurance policies for the municipal securities held by the Fund generally are
obtained either by the issuer of the security or by a third party from a private
insurer. The insurance company guarantees timely payments of principal and
interest. This insurance reduces risk, but these high quality bonds may yield
less than uninsured bonds.

RISK

The New York Tax-Free Fund primarily invests in municipal securities issued by
the State of New York and its municipalities, including New York City. The New
York Tax-Free Fund is subject to the risks common to all mutual funds and mutual
funds that invest in debt securities, that is, interest-rate risk, credit risk,
reinvestment risk, and inflation risk. It also is subject to the risks common to
mutual funds that invest in municipal debt securities. These include the risk
that certain investments could lose their tax-exempt status. The New York
Tax-Free Fund is subject to additional risks because it concentrates its
investments in a single geographic area, and it may invest more than 5% of its
assets in the securities of a single issuer. This could make the New York
Tax-Free Fund more susceptible to economic, political, or credit risks than a
fund that invests in a more diversified geographic area. In the past, New York
State, New York City, and other municipalities have experienced financial
difficulties that jeopardized their ability to repay their debt obligations. If
similar difficulties were to occur again, the New York Tax-Free Fund's
investments may lose value or default. The SAI explains the risks specific to
investments in New York municipal securities. It is also subject to the risks
common to mortgage related securities, like prepayment risk and extension risk.
PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.

PORTFOLIO MANAGEMENT
Paul A. Toft has served as the Portfolio Manager for the New York Tax-Free Fund
since September, 1994. He is a Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment business since 1986.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the New York Tax Free Fund.

<PAGE>

<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares

<S> <C> <C>
Maximum Sales Charge 5.75% NONE
Imposed on Purchases
(as a percentage of offering price)

Sales Charge Imposed NONE NONE

on Reinvested Dividends

Deferred Sales Charge NONE 5.00%<F2>

Redemption Fees NONE NONE

Exchange Fees NONE NONE

<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.

<F2> 5% in the first year, declining to 1% in the sixth year, with no charge
after the sixth year.
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the New York Tax-Free
Fund. These expenses are charged directly to the New York Tax-Free Fund.
Expenses include management fees as well as the costs of maintaining accounts,
administering the New York Tax-Free Fund, providing shareholder services, and
other activities. The expenses

<PAGE>

shown are estimated based on historical expenses of the New York Tax-Free Fund
adjusted to reflect anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Class B
After expense waivers and reimbursements Shares Shares

<S> <C> <C>
(as a percentage of average daily net assets)

Management Fees<F1> .23% .23%

Rule 12b-1 Distribution Fees NONE .75%

Other Expenses<F1>, <F2> .72% 1.21%

Total Fund Operating Expenses<F1>, <F2> .95% 2.19%

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .55%. Without waivers or expense reimbursements
Other Expenses would be .81% for Class A shares and 1.30% for Class B
shares, and the Total Fund Operating Expenses would be 1.36% for Class A
Shares and would be 2.60% for Class B Shares.

<F2> Other Expenses includes an estimate of shareholder servicing fees the
New York Tax-Free Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the New York Tax-Free Fund.

<PAGE>

Example: You would pay the following expenses on a $1,000 investment
in the New York Tax-Free Fund, assuming: (1) a 5% annual return and
(2) redemption at the end of each time period.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $67 $86 $107 $167
Class B Shares $72 $97 $137 $221
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

NEW YORK TAX-FREE FUND

The Financial Highlights describe the New York Tax-Free Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the New York Tax-Free Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<PAGE>

<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------
Year Year Year Period From
Ended Ended Ended Sept. 26,
Oct. 31, Oct. 31, Oct. 31, 1994 to
1997 1996 1995<F1> Oct. 31,
1994<F4>

<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $12.74 $12.86 $12.39 $12.62
------ ------ ------ ------

Investment Activities:
Net investment income 0.57 0.57 0.85 0.07

Net realized and unrealized
gains (losses) from investments 0.03 (0.10) 0.36 (0.23)
------ ------ ------ ------

Total from investment activities 0.60 0.47 1.21 (0.16)
------ ------ ------ ------

Distributions
Net investment income (0.56) (0.57) (0.74) (0.07)

In excess of net investment income (0.05) (0.01) -- --

Net realized gains (0.04) (0.01) -- --
------ ------ ------ ------

Total distributions (0.65) (0.59) (0.74) (0.07)
------ ------ ------ ------

NET ASSET VALUE, END OF PERIOD $12.69 $12.74 $12.86 $12.39
====== ====== ====== ======

Total Return (excludes sales charge) 4.88% 3.72% 10.18% (1.25%)<F2>

RATIOS/SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (000) $2,731 $2,515 $1,953 <F5>

Ratio of expenses
to average net assets 1.82% 1.65% 2.02% 0.52%<F3>

Ratio of net investment income
(loss) to average net income 4.46% 4.52% 5.94% 5.94%<F3>

Ratio of expenses to
average net assets<F7> 2.68% 2.34% 2.25% 0.86%<F3>

Ratio of net investment income

<PAGE>

(loss) to average net assets<F7> 3.60% 3.83% 5.71% 5.60%<F3>

Portfolio turnover<F6> 11% 0% 18% 18%

<FN>
<F1> Effective June 5, 1995, the Victory New York Tax-Free Portfolio
became the New York Tax-Free Fund.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective September 26, 1994, the Fund designated the existing shares
as Class A Shares and commenced offering Class B Shares.
<F5> Amount is less than $1,000.
<F6> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
<F7> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
<F8> Period from commencement of operations.
</FN>
</TABLE>

<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
Year Year Year Period From
Ended Ended Ended Jan. 1,
Oct.31, Oct. 31, Oct. 31, 1994 to
1997 1996 1995<F1> Oct. 31,
1994<F4>
<S> <C> <C> <C> <C>
NET ASSET VALUE,

<PAGE>

BEGINNING OF PERIOD $ 12.73 $ 12.85 $ 12.39 $ 13.5
------- ------- ------- ------

Investment Activities:
Net investment income 0.68 0.68 0.87 0.57

Net realized and unrealized
gains (losses) from investments 0.03 (0.11) 0.42 (1.15)
------- ------- ------- ------

Total from investment activities 0.71 0.57 1.29 (0.58)
------- ------- ------- ------

Distributions
Net investment income (0.72) (0.68) (0.83) (0.57)

In excess of net investment income -- -- -- --

Net realized gains (0.04) (0.01) -- --
------- ------- ------- ------

Total distributions (0.76) (0.69) (0.83) (0.57)
------- ------- ------- ------

Net Asset Value, End of Period $ 12.68 $ 12.73 $ 12.85 $12.39
======= ======= ======= ======

Total Return (excludes sales charge) 5.77% 4.53% 10.82% (4.31%)<F2>

Ratios/Supplemental Data:
Net Assets, End of Period (000) $15,335 $13,754 $15,374 $17,840

Ratio of expenses
to average net assets 0.94% 0.93% 1.16% 0.91%<F3>

Ratio of net investment income
(loss) to average net income 5.32% 5.25% 5.50% 5.33%<F3>

Ratio of expenses to
average net assets<F7> 1.49% 1.58% 1.96% 1.25%<F3>

Ratio of net investment income
(loss) to average net assets<F7> 4.77% 4.60% 4.70% 4.99%<F3>

Portfolio turnover<F6> 11% 0% 18% 18%

<PAGE>

copy of the Annual Report, write or call us at 800-KEY-FUND.

<TABLE>
<CAPTION>
Year Year Period From
Ended Ended Feb. 11,
Dec. 31, Dec.31, 1991 to
1993 1992 Dec. 31,
1991<F8>
<S> <C> <C> <C>

NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.76 $ 12.50 $ 12.00
------- ------- -------

Investment Activities:
Net investment income 0.70 0.74 0.64

Net realized and unrealized
gains (losses) from investments 0.84 0.26 0.50
------- ------- -------

Total from investment activities 1.54 1.00 1.14
------- ------- -------

<PAGE>

Distributions
Net investment income (0.70) (0.74) (0.64)

In excess of net investment income -- -- --

Net realized gains (0.06) -- --
------- ------- -------

Total distributions (0.76) (0.74) (0.64)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.54 $ 12.76 $ 12.50
======= ======= =======

Total Return (excludes sales charge) 12.34% 8.26% 11.06%<F2>

RATIOS/SUPPLEMENTAL DATA:

Net Assets, End of Period (000 $28,530 $26,034 $20,995

Ratio of expenses
to average net assets 0.87% 0.66% 0.45%<F3>

Ratio of net investment income
(loss) to average net income 5.28% 5.89% 6.28%<F3>

Ratio of expenses to
average net assets<F7> 0.96% 0.96% 0.95%<F3>

Ratio of net investment income
(loss) to average net assets<F7> 5.19% 5.59% 5.78%<F3>

Portfolio turnover<F6> 12% 14% 61%

<PAGE>

shares as Class A Shares and commenced offering Class B Shares.
<F5> Amount is less than $1,000.
<F6> Portfolio turnover is calculated on the basis of the Fund as
a whole without distinguishing between the classes of shares issued.
<F7> During the period, certain fees were voluntarily reduced. If
such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
<F8> Period from commencement of operations.
</FN>
</TABLE>

OHIO MUNICIPAL BOND FUND

INVESTMENT OBJECTIVE

The Ohio Municipal Bond Fund seeks to provide a high level of current interest
income which is exempt from both federal income tax and Ohio personal income
tax.

INVESTMENT POLICIES AND STRATEGY

The Ohio Municipal Bond Fund pursues its investment objective by investing at
least 80% of its total assets in investment grade obligations. The interest on
these obligations is exempt from federal income taxes, including the federal
alternative minimum tax. The Ohio Municipal Bond Fund expects to invest at least
65% of its total assets in bonds that pay interest which is also exempt from
Ohio state income tax.

Under normal market conditions, the Ohio Municipal Bond Fund primarily invests
in:

Municipal securities with fixed, variable, or floating interest rates

Zero coupon, tax, revenue, and bond anticipation notes

Tax-exempt commercial paper

Important Characteristics of the Ohio Municipal Bond Fund's Investments:

Quality: Municipal securities rated A or above at the time of purchase by S&P,
Fitch, Moody's, or another NRSRO, or if unrated, of comparable quality. For more
information on ratings, see the Appendix to the SAI.

<PAGE>

Maturity: The dollar-weighted effective average maturity of the Ohio Municipal
Bond Fund generally will range from 5 to 15 years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.

Ohio's economic activity includes the service sector, durable goods
manufacturing, and agricultural industries. Manufacturing activity is
concentrated in cyclical industries; therefore, the Ohio economy may be more
cyclical than other states. The Ohio Municipal Bond Fund's higher portfolio
turnover rate may result in higher expenses and taxable capital gain
distributions.

RISK

The Ohio Municipal Bond Fund primarily invests in municipal securities issued by
the State of Ohio and its municipalities. The Ohio Municipal Bond Fund is
subject to the risks common to all mutual funds and mutual funds that invest in
debt securities; that is, interest-rate risk, credit risk, reinvestment risk,
and inflation risk. It also is subject to the risks common to mutual funds that
invest in municipal debt securities. These include the risk that certain
investments could lose their tax-exempt status. The Ohio Municipal Bond Fund is
subject to additional risks because it concentrates its investments in a single
geographic area, and it may invest more than 5% of its assets in the securities
of a single issuer. This could make the Ohio Municipal Bond Fund more
susceptible to economic, political, or credit risks than a fund that invests in
a more diversified geographic area. The SAI explains the risks specific to
investments in Ohio municipal securities. It is also subject to the risks common
to mortgage related securities, like prepayment risk and extension risk. Please
read "Risk Factors" carefully before investing.

PORTFOLIO MANAGEMENT
Paul A. Toft has served as the Portfolio Manager for the Ohio Municipal Bond
Fund since September, 1994. He is a Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment business since 1986.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Ohio Municipal Bond Fund.

<PAGE>

<TABLE>
<CAPTION>
Shareholder Class A
Transaction Expenses<F1> Shares

<S> <C>
Maximum Sales Charge 5.75%
Imposed on Purchases
(as a percentage of offering price)

Sales Charge Imposed NONE
on Reinvested Dividends

Deferred Sales Charge NONE

Redemption Fees NONE

Exchange Fee NONE

<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will pay as a shareholder of the Ohio Municipal Bond
Fund. These expenses are charged directly to the Ohio Municipal Bond Fund.
Expenses include management fees as well as the costs of maintaining accounts,
administering the Ohio Municipal Bond Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical expenses
of the Ohio Municipal Bond Fund adjusted to reflect anticipated expenses.

<PAGE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A
After expense waivers and reimbursements Shares
(as a percentage of average daily net assets)

<S> <C>
Management Fees<F1> .38%

Other Expenses<F2> .52%

Total Fund Operating Expenses<F1> .90%

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .60%, and Total Fund Operating Expenses would be
1.12%.
<F2> Other Expenses include an estimate of the shareholder servicing fees
the Ohio Municipal Bond Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Ohio Municipal Bond
Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $66 $85 $104 $162
</TABLE>

<PAGE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

[Chart depicting the variability of the Fund's year-to-year total review.]

Financial Highlights

Ohio Municipal Bond Fund

The Financial Highlights describe the Ohio Municipal Bond Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Ohio Municipal Bond Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct.31,
1997 1996 1995 1994 1993

<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.43 $ 11.32 $ 10.33 $ 11.52 $ 10.52
------- ------- ------- ------- -------

Investment Activities
Net investment income 0.53 0.54 0.52 0.49 0.52

Net realized and unrealized gains
(losses) from investments 0.29 0.11 1.00 (0.94) 1.00
------- ------- ------- ------- -------

Total from Investment Activities 0.82 0.65 1.52 (0.45) 1.52
------- ------- ------- ------- -------

<PAGE>

Distributions
Net investment income (0.53) (0.54) (0.52) (0.49) (0.52)

In excess of net investment income -- -- (0.01) -- --

Net realized gains -- -- -- (0.25) --
------- ------- ------- ------- -------

Total Distributions (0.53) (0.54) (0.53) (0.74) (0.52)
------- ------- ------- ------- -------

NET ASSET VALUE, END OF PERIOD $ 11.72 $ 11.43 $ 11.32 $ 10.33 $ 11.52
======= ======= ======= ======= =======

Total Return (excludes sales charge) 7.37% 5.87% 15.03% (4.08%) 14.75%

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $78,043 $73,463 $60,031 $57,704 $50,676

Ratio of expenses to
average net assets 0.89% 0.89% 0.66% 0.51% 0.42%

Ratio of net investment income
to average net assets 4.60% 4.72% 4.78% 4.58% 4.77%

Ratio of expenses to
average net assets<F4> 0.99% 1.05% 0.94% 1.09% 0.86%

Ratio of net investment income
to average net assets<F4> 4.50% 4.56% 4.49% 4.01% 4.33%

Portfolio turnover 74% 81% 125% 53% 151%

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Ohio Municipal Bond Fund's
most recent Annual Report to shareholders, which is incorporated by reference
into the SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.
<F2> Annualized.
<F3> Not annualized.
<F4> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Year Year May 18,
Ended Ended 1990 to
Oct. 31, Oct. 31, Oct. 31,
1992 1991 1990<F1>

<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.37 $10.06 $10.00
------- ------ ------

Investment Activities
Net investment income 0.60 0.65 0.28

Net realized and unrealized gains
(losses) from investments 0.15 0.31 0.04
------- ------ ------

Total from Investment Activities 0.75 0.96 0.32
------- ------ ------

Distributions
Net investment income (0.60) (0.65) (0.26)

In excess of net investment income -- -- --

Net realized gains -- -- --
------- ------ ------

Total Distributions (0.60) (0.65) (0.26)
------- ------ ------

NET ASSET VALUE, END OF PERIOD $ 10.52 $10.37 $10.06
======= ====== ======

Total Return (excludes sales charge) 7.34% 9.87% 3.27%<F3>

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $17,676 $8,042 $6,315

Ratio of expenses to
average net assets 0.09% 0.01% 0.38%<F2>

<PAGE>

Ratio of net investment income
to average net assets 5.76% 6.39% 6.11%<F2>

Ratio of expenses to
average net assets<F4> 0.84% 1.17%<F2>

Ratio of net investment income
to average net assets<F4> 5.01% 5.32%<F2>

Portfolio turnover 47% 15% 18%

RISK FACTORS

The following risks are common

<PAGE>

to all mutual funds:

MANAGER RISK is the risk that a Fund's Portfolio Manager may use a strategy that
does not produce the intended result.

The following risks are common to mutual funds that invest in debt securities:

INFLATION RISK is the risk that inflation will erode the purchasing power of the
cash flows generated by debt securities held by a Fund. Fixed rate debt
securities are more susceptible to this risk than floating-rate debt securities.

CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security will be
unable to make timely payments of interest or principal. Although the Funds
generally invest only in high-quality securities, the interest or principal
payments may not be insured or guaranteed on all securities. Credit risk is
measured by NRSROs such as S&P, Fitch, or Moody's.

<PAGE>

The following risk is common to mutual funds that invest in municipal debt
securities:

TAX-EXEMPT STATUS RISK is the risk that a municipal debt security issued as a
tax-exempt security may be declared by the Internal Revenue Service to be
taxable.

The following risk is common to mutual funds that invest in the securities of a
single state:

CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited number of
high-quality securities of a particular type may be available. Concentration and
diversification risk is greater for funds that primarily invest in the
securities of a single state.

The following risks are common to mutual funds that invest in mortgage-related
securities:

PREPAYMENT RISK. Prepayments of principal on mortgage-related securities affect
the average life of a pool of mortgage-related securities. Mortgage prepayments
are affected by the level of interest rates and other factors. In periods of
rising interest rates, the prepayment rate tends to decrease, lengthening the
average life of a pool of mortgage-related securities. In periods of falling
interest rates, the prepayment rate tends to increase, shortening the average
life of a pool of mortgage-related securities. Prepayment risk is the risk that,
because prepayments generally occur when interest rates are falling, a Fund may
have to reinvest the proceeds from prepayments at lower interest rates.

EXTENSION RISK is the risk that the rate of anticipated payments on principal
may not occur, typically because of a rise in interest rates, and the expected
maturity of the security will increase. During periods of rapidly rising
interest rates, the maturity of a security may be extended past what the Fund's
Portfolio Manager anticipated that it would be.

<PAGE>

The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.

INVESTMENT LIMITATIONS

To help reduce risk, the Funds have adopted limitations on some investment
policies. These limits involve a Fund's ability to borrow money and the amount
it can invest in various types of securities, including illiquid securities.
Certain limitations can be changed only with the approval of shareholders.
Victory's Board of Trustees can change other investment limitations without
shareholder approval. See "Other Securities and Investment Practices" and the
SAI for more information.

Each Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations). Each Fund limits its
borrowing to 331/3% of its total assets. Borrowing may be in the form of selling
a security that it owns and agreeing to repurchase that security later at a
higher price. The Funds will not borrow for leverage purposes.

DIVERSIFICATION REQUIREMENTS

SEC REQUIREMENT: The Funds are not "diversified" according to certain federal
securities provisions regarding diversification of their assets. As a
non-diversified investment company, a Fund may devote a larger portion of its
assets to the securities of a single issuer than if it were diversified.

IRS REQUIREMENT: Each Fund intends to comply with certain federal tax
requirements regarding the diversification of its assets, which generally are
less restrictive than the securities provisions. Generally, under these
requirements, a Fund must invest at least 50% of its total assets so that no
more than 5% of its total assets are invested in the securities of any one
issuer at the time of purchase. These diversification provisions and
requirements are discussed in the SAI.

Past performance is not a guarantee of future results. You may obtain
the current 30-day yield by calling 800-KEY-FUND. Our Shareholder
Servicing representatives are available from 8:00 a.m. to
8:00 p.m. Eastern Time Monday through Friday.

<PAGE>

INVESTMENT PERFORMANCE

The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to earn the same net interest
income throughout that year. To calculate 30-day yield, a Fund's net investment
income per share for the most recent 30 days is divided by the maximum offering
price per share for Class A shares, or by the NAV for Class B shares.

YIELD is a measure of net interest income.

TAX-EQUIVALENT YIELD shows the taxable income you would have to earn to obtain a
yield equal to an investment in one of the Funds.

AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend income
plus capital appreciation. It is the sum of all parts of a Fund's investment
return for periods greater than one year.

TOTAL RETURN is the sum of all parts of a Fund's investment return.

Whenever you see information on the Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in a Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.

<PAGE>

The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own, gives you the dollar amount and value of your
investment.

SHARE PRICE

Each Fund's share price, called its net asset value (NAV), is calculated each
business day as of the close of regular trading on the New York Stock Exchange
(normally at 4:00 p.m. Eastern time). Shares are purchased, exchanged, and
redeemed at the next share price calculated after your investment instructions
are received and accepted. A business day is a day on which the New York Stock
Exchange is open for trading or any day in which enough trading has occurred in
the securities held by a Fund to affect the NAV materially. If your account is
established with an Investment Professional or a bank, you may not be able to
purchase or sell shares on other holidays when the Federal Reserve Bank of
Cleveland is closed, but the New York Stock Exchange is open.

Total Assets -- Liabilities
NAV =----------------------------------------
Number of Shares Outstanding

Each Fund's net asset value can be found daily in The Wall Street Journal and
other newspapers.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

As a shareholder, you are entitled to your share of net income and

<PAGE>

capital gains on a Fund's investments. The Funds pass their earnings along to
investors in the form of dividends. Dividend distributions are the net interest
earned on investments after expenses. If a Fund makes a capital gain
distribution, it is paid once a year. As with any investment, you should
consider the tax consequences of an investment in a Fund.

Ordinarily, net income earned on securities owned by a Fund accrues daily and is
paid monthly. The Fund pays any net capital gains realized as dividends at least
annually. The National Municipal Bond Fund and New York Tax-Free Fund declare
and pay dividends separately for Class A and Class B shares. Distributions can
be received in one of the following ways:

REINVESTMENT OPTION

CASH OPTION

A check will be mailed to you no later than 7 days after the pay date.

INCOME EARNED OPTION

Dividends can be automatically reinvested in a Fund in which you have invested
and your capital gains can be paid in cash, or capital gains can be reinvested
and dividends paid in cash.

DIRECTED DIVIDENDS OPTION

<PAGE>

DIRECTED BANK ACCOUNT OPTION

In most cases, you can have distributions automatically transferred to your bank
checking or savings account. Under normal circumstances, dividends will be
transferred within 7 days of the dividend payment date. The bank account must
have a registration identical to that of your Fund account.

Your choice of distribution should be set up on the original Account
Application.If you would like to change the option you selected, please call the
Transfer Agent at 800-KEY-FUND.

IMPORTANT INFORMATION ABOUT TAXES

Each Fund intends to continue to qualify as a regulated investment company, in
which case it will pay no federal income tax on the earnings or capital gains it
distributes to its shareholders.

Certain dividends from a Fund will be "exempt-interest dividends," which are
exempt from federal income tax. However, exempt-interest dividends are not
necessarily exempt from state or local taxes.

Ordinary dividends from a Fund, if taxable, are treated as ordinary income;
dividends from a Fund's long-term capital gain are taxable as capital gain.

Dividends are treated in the same manner for federal income tax purposes whether
you receive them in cash or in additional shares. They may also be subject to
state and local taxes.

Certain dividends paid to you in January may be taxable as if they had been paid
to you in December of the previous year.

Tax statements will be mailed from a Fund every January showing the amounts and
tax status of distributions made to you.

Certain dividends from the Ohio Municipal Bond Fund will be exempt from certain
Ohio state and local taxes.

Certain dividends from the New York Tax-Free Fund will be exempt from certain
New York state and local taxes.

Because your tax treatment depends on your purchase price and tax position, you
should keep your regular account statements for use in determining your tax.

<PAGE>

You should review the more detailed discussion of federal income tax
considerations in the SAI.

THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN A FUND.

INVESTING WITH VICTORY

All you need to do to get started is to fill out an application.

If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
section on "Choosing a Share Class" will help you decide whether it would be
more to your advantage to purchase Class A or Class B shares of a Fund. The
following sections will describe how to open an account, how to access
information on your account, and how to purchase, exchange, and redeem shares of
a Fund. We want to make it simple for you to do business with us. The sections
that follow will serve as a guide to your investments with Victory. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-KEY-FUND.
They will be happy to assist you.

CHOOSING A SHARE CLASS

For historical expense information on Class A and B shares, see the financial
highlights in the fund overviews earlier in this prospectus.

The Ohio Municipal Bond Fund offers only Class A shares. The National Municipal
Bond Fund and the New York Tax-Free Fund offer two classes of shares: Class A
and Class B. Each class has its own cost structure, allowing you to choose the
one that best meets your requirements. Your Investment Professional also can
help you decide.

CLASS A

Front-end sales charges, as described below. There are several ways to reduce
these charges.

Lower annual expenses than Class B shares.

<PAGE>

CLASS B

No front-end sales charge. All your money goes to work for you immediately.

Higher annual expenses than Class A shares.

A deferred sales charge on shares you sell within 6 years of purchase, as
described on the next page.

Automatic conversion to Class A shares after 8 years, thus reducing future
annual expenses.

CALCULATION OF SALES CHARGES--CLASS A

Class A shares are sold at their public offering price, which includes the
initial sales charge. The sales charge as a percentage of your investment
decreases as the amount you invest increases. The current sales charge rates and
commissions paid to Investment Professionals are as follows:

<TABLE>
<CAPTION>
Sales Charge Sales Charge Dealer Reallowance
as a % of as a % of as a % of the
Your Investment Offering Price Your Investment Offering Price

<S> <C> <C> <C>
Up to $50,000 5.75% 6.10% 5.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.50% 2.56% 2.00%
$500,000 up to $1,000,000 2.00% 2.04% 1.75%
$1,000,000 and above <F1> 0.00% 0.00% <F1>

<FN>
<F1> There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed in
the first year after purchase, or at .50% within two

<PAGE>

years of the purchase. This charge will be based on either the cost of the
shares or net asset value at the time of redemption, whichever is lower.
There will be no CDSC on reinvested distributions. Investment Professionals
may be paid at a rate of up to 1.00% of the purchase price.
</FN>
</TABLE>

The Distributor reserves the right to pay the entire commission to dealers. If
that occurs, the dealer may be considered an "underwriter" under federal
securities laws.

SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES

You may qualify for reduced sales charges in the following cases:

3. You can combine Class A shares of multiple Victory Funds (excluding the money
market funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the accounts
of household members of your immediate family (spouse and children under 21)
for a reduced sales charge at the time of purchase.

4. Waivers for certain investors:

a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade
organization to which the Adviser or the Administrator belong.

b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.

c. Investors who reinvest a distribution from a deferred compensation plan,
agency, trust, or custody account that was maintained by KeyBank

<PAGE>

National Association and its affiliates, the Victory Group, or invested in
a fund of the Victory Group.

d. Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales charge
for those shares.

e. Investment Professionals who purchase Fund shares for fee-based investment
products or accounts, and selling brokers and their sales representatives.

*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.

There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.

DEFERRED SALES CHARGES--CLASS B

Shares are offered at their NAV per share, without an initial sales charge. When
you sell the shares within six years of buying them, there is a contingent
deferred sales charge (CDSC). The CDSC is based on the original purchase cost of
your investment or the NAV at the time of redemption, whichever is lower.

Eight years after Class B shares are purchased, they will automatically convert
to Class A shares. Class A shareholders are not subject to the asset-based sales
charge that would normally apply to Class B shares, as described in
"Distribution Plan for Class B Shares." Also see the SAI for additional details.

<TABLE>
<CAPTION>
Years After CDSC on Shares
Purchase Being Sold

<PAGE>

<S> <C>

0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
After 6 Years None
</TABLE>

THE DISTRIBUTOR PAYS SALES COMMISSIONS OF 4.00% OF THE PURCHASE PRICE TO DEALERS
AT THE TIME OF SALE.

SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS B SHARES

The CDSC will be waived for the following redemptions:

1. Distributions from retirement plans if the distributions are made:

a. under the Systematic Withdrawal Plan after age 591/2 for up to
12% of the account value annually; or

b. following the death or disability of the participant or beneficial
owner;

2. Redemptions from accounts other than retirement accounts following the death
or disability of the shareholder;

3. Returns of excess contributions to retirement plans;

4. Distributions of less than 12% of the annual account value under a Systematic
Withdrawal Plan; and

5. Shares issued in a plan of reorganization sponsored by Victory, or shares
redeemed involuntarily in a similar situation.

There is no CDSC on reinvested dividends. The longer the time between the
purchase and sale of shares, the lower the rate of the CDSC.

<PAGE>

HOW TO PURCHASE SHARES

All you need to do to get started is to fill out an application.

Class A and Class B Shares can be purchased in a number of different ways. You
can send in your investment by check, wire transfer, exchange from another fund
of the Victory Group, or through arrangements with your Investment Professional.
An Investment Professional is a salesperson, financial planner, investment
adviser, or trust officer who provides you with investment information.
Sometimes they will charge you for these services. Their fee will be in addition
to, and unrelated to, the fees and expenses charged by a Fund.

Make your check payable to:
The Victory Funds

Keep the following addresses handy for purchases, exchanges, or redemptions.

REGULAR U.S. MAIL ADDRESS

Send a completed Account Application with your check, bank draft or money order
to:

The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527

OVERNIGHT MAIL ADDRESS

Use the following address ONLY for overnight packages.

The Victory Funds
c/o Boston Financial Data Services

<PAGE>

Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND

WIRE ADDRESS

The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a confirmation number.

State Street Bank and Trust Co.
ABA #011000028

For Credit to DDA
Account #9905-201-1

For Further Credit to Account # (insert account number, name, and confirmation
number assigned by the Transfer Agent)

Telephone

800-KEY-FUND
800-539-3863

FAX Number:
800-529-2244

Telecommunication Device for the Deaf (TDD):
800-970-5296

ACH

After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up the ACH feature. Currently, the Funds do not charge a
fee for ACH transfers.

<PAGE>

STATEMENTS AND REPORTS

SYSTEMATIC INVESTMENT PLAN

RETIREMENT PLANS

If you would like to make additional investments after your account is already
established, use the Investment Stub attached to your statement and send it with
your check to the address indicated.

All purchases must be made in U.S. Dollars and drawn on U.S. banks. The

<PAGE>

Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you may be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only invest or
exchange into fund shares legally available in your state. If your account falls
below $500, we may ask you to re-establish the minimum investment. If you do not
do so within 60 days, we may close your account and send you the value of your
account.

HOW TO EXCHANGE SHARES

You can obtain a list of funds available for exchange by calling the Transfer
Agent at 800-KEY-FUND.

You can exchange shares of the Funds by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Funds, you should keep the
following in mind:

Shares of the fund selected for exchange must be available for sale in your
state of residence.

The Fund whose shares you want to exchange and the Fund whose shares you want to
buy must offer the exchange privilege.

Shares of the Fund may be exchanged at relative net asset value. This means that
if you own Class A shares of the Fund, you can only exchange them for Class A
shares of another fund and not pay a sales charge. The same rules apply to Class
B shares.

<PAGE>

You must meet the minimum purchase requirements for the fund you purchase by
exchange.

The registration and tax identification numbers of the two accounts must be
identical.

You must hold the shares you buy when you establish your account for at least 7
days before you can exchange them; after the account is open 7 days, you can
exchange shares on any business day.

Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.

HOW TO REDEEM SHARES

If we receive your request by 4:00 p.m. Eastern Time, your redemption will be
processed the same day.

BY TELEPHONE

Mail a check to the address of record;

Wire funds to a domestic financial institution;

Mail to a previously designated alternate address; or

Electronically transfer the funds via ACH.

<PAGE>

against unauthorized transactions, neither Victory nor its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If these
procedures are not followed, the Transfer Agent may be liable to you for losses
resulting from unauthorized instructions.

If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.

BY WIRE

If you want to redeem funds by wire, you must establish a Fund account which
will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time, your
funds will be wired on the next business day.

BY MAIL

Redemptions over $10,000;

Your account registration has changed within the last 15 days;

The check is not being mailed to the address on your account;

check is not being made payable to the owner of the account; or

If the redemption proceeds are being transferred to another Victory Group
account with a different registration.

A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.

BY ACH

<PAGE>

SYSTEMATIC WITHDRAWAL PLAN

ORGANIZATION AND MANAGEMENT OF THE FUNDS

We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service their shareholders. They are paid a fee for their services.

ABOUT VICTORY

Each Fund is a member of the Victory Funds, a group of 30 distinct investment
portfolios organized as a Delaware business trust. Some of the Victory Funds
have been operating since 1983.

The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.

THE INVESTMENT ADVISER

<PAGE>

Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser
and Society Asset Management, Inc. (formerly the adviser) was the sub-adviser to
each of the Funds. During the fiscal year ended October 31, 1997, KeyCorp Mutual
Fund Advisers, Inc. was paid an advisory fee at an annual rate based on a
percentage of the average daily net assets of each Fund (after waivers) as
follows:

<TABLE>

<CAPTION>
National New York New York Ohio
Municipal Tax-Free Fund Tax-Free Fund Municipal
Bond Fund Class A Class B Bond Fund

<S> <C> <C> <C> <C>
Advisory Fees 0% .14% .13% .50%

</TABLE>

MANAGEMENT OF THE FUNDS

<PAGE>

TRUSTEES
Supervise each Fund's activities.

INVESTMENT ADVISER
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Manages each Fund's business and investment activities.

THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT

BISYS Fund Services is the Administrator and the Distributor. The Funds pay
BISYS a fee at the following annual rate based on each Fund's average daily net
assets as the Administrator:

.15% for portfolio assets of $300 million and less,

.12% for the next $300 million through $600 million of portfolio assets; and

.10% for portfolio assets greater than $600 million.

SHAREHOLDER SERVICING PLAN

The Funds have adopted a Shareholder Servicing Plan for each class of shares of
the Funds. The shareholder servicing agent performs a

<PAGE>

number of services for its customers who are shareholders of the Funds. It
establishes and maintains accounts and records, processes dividend payments,
arranges for bank wires, assists in transactions, and changes account
information. For these services a Fund pays a fee at an annual rate of up to
.25% of the average daily net assets of the shares serviced by the agent. The
Funds may enter into agreements with various shareholder servicing agents,
including KeyBank National Association and its affiliates, other financial
institutions, and securities brokers. The Funds may pay a servicing fee to
broker-dealers and others who sponsor "no transaction fee" or similar programs
for the purchase of shares. Shareholder servicing agents may waive all or a
portion of their fee periodically.

DISTRIBUTION PLAN

Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Class A shares of the National Municipal
Bond Fund and the New York Tax-Free Fund. The Class A Shares currently do not
pay expenses under this plan.

Victory has adopted a Distribution and Service Plan for Class B Shares of the
National Municipal Bond Fund and the New York Tax-Free Fund. Victory pays the
Distributor an annual asset-based sales charge of up to 0.75%. The fee is
computed on the average daily net assets of those shares. The Distributor then
uses the asset-based sales charge to recoup these sales commissions and the
costs for financing them. See the SAI for more details regarding this plan.

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P. serves as independent accountants to the Funds.

LEGAL COUNSEL

Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.

<PAGE>

The Fund is supervised by the Board of Trustees who monitors the services
provided to investors.

HOW THE FUNDS ARE ORGANIZED

SHAREHOLDERS

FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders on their Fund investments.

TRANSFER AGENT/SERVICING AGENT

State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholders' accounts.

DISTRIBUTOR AND ADMINISTRATOR

BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219

As Distributor, markets the Fund and distributes shares through Investment
Professionals. As Administrator, handles the day-to-day operations of the Fund.

SUB-ADMINISTRATOR

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Handles some day-to-day operations of the Fund.

<PAGE>

FUND ACCOUNTANT

BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219

Calculates the value of Fund shares and keeps certain Fund records.

CUSTODIAN

Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114

Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.

ADDITIONAL INFORMATION

Some additional information you should know about the Funds.

If you would like to receive additional copies of any materials, please call the
Funds at 800-KEY-FUND.

SHARE CLASSES

The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.

YOUR RIGHTS AS A SHAREHOLDER

If any matters are to be voted on by shareholders (such as a change
in a fundamental investment objective or the election of Trustees),

<PAGE>

each share outstanding at that point would be entitled to one vote. If you have
a qualified trust account, the trustee will vote your shares on your behalf or
in the same percentage voted on shares that are not held in trust. Shareholders
with more than 10% of the outstanding shares of a Fund may call a special
meeting for removal of a Trustee. Normally, Victory is not required to hold
annual meetings of shareholders. However, shareholders may request one under
certain circumstances, as described in the SAI.

CODE OF ETHICS

Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to the Funds must conform.
Investment personnel must refrain from certain trading practices and are
required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.

BANKING LAWS

Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment adviser, transfer agent, custodian, or shareholder servicing
agent. They may also purchase shares of such a company for their customers and
pay third parties for performing these functions. Should these laws change in
the future, the Trustees would consider selecting another qualified firm so that
all services would continue.

SHAREHOLDER COMMUNICATIONS

THE SECURITIES DESCRIBED IN THIS PROSPECTUS AND THE SAI ARE NOT OFFERED IN ANY
STATE IN WHICH THEY MAY NOT LAWFULLY BE SOLD. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE SAI.

<PAGE>

OTHER SECURITIES AND INVESTMENT PRACTICES

The following table lists some of the types of securities each of the Funds may
choose to purchase under normal market conditions. The majority of the portfolio
for each of the Funds is made up of general obligation bonds and revenue bonds.
However, the Funds are also permitted to invest in securities as shown in the
table below and in the SAI. For temporary defensive purposes each Fund may hold
up to 100% of its total assets in cash or short-term money market instruments.

<TABLE>
<CAPTION>
List of Allowable Investments Ohio
and Investment Practices National New York Municipal
Municipal Tax-Free Bond
Bond Fund Fund Fund

<S> <C> <C> <C>
REVENUE BONDS. Payable only from the proceeds of a specific revenue
source, such as the users of a municipal facility. <F1> <F1> <F1>

GENERAL OBLIGATION BONDS. Secured by the issuer's full faith, credit,
and taxing power for payment of interest and principal. <F1> <F1> <F1>

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that is purchased
for delivery at a later time. The market value may change before
the delivery date, and the value is included in the NAV of the Fund. 33 1/3% 33 1/3% 33 1/3%

<PAGE>

a Fund and its affiliates may not own more than 3% of the securities of 5% 5% 5%
any one mutual fund, and (3) no more than 10% of the Fund's total assets 3% 3% 3%
may be invested in combined mutual fund holdings. 10% 10% 10%

MUNICIPAL LEASE OBLIGATIONS. Issued to acquire land, equipment, or
facilities. They may become taxable if the lease is assigned. The lease
could terminate, resulting in default. 30% 30% 30%

CERTIFICATES OF PARTICIPATION. A certificate that states that an investor
will receive a portion of the lease payments from a municipality. 20% 20% 20%

REFUNDING CONTRACTS. Issued to refinance an issuer's debt. The Fund
buys these at a stated price for a future settlement date. <F1> <F1> <F1>

TAX, REVENUE, AND BOND ANTICIPATION NOTES. Issued in expectation of
future revenues. <F1> <F1> <F1>

LOWER-RATED MUNICIPAL SECURITIES. Municipal securities that have been
down-graded to below investment grade. 5% 5% 5%

U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities. Some are direct
obligations of the U.S. Treasury; others are obligations only of the U.S.
agency. 20% 20% 20%

<F2>VARIABLE & FLOATING RATE SECURITIES. Investment grade instruments,
some of which may be derivatives or illiquid, with interest rates that
reset periodically. <F1> <F1> <F1>

ASSET BACKED SECURITIES. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, student loans, or
other providers of credit. These securities may be enhanced by a bank
letter of credit or by insurance coverage provided by a third party. 35% 35% 35%

MORTGAGE-BACKED SECURITIES, Tax-Exempt. Tax-exempt investments secured
by a mortgage or pools of mortgages. 35% 35% 35%

<PAGE>

List of Allowable Investments in Funds

COLLATERALIZED MORTGAGE OBLIGATIONS, TAX-EXEMPT. Debt obligations
that are secured by mortgage-backed certificates. Some are issued by U.S.
government agencies and instrumentalities. 25% 25% 25%

RESOURCE RECOVERY BONDS. Issued to build waste-to-energy facilities
and equipment. <F1> <F1> <F1>

TAX PREFERENCE ITEMS. Tax-exempt obligations that pay interest which
is subject to the federal "alternative minimum tax." 20% 20% 20%

INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS. Secured by
lease payments made by a corporation, these bonds are issued for
financing large industrial projects; i.e., building industrial parks
or factories. 25% 25% 25%

TAX-EXEMPT COMMERCIAL PAPER. Short-term obligations that are exempt
from state and federal income tax. <F1> <F1> <F1>

<F2>FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Contracts involving 5% in 5% in 5% in
the right or obligation to deliver or receive assets or money depending margins and margins and margins and
on the performance of one or more assets or a securities index. To reduce premiums; premiums; premiums;
the effects of leverage, liquid assets equal to the contract commitment 33 1/3% 331/3% 33 1/3%
are set aside to cover commitment limit. The Funds may invest in futures subject to subject to subjectto
in an effort to hedge against market risk. futures or futures or futures or
options on options on options on
futures futures futures

<PAGE>

REPURCHASE AGREEMENTS. An agreement to sell and repurchase a security
at a stated price plus interest. The seller's obligation to the Fund
is secured by collateral. Subject to the receipt of an exemptive order from
the SEC, the Adviser may combine repurchase transactions among one or
more Victory funds into a single transaction. 20% 20% 20%

DEMAND FEATURES, OR "PUTS." Contract for the right to sell or redeem a security
at a predetermined price on or before a stated date. Usually the issuer may
obtain a stand-by or direct pay letter of credit or
guarantee from banks as backup. either <F1> <F1> <F1>

TAXABLE OBLIGATIONS. Only used for temporary investments. Fund does
not intend to use. 20% 20% 20%

ILLIQUID SECURITIES. Investments that cannot be readily sold within
seven days in the usual course of business at approximately the price 15% of 15% of 15% of
at which a Fund values them. net assets net assets net assets

RESTRICTED SECURITIES. Securities that are not registered under federal
securities laws but that may be traded among qualified institutional investors
and the Fund. Some of these securities may be illiquid. <F1> <F1> <F1>

BORROWING, REVERSE REPURCHASE AGREEMENTS. The borrowing of money from
banks (up to 5% of total assets) or through reverse repurchase agreements
(up to 33 1/3% of total assets). The Funds will not use borrowing to 5% 5% 5%
create leverage. 33 1/3% 33 1/3% 33 1/3%

DOLLAR WEIGHTED EFFECTIVE AVERAGE MATURITY. Based on the value at the time of
purchase of a Fund's investments in securities with different maturity dates.
This measures the sensitivity of a debt security's value to changes in interest
rates. Longer term debt securities are more volatile than shorter term debt
securities because their prices are more sensitive to interest rate changes.
Therefore, the NAV of a fund with a longer dollar weighted effective average 5-11 20-30 5-15
maturity may fluctuate more. years years years

<PAGE>

% Percentage of total assets.

<FN>
<F1> No limitation of usage; Fund may be using currently.
<F2> Indicates a "derivative security," whose value is linked to, or derived
from another security, instrument, or index.
</FN>
</TABLE>

The Funds may also hold cash for temporary defensive purposes. For more
information on ratings and detailed descriptions of each of the above investment
vehicles, see the SAI.

This page is intentionally left blank.

Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469

LOGO (R)
Victory Funds

(R) PRINTED ON RECYCLED PAPER

VF/TEFI-PRO (3/98)

<PAGE>

LOGO (R)
Victory Funds

PROSPECTUS

BALANCED
FUND

DIVERSIFIED
STOCK FUND

VALUE FUND

STOCK INDEX FUND

OHIO REGIONAL
STOCK FUND

GROWTH
FUND

SPECIAL
VALUE FUND

SPECIAL
GROWTH FUND

INTERNATIONAL
GROWTH FUND

REAL ESTATE
INVESTMENT FUND

800-KEY-FUND (R) or 800-539-3863

March 1, 1998

THE VICTORY PORTFOLIOS

<PAGE>

PROSPECTUS FOR:

BALANCED FUND
DIVERSIFIED STOCK FUND
VALUE FUND
STOCK INDEX FUND
OHIO REGIONAL STOCK FUND
GROWTH FUND
SPECIAL VALUE FUND
SPECIAL GROWTH FUND
INTERNATIONAL GROWTH FUND
REAL ESTATE INVESTMENT FUND

800-KEY-FUND (R) 800-539-3863

The ten Victory Funds discussed in this prospectus (the Funds) are a part of The
Victory Portfolios (Victory), an open-end investment management company. The
Real Estate Investment Fund is a non-diversified mutual fund. The other nine
Funds are diversified mutual funds. This prospectus explains the objectives,
policies, risks, and strategies of the Funds. You should read this prospectus
before investing in one of these Funds and keep it for future reference. A
detailed Statement of Additional Information (SAI) describing each of the Funds
is also available for your review. The SAI has been filed with the Securities
and Exchange Commission (SEC), and is incorporated by reference into this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference into this Prospectus and the SAI, and
other information regarding registrants that file electronically with the SEC.
If you would like a free copy of the SAI, please request one by calling us at
800-KEY-FUND.

Shares of the Funds are:

Not insured by the FDIC;

Not deposits or other
obligations of, or guaranteed by,
any KeyBank, any of its affiliates,
or any other bank;

Subject to investment risks, including possible loss of the principal amount
invested.

<PAGE>

These securities have not been approved or disapproved by the Securities and
Exchange Commission or any securities regulatory authority of any state, nor has
the Securities and Exchange Commission or any such state authority passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.

March 1, 1998

TABLE OF CONTENTS

Introduction 2

AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights

Balanced Fund 4
Diversified Stock Fund 6
Value Fund 8
Stock Index Fund 10
Ohio Regional Stock Fund 12
Growth Fund 14
Special Value Fund 16
Special Growth Fund 18
International Growth Fund 20

Real Estate Investment Fund 22

Risk Factors 24

Investment Limitations 25

Share Price 26

Dividends, Distributions, and Taxes 27

<PAGE>

INVESTING WITH VICTORY 29

Choosing a Share Class 29
How to Purchase Shares 32
How to Exchange Shares 34
How to Redeem Shares 35

Organization and Management of the Funds 36

Additional Information 39

Other Securities and Investment Practices 40

KEY TO FUND INFORMATION

OBJECTIVE AND STRATEGY The goals and the strategy that a Fund plans to use in
pursuing its investment objective.

RISK FACTORS The risks that you may assume as an investor in a Fund.

EXPENSES
The costs that you will pay
as an investor in a Fund,
including sales charges and ongoing expenses.

FINANCIAL HIGHLIGHTS A table that shows a Fund's historical performance by share
class. This table also summarizes previous operating expenses.

Investment Objective and Strategy

OBJECTIVE

The BALANCED FUND seeks to provide income and long-term growth of capital.

The DIVERSIFIED STOCK FUND seeks to provide long-term growth of capital.

<PAGE>

The VALUE FUND seeks to provide long-term growth of capital and dividend income.

The STOCK INDEX FUND seeks to provide long-term capital appreciation by
attempting to match the investment performance of the Standard & Poor's 500
Composite Stock Index.1

The OHIO REGIONAL STOCK Fund seeks to provide capital appreciation.

The GROWTH FUND seeks to provide long-term growth of capital.

The SPECIAL VALUE FUND seeks to provide long-term growth of capital and dividend
income.

The SPECIAL GROWTH FUND seeks capital appreciation.

The INTERNATIONAL GROWTH FUND seeks to provide capital growth consistent with
reasonable investment risk.

The REAL ESTATE INVESTMENT Fund seeks to provide total return through
investments in real estate-related securities.

Strategy

Each of the Funds pursues its investment objective by investing primarily in
equity securities. However, each of the Funds has unique investment strategies
and its own risk/reward profile. Please review the section about the Fund in
which you are interested in investing and "Other Securities and Investment
Practices" for an overview of the Funds.

RISK FACTORS

The Funds are not insured by the FDIC. Since equity securities fluctuate in
value, the Funds' shares also will fluctuate in value. This fluctuation may be
in response to the activities of an individual company, or in response to
general market or economic conditions. Debt securities are subject to interest
rate, inflation and credit risks.

The BALANCED FUND is subject to the risks of both equity and debt securities,
since it is permitted to invest in both types of securities.

1 "Standard & Poor's 500" is a registered service mark of Standard and Poor's
Corporation, which does not sponsor and is in no way affiliated with the Stock
Index Fund.

<PAGE>

The GROWTH FUND, INTERNATIONAL GROWTH FUND, AND SPECIAL GROWTH FUND invest
primarily in equity securities of companies that do not pay out a significant
portion of their earnings as dividends. Therefore, these funds will not pay
significant dividend income.

The INTERNATIONAL GROWTH FUND invests primarily in foreign equity securities. An
investment in a fund holding foreign securities may be subject to more economic,
currency, or political risks than an investment in a domestic equity fund.

The OHIO REGIONAL STOCK FUND invests primarily in the securities of companies
whose headquarters are located in the State of Ohio. An investment in a state
specific fund can involve additional economic or political risks specific to the
state.

The SPECIAL GROWTH FUND AND SPECIAL VALUE Fund invest primarily in securities of
small and mid-capitalization companies. Smaller, less seasoned companies may be
subject to greater business risks than larger, established companies.

The REAL ESTATE INVESTMENT FUND is subject to the risks of both equity and real
estate securities.In addition, there are other potential risks, which are
discussed in the section "Risk Factors."

WHO SHOULD INVEST

Investors willing to accept higher short-term risk along with higher potential
long-term returns
Investors seeking capital appreciation over the long term
Investors seeking funds for the growth portion of a diversified portfolio
Investors who are investing for goals that are many years in the future

FEES AND EXPENSES

The Value Fund, Stock Index Fund, Growth Fund, Special Growth Fund, and Real
Estate Investment Fund offer only Class A Shares, while the Balanced Fund,
Diversified Stock Fund, Ohio Regional Stock Fund, Special

<PAGE>

Value Fund, and International Growth Fund offer both Class A and Class B Shares.
See "Choosing a Share Class." If you purchase Class A Shares of a Fund, you may
pay a sales charge of up to 5.75% of the offering price, depending on the Fund
in which you invest and the amount you invest. If you purchase Class B Shares of
a Fund, you will not pay an initial sales charge; however, you may pay a
deferred sales charge if you sell (redeem) your shares within six years of
purchase, and you will pay additional distribution expenses. In either case, you
also will incur expenses for investment advisory, administrative, and
shareholder services, all of which are included in a Fund's expense ratio. See
"Choosing a Share Class."

PURCHASES

The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. The initial investment
must be accompanied by a Fund's Account Application. Fund shares may
be purchased by check, Automated Clearing House, or wire. See "How
to Purchase Shares."

REDEMPTIONS

DIVIDENDS/DISTRIBUTIONS

Ordinarily, the Balanced Fund declares and pays dividends from its
net investment income monthly. All other Funds in this prospectus

<PAGE>

declare and pay dividends, if any, from their net investment income
quarterly. Any net capital gains realized by a Fund are paid as dividends
at least annually. A Fund can send your dividends directly to you
by mail, credit them to your bank account, reinvest them in the Fund,
or invest them in another fund of the Victory Group. The "Victory
Group" includes other funds of The Victory Portfolios. You can make
this choice when you fill out an Account Application. See "Dividends,
Distributions, and Taxes."

OTHER SERVICES

Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.

GENERAL INFORMATION ABOUT EACH OF THE FUNDS
<TABLE>
<CAPTION>
Annual
Victory Fund Inception Expenses Maximum Newspaper
Date After Waivers Sales Charge Abbreviation <F1>
(as a % of net assets)
<S> <C> <C> <C> <C>

Balanced Fund -- Class A 12/10/93 1.25% 5.75% Victory
BalncdA

Balanced Fund -- Class B 3/1/96 2.49% 5.00% Victory BalncdB

Diversified Stock
Fund -- Class A 10/20/89 1.05% 5.75% Victory DvsStkA

Diversified Stock
Fund -- Class B 3/1/96 2.29% 5.00% Victory DvsStkB

Value Fund -- Class A 12/3/93 1.40% 5.75% Victory Value

Stock Index

<PAGE>

Fund -- Class A 12/3/93 0.56% 5.75% Victory StkIdx

Ohio Regional Stock
Fund -- Class A 10/20/89 1.40% 5.75% Victory OH RegA

Ohio Regional Stock
Fund -- Class B 3/1/96 2.64% 5.00% Victory OH RegB

Growth Fund -- Class A 12/3/93 1.40% 5.75% Victory Growth

Special Value
Fund -- Class A 12/3/93 1.40% 5.75% Victory SplValA

Special Value
Fund -- Class B 3/1/96 2.64% 5.00% Victory SplValB

Special Growth
Fund -- Class A 1/11/94 1.40% 5.75% Victory SplGwth

International Growth
Fund -- Class A 5/18/90 1.75% 5.75% Victory IntlGrA

International Growth
Fund -- Class B 3/1/96 2.99% 5.00% Victory IntlGrA

Real Estate Investment
Fund -- Class A 4/30/97 1.40% 5.75% Victory REIT

<FN>
<F1> All newspapers do not use the same abbreviation.
</FN>

</TABLE>

The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, expenses, and financial
history to determine which Fund will best suit your risk tolerance and
investment needs. You also should review the "Other Securities and Investment
Practices" for additional information about the individual securities in which
the Funds can invest and the risks related to these investments.

BALANCED FUND

<PAGE>

INVESTMENT OBJECTIVE

The Balanced Fund seeks to provide income and long-term growth of capital.

INVESTMENT POLICIES AND STRATEGY

The Balanced Fund pursues its investment objective by investing in
equity securities and fixed income securities. The Balanced Fund may
invest in any type or class of security.

Under normal market conditions, the Balanced Fund will:

Invest 40% to 75% of its total assets in equity securities and securities
convertible or exchangeable into common stock

Invest at least 25% of its total assets in fixed income securities and
preferred stocks

Invest up to 10% of its total assets in equity securities (including American
Depositary Receipts) of foreign companies that derive more than 50% of their
gross revenues from, or have more than 50% of their assets, outside the United
States.

IMPORTANT CHARACTERISTICS OF THE BALANCED FUND'S INVESTMENTS:

In making investment decisions involving Equity Securities, the Adviser
considers:

The growth and profitability prospects for the economic sector and markets in
which the company operates and for the products or services it provides

The financial condition of the company

The price of the security and how that price compares to historical price
levels, to current price levels in the general market, and to prices of
competing companies; projected earnings estimates; and the earnings growth rate
of the company

In making investment decisions involving DEBT SECURITIES, the Adviser

<PAGE>

considers:

Quality: The Balanced Fund primarily purchases investment-grade debt
securities.

Maturity: The average weighted maturity of the Balanced Fund's fixed income
securities will range from 5 to 15 years. This range may be changed in response
to changes in market conditions.

In making investment decisions involving PREFERRED STOCK, the Adviser considers:

The issuer's financial strength, including its historic and current
financial condition

The issuer's projected earnings, cash flow, and borrowing requirements

The issuer's continuing ability to meet its obligations

The Balanced Fund's higher portfolio turnover rate may result in higher expenses
and taxable capital gain distributions.

The Balanced Fund is designed for long-term investors. The Balanced Fund is
subject to the risks common to all mutual funds and the risks common to mutual
funds that invest in equity securities, debt securities, and foreign issuer
risk. By itself, the Balanced Fund does not constitute a complete investment
plan and should be considered a long-term investment for investors who can
afford to weather changes in the value of their investment and in the level of
income they receive from their investment. PLEASE READ "RISK FACTORS" CAREFULLY
BEFORE INVESTING.

PORTFOLIO MANAGEMENT

Denise Coyne and Richard T. Heine are the Portfolio Managers of the Balanced
Fund. Richard Heine has been the Portfolio Manager of the Balanced Fund since
its inception in December 1993. Richard Heine is a Portfolio Manager and
Director of Key Asset Management Inc., and has been in the investment business
since 1976. Denise Coyne has been a Portfolio Manager of the Balanced Fund since
January 1995. She is a Portfolio Manager and Director for Key Asset Management
Inc., and has been in the investment business since 1985.

FUND EXPENSES

<PAGE>

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Balanced Fund.

<TABLE>

Shareholder Class A Class B
Transaction Expenses <F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge 5.75% NONE
Imposed on Purchases
(as a percentage of offering price)

Sales Charge Imposed NONE NONE
on Reinvested Dividends

Deferred Sales Charge NONE<F2> 5.00 <F3>
Redemption Fees NONE NONE
Exchange Fees NONE NONE

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Balanced Fund.
These expenses are charged directly to the Balanced Fund. Expenses include
management fees, as well as the costs of maintaining accounts, administering the
Balanced Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on historical expenses of the Balanced Fund
adjusted to reflect anticipated expenses.

<PAGE>

<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Class B
(After expense waivers and reimbursements) Shares Shares

<S> <C> <C>
(as a percentage of average daily net assets)
Management Fees <F1> .76% .76%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses <F2> .49% .98%
---- ----
Total Fund Operating Expenses <F1> 1.25% 2.49%
==== ====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be 1.00%, and the Total Fund Operating Expenses would
be 1.49% for Class A Shares, and 2.73% for Class B Shares.
<F2> Other Expenses include an estimate of shareholder servicing fees
the Balanced Fund expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Balanced Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $70 $ 95 $122 $200
Class B Shares $75 $108 $153 $252
</TABLE>

<PAGE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

BALANCED FUND

The Financial Highlights describe the Balanced Fund's returns and operating
expenses over time. This table shows the results of an investment in one share
of the Balanced Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
CLASS B CLASS A
Year March 1, Year Year Year Dec. 10,
Ended 1996 Ended Ended Ended 1993
Oct. 31, through Oct. 31, Oct. 31, Oct. 31, through
1997 Oct. 31, 1997 1996<F4> 1995 Oct. 31,
1996 <F4> 1994 <F1>

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.34 $ 11.51 $ 12.33 $ 11.01 $ 9.62 $10.00
------- ------- -------- -------- -------- -------
Investment Activities
Net investment income 0.19 0.14 0.36 0.36 0.41 0.33
------- ------- -------- -------- -------- -------

Net realized and unrealized gains (losses)
from investments and foreign currencies 1.89 0.85 1.90 1.39 1.40 (0.39)
------- ------- -------- -------- -------- -------

Total from Investment Activities 2.08 0.99 2.26 1.75 1.81 (0.06)
------- ------- -------- -------- -------- -------

<PAGE>

Distributions
Net investment income (0.17) (0.14) (0.35) (0.36) (0.41) (0.32)

In excess of net investment income -- (0.02) -- -- (0.01) --

Net realized gains (0.37) -- (0.37) (0.07) -- --
------- ------- -------- -------- -------- ------

Total Distributions (0.54) (0.16) (0.72) (0.43) (0.42) (0.32)
------- ------- -------- -------- -------- ------

Net Asset Value, End of Period $ 13.88 $ 12.34 $ 13.87 $ 12.33 $ 11.01 $ 9.62
======= ======= ======== ======== ======== ======

Total Return (excludes sales charge) 17.43% 15.73% <F5> 19.02% 16.27% 19.24% (0.57%)<F2>

Ratios/Supplemental Data:
Net Assets, End of Period (000) $ 3,291 $ 1,432 $342,933 $273,553 $201,073 $127,285

Ratio of expenses to
average net assets 2.56% 2.46% <F3> 1.25% 1.27% 0.98% 0.87%<F3>

Ratio of net investment income
to average net assets 1.36% 1.78% <F3> 2.69% 3.14% 4.05% 3.97%<F3>

Ratio of expenses to
average net assets <F8> 2.95% 2.67% <F3> 1.36% 1.43% 1.36% 1.49%<F3>

Ratio of net investment income
to average net assets <F8> 0.97% 1.57% <F3> 2.58% 2.98% 3.67% 3.35%<F3>

Portfolio turnover <F6> 109% 80% 109% 80% 69% 118%

Average commission rate paid <F7> $0.0356 $0.0084 $ 0.0356 $ 0.0084 -- --

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Balanced Fund's

<PAGE>

most recent Annual Report to shareholders, which is incorporated by reference in
the SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective March 1, 1996, the Balanced Fund designated the existing shares
as Class A Shares and began offering Class B Shares.
<F5> Represents total return for the Balanced Fund for the period November 1,
1995 through February 29, 1996 plus total return for Class B Shares for the
period March 1, 1996 through October 31, 1996. The total return for Class B
Shares for the period from March 1, 1996 through October 31, 1996 was
8.72%.
<F6> Portfolio turnover is calculated on the basis of the Balanced Fund as a
whole without distinguishing between the classes of shares issued.
<F7> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Balanced Fund for which commissions were charged.
<F8> During the period certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
</FN>
</TABLE>

DIVERSIFIED STOCK FUND

Investment Objective

The Diversified Stock Fund seeks to provide long-term growth of capital.

INVESTMENT POLICIES AND STRATEGY

The Diversified Stock Fund pursues its investment objective by investing
primarily in equity securities and securities convertible into common stocks
issued by established domestic and foreign companies.

The Adviser seeks to invest in securities that it considers undervalued in
relation to historical earnings and the value of the issuer's underlying assets.
In making investment decisions, the Adviser may consider cash

<PAGE>

flow, book value, dividend yield, growth potential, quality of management,
adequacy of revenues, earnings, capitalization, and expected future relative
earnings growth. The Adviser will pursue investments that provide above average
dividend yield or potential for appreciation.

Under normal market conditions, the Diversified Stock Fund:

Will invest at least 80% of its total assets in equity securities and securities
convertible or exchangeable into common stock

May invest up to 20% of its total assets in:

Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations

The Diversified Stock Fund is designed for long-term investors. The Diversified
Stock Fund is subject to the risks common to all mutual funds and the risks
common to mutual funds that invest in equity securities. By itself, the
Diversified Stock Fund does not constitute a complete investment plan and should
be considered a long-term investment for investors who can afford to weather
changes in the value of their investment. PLEASE READ "RISK FACTORS" CAREFULLY
BEFORE INVESTING.

PORTFOLIO MANAGEMENT

Lawrence G. Babin is the Portfolio Manager of the Diversified Stock Fund, a
position he has held since its inception in October 1989. He is a Portfolio
Manager and Managing Director of Key Asset Management Inc., and has been in the
investment business since 1982.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Diversified Stock Fund.

<PAGE>

<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses <F1> Shares Shares

<S> <C> <C>
Maximum Sales Charge 5.75% NONE
Imposed on Purchases
(as a percentage of offering price)

Sales Charge Imposed NONE NONE
on Reinvested Dividends

Deferred Sales Charge NONE<F2> 5.00% <F3>
Redemption Fees NONE NONE
Exchange Fee NONE NONE

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Diversified Stock
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE DIVERSIFIED STOCK FUND.
Expenses include management fees as well as the costs of maintaining accounts,
administering the Diversified Stock Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical expenses
of the Diversified Stock Fund adjusted to reflect anticipated expenses.

<PAGE>

<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares
<S> <C> <C>
(as a percentage of average daily net assets)
Management Fees <F1> .54% .54%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses <F2> .51% 1.00%
---- ----
Total Fund Operating Expenses <F1> 1.05% 2.29%
==== ====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .65% and the Total Fund Operating Expenses would be
1.16% for Class A Shares, and 2.40% for Class B Shares.
<F2> Other Expenses include an estimate of shareholder servicing fees
the Diversified Stock Fund expects to pay. See "Organization and Management
of the Funds -- Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Diversified Stock Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $68 $ 89 $112 $178
Class B Shares $73 $102 $143 $231
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

<PAGE>

FINANCIAL HIGHLIGHTS

DIVERSIFIED STOCK FUND

The Financial Highlights describe the Diversified Stock Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Diversified Stock Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
CLASS B CLASS A
Year March 1, Year Year
Ended 1996 Ended Ended
Oct. 31, through Oct. 31, Oct. 31,
1997 Oct. 31, 1997 1996<F1>
1996 <F1>

<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF PERIOD $ 15.71 $ 14.18 $ 15.75 $ 13.62
------- ------- -------- --------

Investment
Activities:
Net investment
income (0.06) 0.07 0.16 0.20

Net realized
and unrealized
gains (losses)
from investments 3.85 1.57 3.84 3.21
------- ------- -------- --------

Total from
investment
activities 3.79 1.64 4.00 3.41
------- ------- -------- --------

Distributions
Net investment
income -- (0.07) (0.16) (0.19)

<PAGE>

In excess of net
investment income (0.05) (0.04) -- --

Net realized gains (1.83) -- (1.83) (1.09)
------- ------- -------- --------

Total
distributions (1.88) (0.11) (1.99) (1.28)
------- ------- -------- --------

NET ASSET VALUE,
END OF PERIOD $ 17.62 $ 15.71 $ 17.76 $ 15.75
======= ======= ======== ========

Total Return
(excludes sales
charge) 26.48% 26.61% <F3> 27.96% 27.16%

RATIOS/
SUPPLEMENTAL
DATA:
Net Assets,
End of Period (000) $30,198 $ 8,228 $762,270 $571,153

Ratio of expenses
to average net
assets 2.19% 2.07% <F2> 1.03% 1.05%

Ratio of net
investment income
(loss) to average
net assets (0.29%) 0.11% <F2> 0.97% 1.40%

Ratio of expenses
to average net
assets <F7> <F8> 2.08% <F2> <F8> 1.08%

Ratio of net
investment income
(loss) to average
net assets <F7> <F8> 0.10% <F2> <F8> 1.37%

Portfolio
turnover <F4> 63% 94% 63% 94%

Average
commission
rate paid <F5> $0.0505 $0.0504 $ 0.0505 $ 0.0504

<PAGE>

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Diversified Stock Fund's most
recent Annual Report to shareholders, which is incorporated by reference in the
SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>
<F1> Effective March 1, 1996, the Diversified Stock Fund designated the existing
shares as Class A Shares and began offering Class B Shares.
<F2> Annualized.
<F3> Represents total return for the Diversified Stock Fund for the period
November 1, 1995 through February 29, 1996 plus total return for Class B
Shares for the period March 1, 1996 through October 31, 1996. The total
return fo the Class B Shares for the period from March 1, 1996 through
October 31, 1996 was 11.62%.
<F4> Portfolio turnover is calculated on the basis of the Diversified Stock Fund
as a whole without distinguishing between the classes of shares issued.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Diversified Stock Fund for which commissions were charged.
<F6> Period from commencement of operations.
<F7> During the period certain fees were voluntarily reduced. If
such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
<F8> There were no voluntary fee reductions during the period.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Year Year Year Year Year Year Period From
Ended Ended Ended Ended Ended Ended Oct. 20,
Oct.31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct.31, 1989 to
1995 1994 1993 1992 1991 1990 Oct. 31,

1989 <F6>
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF PERIOD $ 12.68 $ 13.39 $ 12.16 $ 11.44 $ 9.25 $ 9.90 $10.00
-------- -------- -------- -------- -------- ------ ------

Investment
Activities:
Net investment
income 0.27 0.25 0.18 0.19 0.23 0.26

Net realized
and unrealized
gains (losses)
from investments 2.33 0.64 1.50 1.11 2.20 (0.67) (0.10)
-------- -------- -------- -------- -------- ------ ------

Total from
investment
activities 2.60 0.89 1.68 1.30 2.43 (0.41) (0.10)
-------- -------- -------- -------- -------- ------ -------

Distributions
Net investment
income (0.27) (0.23) (0.21) (0.19) (0.24) (0.24)

In excess of net
investment income (0.01) -- -- -- -- -- --

Net realized gains (1.38) (1.37) (0.24) (0.39)
-------- -------- -------- -------- -------- ------ -------

Total
distributions (1.66) (1.60) (0.45) (0.58) (0.24) (0.24)
-------- -------- -------- -------- -------- ------ -------

NET ASSET VALUE,
END OF PERIOD $ 13.62 $ 12.68 $ 13.39 $ 12.16 $ 11.44 $ 9.25 $ 9.90
======== ======== ======== ======== ======== ====== =======

Total Return
(excludes sales
charge) 23.54% 7.39% 14.04% 11.57% 27.50% (4.29%) (1.00%)

<PAGE>

RATIOS/
SUPPLEMENTAL
DATA:
Net Assets,
End of Period (000) $409,549 $263,227 $257,405 $227,839 $177,472 $121,754 $80,046

Ratio of expenses
to average net
assets 0.92% 0.89% 0.89% 0.91% 0.91% 0.91% 0.75%<F2>

Ratio of net
investment income
(loss) to average
net assets 2.11% 2.06% 1.45% 1.63% 2.06% 2.75% 1.39%<F2>

Ratio of expenses
to average net
assets <F7> 0.95% 1.10% 0.90% <F8> <F8> <F8> <F8>

Ratio of net
investment income
(loss) to average
net assets <F7> 2.07% 1.86% 1.43% <F8> <F8> <F8> <F8>

Portfolio
turnover <F4> 75% 104% 86% 75% 51% 63% 3%

Average
commission
rate paid <F5> -- -- -- -- -- -- --

<PAGE>

the period November 1, 1995 through February 29, 1996 plus total return for
Class B Shares for the period March 1, 1996 through October 31, 1996. The
total return fo the Class B Shares for the period from March 1, 1996
through October 31, 1996 was 11.62%.
<F4> Portfolio turnover is calculated on the basis of the Diversified Stock Fund
as a whole without distinguishing between the classes of shares issued.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Diversified Stock Fund for which commissions were charged.
<F6> Period from commencement of operations.
<F7> During the period certain fees were voluntarily reduced. If
such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
<F8> There were no voluntary fee reductions during the period.
</FN>
</TABLE>

VALUE FUND

INVESTMENT OBJECTIVE

The Value Fund seeks to provide long-term growth of capital and dividend income.

INVESTMENT POLICIES AND STRATEGY

The Value Fund pursues its investment objective by investing primarily in a
diversified group of equity securities with an emphasis on companies with above
average total return potential. The securities in the Value Fund usually are
listed on a national exchange.

The Adviser seeks equity securities of under-valued companies that are
inexpensive relative to historical measurements, such as price to earnings.

Under normal market conditions, the Value Fund:

<PAGE>

Will invest at least 80% of its total assets in equity securities and securities
convertible or exchangeable into common stock

May invest up to 20% of its total assets in:
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations

The Value Fund is designed for long-term investors. The Value Fund is subject to
the risks common to all mutual funds and the risks common to mutual funds that
invest in equity securities. By itself, the Value Fund does not constitute a
complete investment plan and should be considered a long-term investment for
investors who can afford to weather changes in the value of their investment.
PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.

PORTFOLIO MANAGEMENT

Judith A. Jones is the Portfolio Manager of the Value Fund, a position she has
held since its inception in December 1993. She is a Portfolio Manager and
Managing Director of Key Asset Management Inc., and has been in the investment
business since 1967.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Value Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses <F1> Class A Shares

<S> <C>
Maximum Sales Charge Imposed on Purchases 5.75%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE

<PAGE>

Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Value Fund. THESE
EXPENSES ARE CHARGED DIRECTLY TO THE VALUE FUND. Expenses include management
fees as well as the costs of maintaining accounts, administering the Value Fund,
providing shareholder services, and other activities. The expenses shown are
estimated based on historical expenses of the Value Fund adjusted to reflect
anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares

<S> <C>
(as a percentage of average daily net assets)
Management Fees <F1> .86%
Other Expenses <F1><F2> .54%
-----
Total Fund Operating Expenses <F1> 1.40%
=====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be 1.00% and the Total Operating Expenses would be
1.54%.
<F2> Other Expenses include an estimate of shareholder servicing fees
the Value Fund expects to pay. See "Organization and Management of
the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

<PAGE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Value Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $71 $99 $130 $216
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

VALUE FUND

The Financial Highlights describe the Value Fund's returns and operating
expenses over time. This table shows the results of an investment in one share
of the Value Fund for each of the periods indicated.

Variability, as shown by year-to-year total return:

[Chart depicting the variability of the Fund's year-to-year total return.]

<PAGE>

<TABLE>
<CAPTION>
Year Year Year December 3,
Ended Ended Ended 1993 to
October 31, October 31, October 31, October 31,
1997 1996 1995 <F4> 1994 <F1>

<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.18 $ 11.87 $ 10.13 $10.00
-------- -------- -------- ------

Investment Activities
Net investment income 0.15 0.20 0.27 0.21

Net realized and unrealized gains
from investments 3.57 2.65 1.92 0.11
-------- -------- -------- ------

Total from Investment Activities 3.72 2.85 2.19 0.32
-------- -------- -------- ------

Distributions
Net investment income (0.16) (0.20) (0.27) (0.19)

In excess of net investment income -- -- (0.01) --

Net realized gains (0.67) (0.34) (0.17) --
-------- -------- -------- ------

Total Distributions (0.83) (0.54) (0.45) (0.19)
-------- -------- -------- ------

NET ASSET VALUE, END OF PERIOD $ 17.07 $ 14.18 $ 11.87 $10.13
======== ======== ======== ======

Total Return (excludes sales charge) 27.24% 24.66% 22.28% 3.27%<F2>

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $472,047 $382,083 $295,871 $188,184

Ratio of expenses to average net assets 1.32% 1.33% 0.99% 0.92%<F3>

Ratio of net investment income
to average net assets 0.93% 1.56% 2.55% 2.32%<F3>

Ratio of expenses to average net assets <F7> <F6> 1.35% 1.30% 1.48%<F3>

<PAGE>

Ratio of net investment income
to average net assets <F7> <F6> 1.54% 2.24% 1.76%<F3>

Portfolio turnover 25% 28% 23% 39%

Average commission rate paid <F5> $ 0.0530 $ 0.0524 -- --

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Value Fund's most recent
Annual Report to shareholders, which is incorporated by reference in the SAI. If
you would like a copy of the Annual Report, write or call us at 800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Equity Income Portfolio merged into the
Value Fund. Financial highlights for the periods prior to June 5, 1995
represent the Value Fund.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Value Fund for which commissions were charged.
<F6> There were no voluntary fee reductions during the period.
<F7> During the period, certain fees were voluntarily reduced. If
such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
</FN>
</TABLE>

STOCK INDEX FUND

INVESTMENT OBJECTIVE

The Stock Index Fund seeks to provide long-term capital appreciation by
attempting to match the investment performance of the Standard & Poor's 500
Composite Stock Index (S&P 500 Index).

INVESTMENT POLICIES AND STRATEGY

<PAGE>

The Stock Index Fund pursues its investment objective by attempting to duplicate
the capital performance and dividend income of the S&P 500 Index. The Stock
Index Fund primarily invests in many of the equity securities that are in the
S&P 500 Index, including American Depositary Receipts (ADRs), and secondarily in
related futures and options contracts.

The S&P 500 Index is comprised of 500 common stocks. To minimize small positions
and transactions expenses, the Stock Index Fund need not invest in every stock
included in the S&P 500 Index. The Stock Index Fund may purchase stocks that are
not included in the S&P 500 Index if the Adviser believes that these investments
will reduce "tracking error" (the difference between the Stock Index Fund's
investment results, before expenses, and that of the S&P 500 Index).

The Stock Index Fund is not managed in the traditional sense using economic,
financial, and market analysis. Therefore, the Stock Index Fund will not
necessarily sell a stock that is underperforming. Brokerage costs, fees,
operating expenses, and tracking errors may cause the Stock Index Fund's total
return to be lower than that of the S&P 500 Index.

The Stock Index Fund is designed for long-term investors. The Stock Index Fund
is subject to the risks common to all mutual funds and the risks common to
mutual funds that invest in equity securities. The Stock Index Fund may
purchase, retain, and sell securities when such transactions would not be
consistent with traditional investment criteria. The Stock Index Fund generally
will remain fully invested in common stocks even when stock prices generally are
falling. Accordingly, an investor is exposed to a greater risk of loss (or
conversely, a greater prospect of gain) from fluctuations in the value of such
securities than would be the case if the Stock Index Fund was not fully
invested, regardless of market conditions. By itself, the Stock Index Fund does
not constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather sudden and sometimes
substantial changes in the value of their investment. Please read "Risk Factors"
carefully before investing.

PORTFOLIO MANAGEMENT

Malini S. Menon is the Portfolio Manager of the Stock Index Fund, a position she
has held since April, 1996. She is a Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment business since 1990.

FUND EXPENSES

<PAGE>

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Stock Index Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses <F1> Class A Shares

<S> <C>
Maximum Sales Charge Imposed on Purchases 5.75%
(as a percentage of the offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Stock Index Fund.
THESE EXPENSES ARE CHARGED DIRECTLY TO THE STOCK INDEX FUND. Expenses include
management fees, as well as the costs of maintaining accounts, administering the
Stock Index Fund, and other activities. The expenses shown are estimated based
on historical expenses of the Stock Index Fund adjusted to reflect anticipated
expenses.

<PAGE>

<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
(After expense waivers and reimbursements)

<S> <C>
(as a percentage of average daily net assets)
Management Fees <F1> .46%
Other Expenses <F1> .10%
----
Total Fund Operating Expenses <F1> .56%
====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .60%, and Other Expenses would be .24%. If the waivers
were not in place, the Total Fund Operating Expenses would be .84%.
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Stock Index Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>

Class A Shares $63 $74 $87 $124
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

<PAGE>

FINANCIAL HIGHLIGHTS

STOCK INDEX FUND

The Financial Highlights describe the Stock Index Fund's returns and operating
expenses over time. This table shows the results of an investment in one share
of the Stock Index Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Year December 3,
Ended Ended Ended 1993 to
October 31, October 31, October 31, October 31,
1997 1996 1995 1994 <F1>

<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.85 $ 12.50 $ 10.18 $10.00
-------- -------- -------- ------

Investment Activities
Net investment income 0.29 0.28 0.27 0.20

Net realized and unrealized gains
on investments 4.23 2.58 2.31 0.16
-------- -------- -------- ------

Total from Investment Activities 4.52 2.86 2.58 0.36
-------- -------- -------- ------

Distributions
Net investment income (0.29) (0.28) (0.26) (0.18)

Net realized gains (0.33) (0.23) -- --
-------- -------- -------- ------

Total Distributions (0.62) (0.51) (0.26) (0.18)
-------- -------- -------- ------

NET ASSET VALUE, END OF PERIOD $ 18.75 $ 14.85 $ 12.50 $10.18
======== ======== ======== ======

Total Return (excludes sales charge) 31.16% 23.38% 25.72% 3.66%<F2>

<PAGE>

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $465,015 $277,124 $160,822 $89,686

Ratio of expenses to average net assets 0.56% 0.57% 0.55% 0.58%<F3>

Ratio of net investment income
to average net assets 1.74% 2.14% 2.53% 2.35%<F3>

Ratio of expenses to average net assets <F4> 0.86% 0.89% 0.87% 1.10%<F3>

Ratio of net investment income
to average net assets <F4> 1.44% 1.82% 2.21% 1.82%<F3>

Portfolio turnover 11% 4% 12% 1%

Average commission rate paid <F5> $ 0.0212 $ 0.0186 -- --

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Stock Index Fund's most
recent Annual Report to shareholders, which is incorporated by reference in the
SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Stock Index Fund for which commissions were charged.
</FN>
</TABLE>

<PAGE>

OHIO REGIONAL STOCK FUND

INVESTMENT OBJECTIVE

The Ohio Regional Stock Fund seeks to provide capital appreciation.

INVESTMENT POLICIES AND STRATEGY

The Ohio Regional Stock Fund pursues its investment objective by investing at
least 80% of the Fund's total assets in equity securities issued by companies
headquartered in the State of Ohio.

In making investment decisions, the Adviser analyzes cash flow, book value,
dividend growth potential, quality of management, earnings, and capitalization.
The Ohio Regional Stock Fund looks at any information that reflects the
potential for future earnings growth. The Ohio Regional Stock Fund invests in
nationally recognized companies and lesser-known companies that may have smaller
capitalization, but also the potential for growth.

Under normal market conditions, the Ohio Regional Stock Fund:

Will invest at least 80% of its total assets in common
stocks and preferred stocks

May invest up to 20% of its total assets in:
Short-term debt obligations

Investment-grade corporate debt securities

U.S. Government obligations

May invest up to 5% of its total assets in securities
convertible or exchangeable into common stocks

The Ohio Regional Stock Fund is designed for long-term investors. The Ohio
Regional Stock Fund is subject to the risks common to all mutual funds and the
risks common to mutual funds that invest in equity securities. The Ohio Regional
Stock Fund may be appropriate for investors who are comfortable with assuming
the added risks associated with an investment in a fund that concentrates its
investments in a single

<PAGE>

state. By itself, the Ohio Regional Stock Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment. Since the
Ohio Regional Stock Fund concentrates its investments in the State of Ohio, its
assets may be at greater risk because of economic, political, or regulatory
risks associated with the state. The Ohio Regional Stock Fund is subject to
additional risks because it concentrates its investments in a single geographic
area and it may invest more than 5% of its assets in the securities of a single
issuer. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.

PORTFOLIO MANAGEMENT

Lynn S. Hamilton is the Portfolio Manager of the Ohio Regional Stock Fund, a
position he has held since October, 1991. He is a Portfolio Manager and Managing
Director of Key Asset Management Inc., and has been in the investment business
since 1977.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Ohio Regional Stock Fund.

<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses <F1> Shares Shares

<S> <C> <C>
Maximum Sales Charge 5.75% NONE
Imposed on Purchases
(as a percentage of the offering price)

Sales Charge Imposed NONE NONE
on Reinvested Dividends
Deferred Sales Charge NONE<F2> 5.00% <F3>

<PAGE>

Redemption Fees NONE NONE
Exchange Fees NONE NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
<F2>Except for investments of $1 million or more. See " Investing with Victory."
<F3> 5% in the first year, declining to 1% in the sixth year, with no charge
after the sixth year.
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Ohio Regional
Stock Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE OHIO REGIONAL STOCK FUND.
Expenses include management fees as well as the costs of maintaining accounts,
administering the Ohio Regional Stock Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical expenses
of the Ohio Regional Stock Fund adjusted to reflect anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares

<S> <C> <C>
(as a percentage of average daily net assets)
Management Fees <F1> .62% .62%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses <F2> .78% 1.27%
---- ----

Total Fund Operating Expenses <F1> 1.40% 2.64%
==== ====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .75%, and the Total Fund Operating Expenses would
be 1.53% for Class A Shares, and 2.77% for Class B Shares.
<F2> Other Expenses include an estimate of shareholder servicing fees
the Ohio Regional Stock Fund expects to pay. See "Organization and

<PAGE>

Management of the Funds-- Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Ohio Regional Stock
Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $71 $ 99 $130 $216
Class B Shares $78 $116 $166 $284
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

OHIO REGIONAL STOCK FUND

The Financial Highlights describe the Ohio Regional Stock Fund's return and
operating expenses over time. This table shows the results of an investment in
one share of the Ohio Regional Stock Fund for each of the periods indicated.

<PAGE>

<TABLE>
<CAPTION>
VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:
[Chart depicting the variability of the Fund's year-to-year total return.]

CLASS B CLASS A

Year March 1, Year Year Year Year
Ended 1996 Ended Ended Ended Ended
Oct. 31, through Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1997 Oct. 31, 1997 1996<F5> 1995 1994
1996<F5>

<S> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF PERIOD $ 17.87 $ 16.43 $ 17.95 $ 15.94 $ 14.56 $ 14.69
------- ------- ------- ------- ------- -------

Investment
Activities:
Net
investment
income
(loss) (0.14) (0.03) 0.14 0.14 0.17 0.18

Net realized
and
unrealized
gains
(losses)
from
investments 5.90 1.51 5.96 2.62 2.13 0.39
------- ------- ------- ------- ------- -------

Total from
Investment
Activities 5.76 1.48 6.10 2.76 2.30 0.57
------- ------- ------- ------- ------- -------

Distributions
Net
investment
income -- -- (0.14) (0.14) (0.17) (0.17)

<PAGE>

In excess
of net
investment
income -- (0.04) -- -- (0.01) --

Net realized
gains (0.35) -- (0.35) (0.36) (0.65) (0.53)

In excess of
net realized
gains -- -- -- (0.25) (0.09) --
------- ------- -------- ------- ------- -------

Total
Distributions (0.35) (0.04) (0.49) (0.75) (0.92) (0.70)
------- ------- -------- ------- ------- -------

NET ASSET
VALUE, END
OF PERIOD $ 23.28 $ 17.87 $ 23.56 $ 17.95 $ 15.94 $ 14.56
======= ======= ======= ======= ======= =======

Total Return
(excludes
sales charge) 32.71% 16.95%<F6> 34.61% 17.79% 16.93% 3.96%

RATIOS/SUPPLEMENTAL
DATA:
Net Assets,
End of Period
(000) $ 705 $ 326 $53,703 $45,294 $39,048 $33,965

Ratio of expenses
to average
net assets 2.65% 2.61%<F3> 1.26% 1.39% 1.20% 1.04%

Ratio of net
investment income
(loss) to average
net assets (0.76%) (0.60%)<F3> 0.67% 0.79% 1.13% 1.27%

Ratio of
expenses to
average net
assets<F4> 4.25% 3.50%<F3> 1.26% 1.40% 1.24% 1.27%

Ratio of net
investment

<PAGE>

income
(loss) to
average net
assets<F4> (2.36%) (1.49%)<F3> 0.67% 0.78% 1.09% 1.04%

Portfolio
turnover<F7> 8% 6% 8% 6% 11% 14%

Average
commission
paid<F8> $0.0579 $0.0513 $0.0579 $0.0513 -- --

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Ohio Regional Stock Fund's
most recent Annual Report to shareholders, which is incorporated by reference in
the SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.

<F2> Not annualized.

<F3> Annualized.

<F4> During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.

<F5> Effective March 1, 1996, the Ohio Regional Stock Fund designated the
existing shares as Class A Shares and began offering Class B Shares.

<F6> Represents total return for the Ohio Regional Stock Fund for the period
November 1, 1995 through February 29, 1996 plus total return for Class B
Shares for the period March 1, 1996 through October 31, 1996. The total
return for the Class B Shares for the period from March 1, 1996 through
October 31, 1996 was 9.03%.

<F7> Portfolio turnover is calculated on the basis of the Ohio Regional Stock
Fund as a whole without distinguishing between the classes of shares
issued.

<F8> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased

<PAGE>

and sold by the Ohio Regional Stock Fund for which commissions were
charged.
</FN>
</TABLE>

<TABLE>
continued

Year Year Year Year Period From
Ended Ended Ended Ended Oct. 20,
Oct. 31, Oct. 31, Dec. 31, Dec. 31, 1989 to
1993 1992 1991 1990 Oct. 31,
1989<F1>

NET ASSET
VALUE,
BEGINNING
OF PERIOD $ 12.12 $ 11.15 $ 6.75 $ 9.72 $ 10.00
------- ------- ------ ------- -------

Investment
Activities:
Net
investment
income
(loss) 0.16 0.20 0.21 0.24

Net realized
and
unrealized
gains
(losses)
from
investments 2.63 1.07 4.39 (2.98) (0.28)
------- ------- ------ ------- -------

Total from
Investment
Activities 2.79 1.27 4.60 (2.74) (0.28)
------- ------- ------ ------- -------

Distributions
Net
investment
income (0.18) (0.21) (0.20) (0.23) --

<PAGE>

In excess
of net
investment
income -- -- -- -- --

Net realized
gains (0.04) (0.09) -- -- --

In excess of
net realized
gains -- -- -- -- --
------- ------- ------ ------- -------

Total
Distributions (0.22) (0.30) (0.20) (0.23)
------- ------- ------ ------- -------

NET ASSET
VALUE, END
OF PERIOD $ 14.69 $ 12.12 $ 11.15 $ 6.75 $ 9.72
======= ======= ======= ======= =======

Total Return
(excludes
sales charge) 23.16% 11.50% 68.68% (28.63%) (2.80%)<F2>

RATIOS/SUPPLEMENTAL
DATA:
Net Assets,
End of Period
(000) $34,926 $36,115 $27,092 $13,039 $20,277

Ratio of expenses
to average
net assets 1.04% 1.04% 1.08% 1.11% 0.88%<F3>

Ratio of net
investment income
(loss) to average
net assets 1.17% 1.73% 2.16% 2.66% 0.47%<F3>

Ratio of
expenses to
average net
assets<F4> 1.06% -- -- -- --

Ratio of net
investment

<PAGE>

income
(loss) to
average net
assets<F4> 1.15% -- -- -- --

Portfolio
turnover<F7> 7% 8% 15% 11% --

Average
Commission
Paid<F8> -- -- -- -- --

The financial highlights were audited by Coopers & Lybrand, L.L.P. This
information should be read in conjunction with the Ohio Regional Stock Fund's
most recent Annual Report to shareholders, which is incorporated by reference in
the SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>

<F1> Period from commencement of operations.

<F2> Not annualized.

<F3> Annualized.

<F4> During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.

<F5> Effective March 1, 1996, the Ohio Regional Stock Fund designated the
existing shares as Class A Shares and began offering Class B Shares.

<F7> Portfolio turnover is calculated on the basis of the Ohio Regional Stock
Fund as a whole without distinguishing between the classes of shares
issued.

<F8> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Ohio Regional Stock Fund for which commissions were charged.
</FN>
</TABLE>

<PAGE>

GROWTH FUND

INVESTMENT OBJECTIVE

The Growth Fund seeks to provide long-term growth of capital.

INVESTMENT POLICIES AND STRATEGY

The Growth Fund pursues its investment objective by investing primarily in
equity securities of companies with superior prospects for long-term earnings
growth and price appreciation. The issuers usually are listed on a nationally
recognized exchange.

In making investment decisions, the Adviser will look for above average growth
rates, high return on equity, issuers that reinvest their earnings in their
business, and strong balance sheets.

Under normal market conditions, the Growth Fund:

Will invest at least 80% of its total assets in common stocks and securities
convertible into common stocks

May invest up to 20% of its total assets in:
Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations

The Growth Fund is designed for long-term investors. The Growth Fund is subject
to the risks common to all mutual funds and the risks common to mutual funds
that invest in equity securities. The Growth Fund may be appropriate for
investors who are comfortable with assuming the added risks associated with
stocks that do not pay out significant portions of their earnings as dividends.
By itself, the Growth Fund does not constitute a complete investment plan and
should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment and do not require significant
current income from their investments. PLEASE READ "RISK FACTORS" CAREFULLY
BEFORE INVESTING.

PORTFOLIO MANAGEMENT

<PAGE>

William F. Ruple is the Portfolio Manager of the Growth Fund, a position he has
held since June, 1995. He is a Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment advisory business since 1970.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Growth Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses <F1> Class A Shares

<S> <C>
Maximum Sales Charge Imposed on Purchases 5.75%
(as a percentage of offering price)

Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Growth Fund.
THESE EXPENSES ARE CHARGED DIRECTLY TO THE GROWTH FUND'S INCOME BEFORE IT IS
PAID TO YOU. Expenses include management fees as well as the costs of
maintaining accounts, administering the Growth Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical expenses of the Growth Fund adjusted to reflect anticipated expenses.

<PAGE>

<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares

<S> <C>
(as a percentage of average daily net assets)
Management Fees <F1> .86%
Other Expenses <F2> .54%
-----

Total Fund Operating Expenses <F1> 1.40%
=====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be 1.00% and the Total Fund Operating Expenses would
be 1.54%.
<F2> Other Expenses includes an estimate of shareholder servicing fees
the Growth Fund expects to pay. See "Organization and Management of
the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Growth Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>

Class A Shares $71 $99 $130 $216
</TABLE>

<PAGE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

GROWTH FUND

The Financial Highlights describe the Growth Fund's returns and operating
expenses over time. This following table shows the results of an investment in
one share of the Growth Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:
[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Year December 3,
Ended Ended Ended 1993 to
October 31, October 31, October 31, October 31,
1997 1996 1995 <F4> 1994 <F1> <F5>

<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.57 $ 12.15 $ 10.23 $10.00
-------- -------- -------- ------

Investment Activities
Net investment income (loss) 0.03 0.08 0.11 0.10

Net realized and unrealized gains
(losses) on investments 4.07 2.93 1.97 0.22
-------- -------- -------- ------

<PAGE>

Total from Investment Activities 4.10 3.01 2.08 0.32
-------- -------- ------- -------

Distributions
Net investment income (0.04) (0.08) (0.11) (0.09)
Net realized gains (0.62) (0.51) (0.05) --
-------- -------- ------- -------

Total Distributions (0.66) (0.59) (0.16) (0.09)
-------- -------- ------- -------

Net Asset Value, End of Period $ 18.01 $ 14.57 $ 12.15 $10.23
======== ======== ======= ======

Total Return (excludes sales charge) 29.08% 25.66% 20.54% 3.22%<F2>

Ratios/Supplemental Data:
Net Assets, End of Period (000) $185,533 $147,753 $108,253 $66,921

Ratio of expenses to average net assets 1.34% 1.33% 1.07% 0.94%<F3>

Ratio of net investment income
to average net assets 0.19% 0.64% 1.00% 1.10%<F3>

Ratio of expenses to average net assets<F6> <F8> 1.39% 1.42% 1.51% <F3>

Ratio of net investment income
to average net assets<F6> <F8> 0.58% 0.65% 0.52%<F3>

Portfolio turnover 21% 27% 107% 28%

Average commission rate paid<F7> $ 0.0592 $ 0.0618 -- --

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Growth Fund's most recent
Annual Report to shareholders, which is incorporated by reference in the SAI. If
you would like a copy of the Annual Report, write or call us at 800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.

<PAGE>

<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Equity Portfolio merged into the Growth
Fund. Financial highlights for the period prior to June 5, 1995 represent
the Growth Fund.
<F5> Effective March 17, 1994, the Society Earnings Momentum Fund merged into
the Growth Fund. Financial highlights for the period prior to March 17,
1994 represent the Growth Fund.
<F6> During the period, certain fees were voluntarily reduced . If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F7> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Growth Fund for which commissions were charged.
<F8> There were no voluntary fee reductions during the period.
</FN>
</TABLE>

SPECIAL VALUE FUND

INVESTMENT OBJECTIVE

The Special Value Fund seeks to provide long-term growth of capital and dividend
income.

INVESTMENT POLICIES AND STRATEGY

The Special Value Fund pursues its investment objective by investing primarily
in equity securities of small- and medium-sized companies listed on a national
exchange. Small-sized companies are defined as those having market
capitalization of less than $1 billion, and medium-sized companies are defined
as those having a market capitalization of between $1 billion and $5 billion.

The Adviser looks for companies with above average total return potential whose
equity securities are under-valued and considered statistically cheap.

Under normal market conditions the Special Value Fund will:

<PAGE>

Invest at least 80% of its total assets in:

Common stocks

Securities convertible into common stock
of small- and medium-sized companies

Invest up to 20% of its total assets in:
Investment-grade debt securities
Preferred stocks

The Special Value Fund is designed for long-term investors. The Special Value
Fund is subject to the risks common to all mutual funds and the risks common to
mutual funds that invest in equity securities. The Special Value Fund may be
appropriate for investors who are comfortable with assuming the added risks
associated with small- and mid-capitalization stocks in return for the
possibility of long-term rewards. The smaller, less seasoned companies in which
the Special Value Fund may invest may be subject to greater business risks than
larger, established companies. They may be at greater risk to changes in
economic conditions and factors affecting the profits of corporations. By
itself, the Special Value Fund does not constitute a complete investment plan
and should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment. Please read "Risk Factors"
carefully before investing.

PORTFOLIO MANAGEMENT

Anthony Aveni, Barbara Myers, and Paul Danes are the Portfolio Managers of the
Special Value Fund. Anthony Aveni has been a Portfolio Manager of the Special
Value Fund since its inception in December, 1993. He is a Managing Director with
Key Asset Management Inc., and has been in the investment business since 1981.
Barbara Myers has been a Portfolio Manager of the Special Value Fund since June,
1995. She is a Portfolio Manager and Director with Key Asset Management Inc.,
and has been in the investment business since 1987. Paul Danes has been a
Portfolio Manager of the Special Value Fund since October, 1995. He is a
Portfolio Manager and Director with Key Asset Management Inc., and has been in
the investment business since 1987.

FUND EXPENSES

This section will help you understand the costs and expenses you would

<PAGE>

pay, directly or indirectly, if you invested in the Special Value
Fund.

<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses <F1> Shares Shares

<S> <C> <C>
Maximum Sales Charge 5.75% NONE
Imposed on Purchases
(as a percentage of the offering price)

Sales Charge Imposed NONE NONE
on Reinvested Dividends

Deferred Sales Charge NONE<F2> 5.00% <F3>
Redemption Fees NONE NONE
Exchange Fee NONE NONE

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Special Value
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE SPECIAL VALUE FUND. Expenses
include management fees, as well as the costs of maintaining accounts,
administering the Special Value Fund, providing shareholder services, and other
activities. The expenses shown are estimated based on historical expenses of the
Special Value Fund adjusted to reflect anticipated expenses.

<PAGE>

<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares

<S> <C> <C>
(as a percentage of average daily net assets)
Management Fees <F1> .90% .90%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses <F2> .50% .99%
---- ----
Total Fund Operating Expenses <F1> 1.40% 2.64%
==== ====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be 1.00% and the Total Fund Operating Expenses would
be 1.50% for Class A Shares, and 2.74% for Class B Shares.
<F2> Other Expenses includes an estimate of shareholder servicing fees
the Special Value Fund expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Special Value Fund.

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

<TABLE>

<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $71 $ 99 $130 $216
Class B Shares $77 $112 $160 $267
---- ----

</TABLE>

<PAGE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

SPECIAL VALUE FUND

The Financial Highlights describe the Special Value Fund's returns and operating
expenses over time. This table shows the results of an investment in one share
of the Special Value Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:
[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
CLASS B CLASS A
Year March 1, Year Year Year Dec. 3,
Ended 1996 Ended Ended Ended 1993
Oct. 31, through Oct. 31, Oct. 31, Oct. 31, through
1997 Oct. 31, 1997 1996 <F5> 1995 Oct. 31,
1996 <F5> 1994 <F1>

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 14.09 $ 12.89 $ 14.15 $ 12.15 $ 10.49 $10.00
------- ------- -------- -------- -------- -------

Investment Activities
Net investment income (0.04) 0.01 0.10 0.12 0.15 0.11

Net realized and unrealized gains (losses)

<PAGE>

from investments and foreign currencies 3.41 1.23 3.50 2.33 1.71 0.48
------- ------- -------- -------- -------- -------

Total from Investment Activities 3.37 1.24 3.60 2.45 1.86 0.59
------- ------- -------- -------- -------- -------

Distributions
Net investment income -- (0.01) (0.12) (0.11) (0.15) (0.10)

In excess of net investment income (0.02) (0.03) -- -- -- --

Net realized gains (0.95) -- (0.95) (0.34) (0.05) --
------- ------- -------- -------- -------- -------

Total Distributions (0.97) (0.04) (1.07) (0.45) (0.20) (0.10)
------- ------- -------- -------- -------- -------

NET ASSET VALUE, END OF PERIOD $ 16.49 $ 14.09 $ 16.68 $ 14.15 $ 12.15 $ 10.49
======= ======= ======== ======== ======== =======

Total Return (excludes sales charge) 25.41% 19.80%<F6> 27.05% 20.60% 18.01% 5.92%<F2>

RATIOS/SUPPLEMENTAL DATA:

Net Assets, End of Period (000) $ 1,660 $ 386 $420,020 $289,460 $194,700 $118,600

Ratio of expenses to
average net assets 2.66% 2.51%<F3> 1.37% 1.37% 1.04% 1.00%<F3>

Ratio of net investment income (loss)
to average net assets (0.62%) (0.31%)<F3> 0.65% 0.88% 1.35% 1.23%<F3>

Ratio of expenses to
average net assets <F4> 3.63% 3.75%<F3> 1.37% 1.40% 1.30% 1.49%<F3>

Ratio of net investment income (loss)
to average net assets <F4> (1.59%) (1.55%)<F3> 0.65% 0.85% 1.09% 0.74%<F3>

Portfolio turnover <F7> 39% 55% 39% 55% 39% 18%

<PAGE>

Average commission rate paid <F8> $0.0503 $0.0501 $ 0.0503 $ 0.0501 -- --

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Special Value Fund's most
recent Annual Report to shareholders, which is incorporated by reference in the
SAI. If you would like a copy of the Annual Report, write or call us at
800-KEY-FUND.

<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
<F5> Effective March 1, 1996, the Special Value Fund designated the existing
shares as Class A Shares and began offering Class B Shares.
<F6> Represents total return for the Special Value Fund for the period November
1, 1995 through February 29, 1996 plus total return for Class B Shares for
the period March 1, 1996 through October 31, 1996. The total return for the
Class B Shares for the period from March 1, 1996 through October 31, 1996
was 9.66%.
<F7> Portfolio turnover is calculated on the basis of the Special Value Fund as
a whole without distinguishing between the classes of shares issued.
<F8> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Special Value Fund for which commissions were charged.
</FN>
</TABLE>

SPECIAL GROWTH FUND

INVESTMENT OBJECTIVE

The Special Growth Fund seeks to provide capital appreciation.

<PAGE>

INVESTMENT POLICIES AND STRATEGY

The Special Growth Fund pursues its investment objective by investing primarily
in equity securities of companies with market capitalization of $750 million or
less.In making investment decisions, the Adviser will look for above average
growth rates, high return on equity, issuers that reinvest their earnings in
their business, and strong balance sheets.

Under normal market conditions, the Special Growth Fund:

Will invest at least 65% of its total assets in equity securities
of companies with market capitalization of $1 billion or less. These
equity investments include:

Common stock
Convertible preferred stock
Debt convertible or exchangeable into equity securities
Securities convertible into common stock

May invest up to 35% of its total assets in:
Equity securities of companies with market capitalizations of approximately
$1 billion or more
Investment-grade debt securities
Preferred stocks

The Special Gorwth Fund's higher portfolio turnover rate may result in higher
expenses and taxable capital gain distributions.

The Special Growth Fund is designed for long-term equity investors. The Special
Growth Fund may be appropriate for investors who are comfortable with assuming
the added risks associated with small-capitalization stocks in return for the
possibility of long-term rewards. Smaller capitalization companies may have
limited product lines, markets, or financial resources, which may make them more
susceptible to setbacks and reversals. These securities may be subject to more
abrupt or erratic price fluctuations than securities of larger companies.
Small-capitalization stocks as a group may not respond to general market rallies
or downturns as much as other types of equity securities. The Special Growth
Fund may be appropriate for investors who are comfortable with assuming the
added risks associated with stocks that do not pay out significant portions of
their earnings as dividends. By itself, the Special Growth Fund does not
constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the value of their
investment and do not require

<PAGE>

significant current income from their investments. Please read "Risk
Factors" carefully before investing.

PORTFOLIO MANAGEMENT

Annette Geddes is the Portfolio Manager of the Special Growth Fund, a position
she has held since June, 1996. She is a Portfolio Manager and Managing Director
of Key Asset Management Inc., and has been in the investment business since
1967.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Special Growth Fund.

<TABLE>
<CAPTION>
Shareholder Class A
Transaction Expenses <F1> Shares

<S> <C>
Maximum Sales Charge 5.75%
Imposed on Purchases
(as a percentage of the offering price)

Sales Charge Imposed NONE
on Reinvested Dividends

Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fee NONE

<PAGE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Special Growth
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE SPECIAL GROWTH FUND. Expenses
include management fees as well as costs of maintaining accounts, administering
the Special Growth Fund, providing shareholder services, and other activities.
The expenses shown are estimated based on historical expenses of the Special
Growth Fund adjusted to reflect anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Class A
Operating Expenses Shares
<S> <C>

(as a percentage of average daily net assets)
Management Fees <F1> .86%
Other Expenses <F2> .54%

-----
Total Fund Operating Expenses <F1> 1.40%
=====

<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be 1.00% and the Total Fund Operating Expenses would
be 1.54%.
<F2> Other Expenses includes an estimate of shareholder servicing fees
the Special Growth Fund expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Special Growth Fund.

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

<PAGE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
Class A Shares $71 $99 $130 $216
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

SPECIAL GROWTH FUND

The Financial Highlights describe the Special Growth Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Special Growth Fund for each of the periods indicated.

VARIABILITY AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
Year Year Six Months Year Jan. 11,
Ended Ended Ended Ended 1994
Oct. 31, Oct. 31, Oct. 31, April 30, through
1997 1996 1995<F4> 1995<F4> April 30,
1994<F1>

<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.14 $ 11.81 $ 10.54 $ 9.82 $ 10.00
-------- ------- ------- ------- -------

Investment Activities
Net investment income (0.13) (0.07) -- 0.02 (0.01)

Net realized and
unrealized gains
(losses) on investments 2.93 2.40 1.27 0.72 (0.17)
-------- ------- ------- ------- -------

<PAGE>

Total from
Investment Activities 2.80 2.33 1.27 0.74 (0.18)
-------- ------- ------- ------- -------

Distributions
Net investment
income -- -- -- (0.02) --

In excess of net
investment income -- -- -- -- --

Net realized gains (0.65) -- -- -- --
-------- ------- ------- ------- -------

Total Distributions (0.65) -- -- (0.02) --
-------- ------- ------- ------- -------

NET ASSET VALUE,
END OF PERIOD $ 16.29 $ 14.14 $ 11.81 $ 10.54 $ 9.82
======== ======= ======= ======= =======

Total Return (excludes
sales charge) 20.62% 19.73% 12.05%<F2> 7.51% (1.80%)<F2>

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (000) $104,565 $87,837 $54,335 $20,796 $30,867

Ratio of expenses to
average net assets 1.38% 1.47% 0.65%<F3> 1.04% 0.82%<F3>

Ratio of net investment
income (loss) to average
net assets (0.93%) (0.62%) (0.13%)<F3> 0.17% (0.27%)<F3>

Ratio of expenses to
average net assets<F6> <F7> 1.51% 1.40%<F3> 1.35% 1.47%<F3>

Ratio of net investment
income (loss) to
average net assets<F6> <F7> (0.66%) (0.88%)<F3> (0.14%) (0.92%)<F3>

Portfolio turnover 195% 152% 54% 102% 61%

Average commission rate
paid<F5> $ 0.0541 $0.0468 -- -- --

The financial highlights were audited by Coopers & Lybrand L.L.P.
for the period ended October 31, 1995, 1996, and 1997, and by other

<PAGE>

auditors for all earlier periods. This information should be read in conjunction
with the Special Growth Fund's most recent Annual Report to shareholders, which
is incorporated by reference in the SAI. If you would like a copy of the Annual
Report, write or call us at 800-KEY-FUND.

<FN>
<F1>Period from commencement of operations.
<F2>Not annualized.
<F3>Annualized.
<F4>Effective June 5, 1995, the Victory Aggressive Growth Portfolio merged into
the Special Growth Fund. Financial highlights for the periods prior to June
5, 1995 represent the Aggressive Growth Portfolio.
<F5>Represents the total dollar amount of commissions paid on portfolio security
transactions divided by total number of shares purchased and sold by the
Special Growth Fund for which commissions were charged.
<F6>During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
<F7>There were no voluntary fee reductions during the period.
</FN>
</TABLE>

INTERNATIONAL GROWTH FUND

INVESTMENT OBJECTIVE

The International Growth Fund seeks to provide capital growth consistent with
reasonable investment risk.

INVESTMENT POLICIES AND STRATEGY

The International Growth Fund pursues its investment objective by investing
primarily in equity securities of foreign corporations, most of which are
denominated in foreign currencies.

The International Growth Fund will invest most of its assets in securities of
companies located either in developed countries in Western Europe or in Japan,
although it may purchase securities of companies located in any exchange outside
of the U.S. including developing countries and other developed countries. In
making investment decisions, the Adviser may analyze the economies of foreign
countries and the growth potential for individual sectors and securities.

<PAGE>

Under normal market conditions, the International Growth Fund:

Will invest at least 65% of its total assets in:
Securities (including American Depositary Receipts) of companies that derive
more than 50% of their gross revenues from, or have more than 50% of their
assets, outside the United States.

Securities for which the principal trading markets are located in at least
three different countries (excluding the United States).

May invest up to 35% of its total assets in:
Domestic money market securities

Securities convertible into common stock

"Sponsored" and "unsponsored" American Depositary Receipts and similar
securities

Investment grade corporate debt obligations

U.S. Government Obligations

Preferred stocks

May invest up to 20% of its total assets in securities of companies located in
developing countries

The International Growth Fund's higher portfolio turnover rate may result in
higher expenses and taxable capital gain distributions.

The International Growth Fund is designed for long-term investors. The
International Growth Fund is subject to the risks common to all mutual funds and
to the risks common to mutual funds that invest in equity securities and foreign
securities. The International Growth Fund may be appropriate for investors who
are comfortable with assuming the added risks associated with stocks that do not
pay out significant portions of their earnings as dividends. The International
Growth Fund may be appropriate for investors who are comfortable with assuming
the added risks associated with investments in foreign countries and investments
denominated in foreign currencies. By itself, the International Growth Fund does
not constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the value of their
investment and do not require significant current income from their investments.
PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.

<PAGE>

PORTFOLIO MANAGEMENT

Conrad R. Metz is the Portfolio Manager of the International Growth Fund, a
position he has held since October, 1995. From 1993-1995 he was Senior Vice
President, International Equities, at Bailard Biehl & Kaiser and has held other
responsible positions managing or researching international investments since
1983. He is a Portfolio Manager and Managing Director of Key Asset Management
Inc., and has been in the investment business since 1978.

FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the International Growth Fund.

<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge 5.75% NONE
Imposed on Purchases
(as a percentage of the
offering price)
Sales Charge Imposed NONE NONE
on Reinvested Dividends
Deferred Sales Charge NONE<F2> 5.00%<F3>
Redemption Fees NONE NONE
Exchange Fee NONE NONE

<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
<F2>Except for investments of $1 million or more. See " Investing with Victory."
<F3>5% in the first year, declining to 1% in the sixth year with no charge after
the sixth year.
</FN>
</TABLE>

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the International
Growth Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE INTERNATIONAL GROWTH
FUND. Expenses include management fees as well as the costs

<PAGE>

of maintaining accounts, administering the International Growth Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical expenses of the International Growth Fund adjusted to
reflect anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares

(as a percentage of average
daily net assets)

<S> <C> <C>
Management Fees<F1> .96% .96%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses<F2> .79% 1.28%
---- ----

Total Fund Operating
Expenses<F1> 1.75% 2.99%
==== ====

<FN>
<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be 1.10% and the Total Fund Operating Expenses would be
1.89% for Class A Shares, and 3.13% for Class B Shares.
<F2>Other Expenses includes an estimate of shareholder servicing fees
the International Growth Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the International Growth
Fund.

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

<PAGE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>

Class A Shares $74 $109 $147 $252
Class B Shares $80 $122 $177 $302
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

INTERNATIONAL GROWTH FUND

The Financial Highlights describe the International Growth Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the International Growth Fund for each of the periods indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>
<CAPTION>
CLASS B CLASS A

Year March 1, Year Year Year Year Year Year Year May 18, 1990
Ended 1996 Ended Ended Ended Ended Ended Ended Ended through
Oct. 31, through Oct. 31, Oct. 31, Oct.31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1997 Oct. 31, 1997 1996<F1> 1995<F2> 1994 1993 1992 1991 1990<F8>
1996<F1>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
NET ASSET
VALUE,
BEGINNING
OF PERIOD $ 12.93 $ 12.79 $ 13.01 $ 12.33 $ 13.32 $ 11.93 $ 8.93 $ 9.20 $ 9.46 $10.00
------- ------- -------- -------- -------- ------- ------- ------- ------ ------

Investment
Activities:

<PAGE>

Net
investment
income (loss) (0.06) -- 0.09 0.08 0.05 (0.01) (0.03) (0.02) 0.51 0.09

Net realized
and
unrealized
gains
(losses)
from
investments
from
foreign
currencies 0.65 0.14 0.67 0.62 (0.42) 1.40 3.03 (0.17) (0.25) (0.55)
------ ------- ------- ------- ------- ------ ------- ------ ----- ----

Total
from
Investment
Activities 0.59 0.14 0.76 0.70 (0.37) 1.39 3.00 (0.19) 0.26 (0.46)
------ ------- ------- ------- ------- ------ ------- ------ ----- ----

Distributions
Net investment
income -- -- (0.01) (0.02) -- -- -- (0.01) (0.52) (0.08)

Net realized
gains (0.45) -- (0.45) -- (0.55) -- -- (0.07) -- --

Tax return
of capital -- -- -- -- (0.07) -- -- -- -- --
------ ------- ------- ------- ------- ------ ------- ------- ------ -----

Total
Distributions (0.45) -- (0.46) (0.02) (0.62) -- -- (0.08) (0.52) (0.08)
------ ------- ------- ------- ------- ------ ------- ------- ------ -----

NET ASSET VALUE,
END OF PERIOD $ 13.07 $ 12.93 $ 13.31 $ 13.01 $ 12.33 $13.32 $ 11.93 $ 8.93 $ 9.20 $ 9.46
======= ======= ======= ======= ======= ====== ======= ======= ====== ======

Total Return
(excludes
sales charge) 4.68% 4.89%<F3> 6.04% 5.65% (2.50%) 11.65% 33.59% (2.08%) 2.93% (4.54%)<F9>

<PAGE>

RATIOS/
SUPPLEMENTAL
DATA:
Net Assets,
End of
Period (000) $ 184 $ 118 $106,189 $121,517 $106,477 $81,307 $30,629 $11,091 $5,682 $9,878

Ratio of
expenses
to average
net
assets 3.07% 2.91%<F4> 1.69% 1.73% 1.53% 1.48% 1.46% 1.56% 1.72% 1.70%<F4>

Ratio of net
investment
income
(loss) to
average net
assets (0.68%) (0.10%)<F4> 0.63% 0.64% 0.75% (0.51%) (0.74%) (0.20%) 5.97% 2.51%<F4>

Ratio of
expenses
to average
net assets<F7> 10.01% 6.46%<F4> 1.69% 1.75% 1.65% 1.83% 1.63% 1.72%

Ratio of net
investment
loss
to average net
assets<F7> (7.62%) (3.65%)<F4> 0.63% 0.62% 0.63% (0.86%) (0.91%) (0.35%)

Portfolio
turnover<F5> 116% 178% 116% 178% 68% 51% 45% 92% 103% 12%

Average
commission
paid<F6> $0.0274 $0.0242 $ 0.0274 $ 0.0242

The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the International

<PAGE>

Growth Fund's most recent Annual Report to shareholders, which is incorporated
by reference in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.

<FN>
<F1> Effective March 1, 1996, the International Growth Fund designated the
existing shares of Class A Shares and began offering Class B Shares.
<F2> Effective June 5, 1995, the Victory Foreign Markets Portfolio merged into
the International Growth Fund. Financial highlights for the periods prior
to June 5, 1995 represent the International Growth Fund.
<F3> Represents total return for the International Growth Fund for the period
November 1, 1995 through February 29, 1996 plus total return for Class B
Shares for the Period March 1, 1995 through October 31, 1996. The total
return for Class B Shares for the period from March 1, 1996 through October
31, 1996 was 1.11%.
<F4> Annualized.
<F5> Portfolio turnover is calculated on the basis of the International Growth
Fund as a whole without distinguishing between the classes of shares
issued.
<F6> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the International Growth Fund for which commissions were charged.
<F7> During the period certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursments had not occurred, the
ratios would have been as indicated.
<F8> Period from commencement of operations.
<F9> Not annualized.
</FN>
</TABLE>

REAL ESTATE INVESTMENT FUND

INVESTMENT OBJECTIVE

The Real Estate Investment Fund seeks to provide total return through
investments in real estate-related securities.

INVESTMENT POLICIES AND STRATEGY

The Real Estate Investment Fund pursues its investment objective by investing at
least 80% of the Fund's total assets in real estate-related companies.

Under normal market conditions, the Real Estate Investment Fund will

<PAGE>

invest substantially all of its assets in:

Equity securities (including equity and
mortgage REITs)

Rights or warrants to purchase common stocks

Securities convertible into common stocks when the Fund's investment adviser
thinks that the conversion will be profitable

Preferred stocks

The Real Estate Investment Fund also may invest up to 20% of its total assets in
securities of foreign real estate companies and ADRs.

The Real Estate Investment Fund is designed for long-term investors. The Real
Estate Investment Fund is subject to the risks common to all mutual funds and
the risks common to mutual funds that invest in equity securities. In addition,
the Real Estate Investment Fund is subject to the risks related to direct
investment in real estate. By itself, the Real Estate Investment Fund does not
constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the value of their
investment. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.

PORTFOLIO MANAGEMENT

Patrice Derrington and Richard E. Salomon are the Portfolio Managers
of the Real Estate Investment Fund. Patrice Derrington is a Managing
Director and Portfolio Manager of Key Asset Management Inc. (KAM or
the Adviser), and has been in the real estate, investment, and finance
business since 1991. Richard E. Salomon is the President and Senior
Managing Director of KAM, and has been in the investment advisory
business since 1982.

FUND EXPENSES

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Real Estate Investment Fund.

<PAGE>

<TABLE>
<CAPTION>
Shareholder Transaction
Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price) 5.75%
Sales Charge Imposed on
Reinvested Dividends NONE
Deferred Sales Charge NONE<F2>
Redemption Fees NONE
Exchange Fees NONE

The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Real Estate
Investment Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE REAL ESTATE
INVESTMENT FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the Real Estate Investment Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical expenses of the Real Estate Investment Fund adjusted to
reflect anticipated expenses.

<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
(as a percentage of average
daily net assets)
<S> <C>
Management Fees<F1> 1.00%
Rule 12b-1 Distribution Fees .00%
Other Expenses<F2> .40%
----

Total Fund Operating Expenses<F1> 1.40%
====
<FN>
<F1>These fees have been voluntarily reduced. Without this reimbursement,

<PAGE>

other expenses would be 1.93%, and the Total Fund Operating Expenses
would be 2.93%
<F2>Other Expenses include an estimate of shareholder servicing fees
the Real Estate Investment Fund expects to pay. See "Organization
and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>

The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Real Estate Investment
Fund.

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

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $71 $99 $130 $216
</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

FINANCIAL HIGHLIGHTS

REAL ESTATE INVESTMENT FUND

The Financial Highlights describe the Real Estate Investment Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Real Estate Investment Fund for the period indicated.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variabilitiy of the Fund's year-to-year total return.]

<PAGE>

<TABLE>
<CAPTION>
April 30, 1997
through
October 31, 1997<F1>
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00
-------

Investment Activities
Net investment income 0.23

Net realized and unrealized gains
(losses) from investments 2.01
-------

Total from Investment Activities $ 2.24
-------

Distributions
Net investment income (0.17)
-------

Total Distributions (0.17)
-------

NET ASSET VALUE, END OF PERIOD $ 12.07
=======

Total Return (excludes sales
charges) 22.42%<F2>

RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 4,376

Ratio of expenses to average
net assets 0.00%<F3>

Ratio of net investment income
to average net assets 5.11%<F3>

Ratio of expenses to average
net assets<F5> 2.93%<F3>

Ratio of net investment income
to average net assets<F4> 2.18%<F3>

Portfolio turnover 21%

Average commission rate paid<F4> $0.0464

<PAGE>

in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Fund for which commissions were charged.
<F5> During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated
</FN>
</TABLE>

RISK FACTORS

The following risks are common to all mutual funds:

Market risk is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for it or less than the security was worth at an earlier time.
Market risk may affect a single security, an industry, a sector of the economy,
or the entire market and is common to all investments.

<PAGE>

Manager risk is the risk that a Fund's Portfolio Manager may use a strategy that
does not produce the intended result. Manager risk also refers to the
possibility that the Portfolio Manager may fail to execute a Fund's investment
strategy effectively and thus fail to achieve its objective.

The following risk is common to mutual funds that invest in equity securities:

EQUITY RISK is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow, equity securities are entitled to the residual value
after the company meets its other obligations. For example, holders of debt
securities have priority over holders of equity securities to a company's assets
in the event of bankruptcy.

The following risks are common to mutual funds that invest in foreign
securities:

CURRENCY RISK is the risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments and may widen any losses.

The following risks are common to mutual funds that invest in debt securities:

<PAGE>

The following risks are common to mutual funds that invest in the securities of
a single state and real estate:

CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited number of
high-quality securities of a particular type may be available. Concentration and
diversification risk is greater for Funds that primarily invest in the
securities of a single state, geographic area, or a particular industry.

The following risks are common to mutual funds that invest in real estate
securities:

<PAGE>

REAL ESTATE RISK is the risk that the value of a security will fluctuate because
of changes in property values, vacancies of rental properties, overbuilding,
changes in local laws, increased property taxes and operating expenses, and
other risks associated with real estate. While the Fund will not invest directly
in real estate, it may be subject to the risks associated with direct ownership.
Equity REITs** may be affected by changes in property value, while mortgage
REITs*** may be affected by credit quality.

REGULATORY RISK. Certain REITs may fail to qualify for pass-through of income
under federal tax law, or to maintain their exemption from the registration
requirements under federal securities laws.

* An NRSRO is a nationally recognized statistical ratings organization such as
Standard and Poors (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
** Equity REITs may own property, generate income from rental and lease
payments, and offer the potential for growth from property appreciation and
periodic capital gains from the sale of property.
*** Mortgage REITs earn interest income and are subject to credit risks, like
the chance that a developer may fail to repay a loan.

INVESTMENT LIMITATIONS

The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.

To help reduce risk, the Funds have adopted limitations on some investment
policies. These limits involve a Fund's ability to borrow money and the amount
it can invest in various types of securities. Certain limitations can be changed
only with the approval of shareholders. Victory's Board of Trustees can change
other investment limitations without shareholder approval. See"Other Securities
and Investment Practices" and the SAI for more information.

<PAGE>

Each Fund limits to 25% of its total assets the amount that it may invest in any
single industry (other than U.S. Government obligations). Each Fund limits its
borrowing to 331/3% of its total assets. Borrowing would be in the form of
selling a security that it owns and agreeing to repurchase that security later
at a higher price. The Funds do not intend to borrow for leveraging purposes.

DIVERSIFICATION REQUIREMENTS

SEC REQUIREMENT: Each Fund is "diversified" according to certain federal
securities provisions regarding the diversification of its assets. Generally,
under these provisions, a Fund must invest at least 75% of its total assets so
that no more than 5% of its total assets are invested in the securities of any
one issuer.

INVESTMENT PERFORMANCE

Past performance does not guarantee future results. You may obtain the current
30-day yield by calling 800-KEY-FUND. Our Shareholder Servicing representatives
are available from 8:00 a.m. to 7:00 p.m. Eastern Time Monday through Friday.

The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to earn the same net interest
income throughout that year. To calculate 30-day yield, a Fund's net interest
income per share for the most recent 30 days is divided by the maximum offering
price per share for Class A Shares, or by the NAV for Class B Shares.

<PAGE>

To calculate "total return," a Fund starts with the total number of shares that
you can buy for $1,000 at the beginning of the period. Then the Fund adds all
dividends and distributions paid as if they were reinvested in additional shares
(this takes into account the Fund's dividend distributions, if any). The total
number of shares is multiplied by the net asset value on the last day of the
period and the result is divided by the initial $1,000 investment to determine
the percentage gain or loss. For periods of more than one year, the cumulative
total return is adjusted to get an average annual total return.

YIELD is a measure of net interest and dividend income.

AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend income
plus capital appreciation. It is the sum of all of the parts of a Fund's
investment return for periods
greater than one year.

TOTAL RETURN is the sum of all of the parts of a Fund's investment return.

SHARE PRICE

The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own, gives you the dollar amount and value of your
investment.

Each Fund's share price, called its net asset value (the NAV), is calculated
each business day as of the close of the New York Stock

<PAGE>

Exchange (normally at 4:00 p.m. Eastern Time). Shares are purchased, exchanged,
and redeemed at the next share price calculated after your investment
instructions are received and accepted. A business day is a day on which the New
York Stock Exchange is open for trading or any day in which enough trading has
occurred in the securities held by a Fund to affect the NAV materially. If your
account is established with an Investment Professional or a bank, you may not be
able to purchase or sell shares on other holidays when the Federal Reserve Bank
of Cleveland is closed but the New York Stock Exchange is open.

Total Assets--Liabilities
NAV = ------------------------------------
Number of Shares Outstanding

Each Fund's net asset value can be found daily in The Wall Street Journal and
other newspapers.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of dividends. Dividend distributions are the net dividends or interest
earned on investments after expenses. If a Fund makes a capital gain
distribution, it is paid once a year. As with any investment, you should
consider the tax consequences of an investment in a Fund.

Ordinarily, the Balanced Fund declares and pays dividends from its net
investment income monthly. All other Funds in this prospectus declare and pay
dividends from their net investment income quarterly. The Funds pay any net
capital gains realized as dividends at least annually. The Funds declare and pay
dividends separately for Class A and Class B Shares of the Funds. Distributions
can be received in one of the following ways:

<PAGE>

Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution, some
of your investment may come back to you as a taxable distribution.

REINVESTMENT OPTION

CASH OPTION

A check will be mailed to you no later than 7 days after the pay date.

INCOME EARNED OPTION

Dividends can be reinvested automatically in a Fund in which you have invested
and your capital gains can be paid in cash, or capital gains can be reinvested
and dividends paid in cash.

DIRECTED DIVIDENDS OPTION

You can have distributions automatically reinvested in shares of another fund of
the Victory Group. If distributions from Class A Shares are reinvested in Class
A Shares of another fund, you will not pay a sales charge on the reinvested
distributions.

DIRECTED BANK ACCOUNT OPTION

In most cases, you can have distributions transferred automatically to your bank
checking or savings account. Under normal circumstances, dividends will be
transferred within 7 days of the dividend payment date. The bank account must
have a registration identical to that of your Fund account.

<PAGE>

Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-KEY-FUND.

IMPORTANT INFORMATION ABOUT TAXES

Each Fund intends to continue to qualify as a regulated investment company, in
which case it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders.

Ordinary dividends from a Fund are taxable as ordinary income; dividends from a
Fund's long-term capital gain are taxable as capital gain.

Dividends are treated in the same
manner for federal income tax purposes whether you receive them in cash or in
additional shares. They may also be subject to state and local taxes.

Dividends from the Funds that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income taxes.
The extent to which ordinary dividends are attributable to U.S. Government
obligations will be provided on the tax statements you receive from a Fund.

Certain dividends paid to you in January will be taxable as if they had been
paid to you the previous December.

Tax statements will be mailed from a Fund every January showing the amounts and
tax status of distributions made to you.

Under certain circumstances, a Fund may be in a position to (in which case it
would) "pass-through" to you the right to a credit or deduction for income or
other tax credits earned from foreign investments.

<PAGE>

Because your tax treatment depends on your purchase price and tax position, you
should keep your regular account statements for use in determining your tax.

You should review the more detailed discussion of federal income tax
considerations in the SAI.

THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN A FUND.

INVESTING WITH VICTORY

If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
section on "Choosing a Share Class" will help you decide whether it would be
more to your advantage to purchase Class A or Class B Shares of a Fund. The
following sections will describe how to open an account, how to access
information on your account, and how to purchase, exchange, and redeem shares of
a Fund. We want to make it simple for you to do business with us. The sections
that follow will serve as a guide to your investments with Victory. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-KEY-FUND.
They will be happy to assist you.

All you need to do to get started is to fill out an application.

CHOOSING A SHARE CLASS

Some of the funds described in this prospectus offer only Class A Shares, while
others offer both Class A and B shares of the funds. The following chart shows
which funds offer one or both classes of shares:

<TABLE>
<CAPTION>
ONLY CLASS A SHARES BOTH CLASS A AND CLASS B SHARES
<S> <C>
Growth Fund Balanced Fund
Special Growth Fund Diversified Stock Fund
Stock Index Fund International Growth Fund

<PAGE>

Value Fund Ohio Regional Stock Fund
Real Estate Investment Fund Special Value Fund

</TABLE>

Each class has its own cost structure, allowing you to choose the
one that best meets your requirements. Your Investment Professional
can also help you decide.

CLASS A

Front-end sales charges, as described below. There are several ways to reduce
these charges.

Lower annual expenses than Class B shares.

CLASS B

No front-end sales charge. All your money goes to work for you right away.

Higher annual expenses than Class A shares.

A deferred sales charge on shares you sell within 6 years of purchase, as
described on the next page.

Automatic conversion to Class A shares after 8 years, thus reducing future
annual expenses.

For historical expense information on Class A and B shares, see the financial
highlights in the Fund overviews earlier in this prospectus.

CALCULATION OF SALES CHARGES--CLASS A

Class A Shares are sold at their public offering price, which includes the
initial sales charge. The sales charge as a percentage of your investment
decreases as the amount you invest increases. The current sales charge rates and
commissions paid to Investment Professionals are as follows:

<PAGE>

<TABLE>

Your Investment Sales Charge Sales Charge Dealer Reallowance
as a % of as a % of as a % of the
Offering Price Your Investment Offering Price

Up to $50,000 5.75% 6.10% 5.00%

$50,000 up to $100,000 4.50% 4.71% 4.00%

$100,000 up to $250,000 3.50% 3.63% 3.00%

$250,000 up to $500,000 2.50% 2.56% 2.00%

$500,000 up to $1,000,000 2.00% 2.04% 1.75%

$1,000,000 and above<F1> 0.00% 0.00% <F1>

<FN>

<F1> There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed in
the first year after purchase, or at .50% within two years of the purchase.
This charge will be based on either the cost of the shares or net asset
value at the time of redemption, whichever is lower. There will be no CDSC
on reinvested distributions. Investment Professionals may be paid at a rate
of up to 1.00% of the purchase price.
</FN>
</TABLE>

The Distributor reserves the right to pay the entire commission to dealers. If
that occurs, the dealer may be considered an "underwriter" under federal
securities laws.

There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.

<PAGE>

SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES

You may qualify for reduced sales charges in the following cases:

1. A Letter of Intent lets you purchase Class A Shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of
5% of the total amount.

2. Rights of Accumulation allow you to add the value of any Class A Shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.

3. You can combine Class A Shares of multiple Victory Funds, (excluding money
market funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the
accounts of household members of your immediate family (spouse and children
under 21) for a reduced sales charge at the time of purchase.

4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade
organization to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.

c. Investors who reinvest a distribution from a deferred compensation plan,
agency, trust, or custody account that was maintained by KeyBank
National Associates and its affiliates, the Victory Group, or invested
in a fund of the Victory Group.

d. Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.

e. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, and selling brokers and their sales
representatives.

<PAGE>

* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.

DEFERRED SALES CHARGES--CLASS B

Eight years after Class B Shares are purchased, they automatically
will convert to Class A Shares. Class A shareholders are not subject
to the asset-based sales charge that normally would apply to Class
B shares, as described in "Distribution Plan for Class B Shares."
Also see the SAI for additional details.
<TABLE>
<CAPTION>
YEARS AFTER CDSC ON SHARES
PURCHASE BEING SOLD
<S> <C>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
After 6 Years None
</TABLE>

THE DISTRIBUTOR PAYS SALES COMMISSIONS OF 4.00% OF THE PURCHASE PRICE TO DEALERS
AT THE TIME OF SALE.

There is no CDSC on reinvested dividends. The longer the time between the
purchase and sale of shares, the lower the rate of the CDSC.

SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS B SHARES

The CDSC will be waived for the following redemptions:

1. Distributions from retirement plans if the distributions are made:

<PAGE>

a. Under the Systematic Withdrawal Plan after age 591/2 for up to
12% of the account value annually; or

b. Following the death or disability of the participant or beneficial
owner;

2. Redemption's from accounts other than retirement accounts following the
death or disability of the shareholder;

3. Returns of excess contributions to retirement plans;

4. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan;

5. Shares issued in a plan of reorganization sponsored by Victory, or shares
redeemed involuntarily in a similar situation.

HOW TO PURCHASE SHARES

All you need to do to get started is to fill out an application.

Make your check payable to:

The
Victory
Funds

Keep the following addresses handy for purchases, exchanges, or redemptions:

REGULAR U.S. MAIL ADDRESS

<PAGE>

Send a completed Account Application with your check, bank draft, or money order
to:

The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527

OVERNIGHT MAIL ADDRESS

Use the following address ONLY for overnight packages.

The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND

WIRE ADDRESS

The Transfer Agent does not charge a
wire fee, but your originating bank may charge a fee. Always call the Transfer
Agent at 800-KEY-FUND BEFORE wiring funds to obtain a confirmation number.

State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
For Further Credit to Account #
(insert account number, name,
and confirmation number assigned
by the Transfer Agent)

TELEPHONE

800-KEY-FUND
800-539-3863

FAX Number:
800-529-2244

Telecommunication Device for the Deaf (TDD):

<PAGE>

800-970-5296

ACH

After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up the ACH feature. Currently, the Funds do not charge a
fee for ACH transfers.

STATEMENTS AND REPORTS

You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, account activity will be detailed in their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Funds. By January 31 of each year, you will
be mailed an IRS form reporting account distributions for the previous year,
which also will be filed with the IRS.

SYSTEMATIC INVESTMENT PLAN

RETIREMENT PLANS

You can use the Funds as part of your

<PAGE>

retirement portfolio. Your Investment Professional can set up your new account
under one of several tax-deferred retirement plans. Please contact your
Investment Professional or the Fund for details regarding an IRA or other
retirement plan that works best for your financial situation.

If you would like to make additional investments after your account is already
established, use the Investment Stub attached to your statement and send it with
your check to the address indicated.

HOW TO EXCHANGE SHARES

You can obtain a list of funds available for exchange by calling the Transfer
Agent at 800-KEY-FUND.

You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Funds, you should keep the
following in mind:

Shares of the fund selected for exchange must be available for sale in your
state of residence.

<PAGE>

The Fund whose shares you would like to exchange and the fund whose shares you
want to buy must offer the exchange privilege.

Shares of a Fund may be exchanged at relative net asset value. This means that
if you own Class A Shares of the Fund, you can only exchange them for Class A
Shares of another fund and not pay a sales charge.
The same rules apply to Class B Shares.

You must meet the minimum purchase requirements for the fund you purchase by
exchange.

The registration and tax identification numbers of the two accounts must be
identical.

You must hold the shares you buy when you establish your account for at least 7
days before you can exchange them; after the account is open 7 days, you can
exchange shares on any business day.

Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.

How to Redeem Shares

If we receive your request by 4:00 p.m. Eastern Time, your redemption will be
processed the same day.

BY TELEPHONE

Mail a check to the address of record;

Wire funds to a domestic financial institution;

Mail to a previously designated alternate address; or

<PAGE>

Electronically transfer the funds via ACH.

If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.

BY MAIL

Redemptions over $10,000;

Your account registration has changed within the last 15 days;

The check is not being mailed to the address on your account;

The check is not being made payable to the owner of the account;
or

If the redemption proceeds are being transferred to another Victory Group
account with a different registration.

A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.

BY WIRE

<PAGE>

BY ACH

SYSTEMATIC WITHDRAWAL PLAN

If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have an account value of $5,000 or more
to begin withdrawals. Once again, we will need a voided personal check to
activate this feature. You should be aware that your account eventually may be
depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your account value falls below $500, we may ask
you to bring the account back to the $500 minimum. If you decide not to increase
your account to the minimum balance, your account may be closed and the proceeds
mailed to you.

We want you to know who plays what role in your investment and how they are
related. This

<PAGE>

section discusses the organizations employed by the Funds to service their
shareholders. They are paid a fee for their services.

ORGANIZATION AND MANAGEMENT OF THE FUNDS

ABOUT VICTORY

Each Fund is a member of the Victory Funds, a group of 30 distinct investment
portfolios, organized as a Delaware business trust. Some of the Victory Funds
have been operating continuously since 1983.

The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.

THE INVESTMENT ADVISER

<PAGE>

of the Adviser.

Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser.
Society Asset Management, Inc. (formerly the adviser) was the sub-adviser to
each of the Funds except the Special Growth Fund and the Real Estate Investment
Fund. During the fiscal year ended October 31, 1997, the Adviser was paid an
advisory fee at an annual rate based on the average daily net assets of each
Fund (after waivers) as follows:

<TABLE>

Balanced Diversified Value Stock Ohio Growth Special Special International Real
Fund Stock Fund Index Regional Fund Value Growth Growth Estate
Fund Fund Stock Fund Fund Fund Investment
Fund Fund

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Fees .89% .65% 1.00% .45% .75% 1.00% 1.00% 1.00% 1.10% .00%
</TABLE>

MANAGEMENT OF THE FUNDS

TRUSTEES

Supervise each Fund's activities.

<PAGE>

Investment Adviser
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Manages each Fund's business and investment activities.

THE ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT

BISYS Fund Services is the Administrator and the Distributor. The Fund pays
BISYS a fee as the Administrator at the following annual rate based on each
Fund's average daily net assets:

.15% for portfolio assets of $300
million and less,

.12% for the next $300 million through $600 million of portfolio
assets; and

.10% for portfolio assets greater
than $600 million.

Under a Sub-Administration Agreement, BISYS pays KAM a fee at the annual rate of
up to .05% of each Fund's average daily net assets to perform some of the
administrative duties for the Funds. The Funds do not pay BISYS a fee for its
services as Distributor, although BYSIS receives the sales charge. Each Fund
pays BISYS Fund Services Ohio, Inc. a fee for serving as the Funds' Accountant.

The Distributor may provide sales support, including cash or other compensation
to dealers for selling shares of a Fund. Payments may be in the form of trips,
tickets, and/or merchandise offered through sales contests. It does this at its
own expense and not at the expense of a Fund or its shareholders.

<PAGE>

SHAREHOLDER SERVICING PLAN

The Funds have adopted a Shareholder Servicing Plan for each class of shares of
the Funds except the Stock Index Fund. The shareholder servicing agent performs
a number of services for its customers who are shareholders of the Funds. It
establishes and maintains accounts and records, processes dividend payments,
arranges for bank wires, assists in transactions, and changes account
information. For these services a Fund pays a fee at an annual rate of up to
.25% of the average daily net assets of the appropriate class of shares serviced
by the agent. The Funds may enter into agreements with various shareholder
servicing agents, including KeyBank National Association and its affiliates,
other financial institutions, and securities brokers. The Funds may pay a
servicing fee to broker-dealers and others who sponsor "no transaction fee" or
similar programs for the purchase of shares. Shareholder servicing agents may
waive all or a portion of their fee periodically.

DISTRIBUTION PLAN

Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for Class B Shares of the five funds that sell
Class B Shares. Victory pays the Distributor an annual asset-based sales charge
of up to 0.75%. The fee is computed on the average daily net assets of those
shares. The Distributor then uses the asset-based sales charge to recoup these
sales commissions and the costs for financing them. Victory has adopted a
Distribution and Service Plan for the Real Estate Investment Plan, but this Fund
does not currently pay expenses under the plan. See the SAI for more details
regarding this plan.

The Funds are supervised by the Board of Trustees who monitor the services
provided to investors.

BROKERAGE

The Fund may buy and sell securities through an affiliate of KAM.
The Board of Trustees has adopted procedures to ensure that these

<PAGE>

transactions are fair and in the best interest of the Funds.

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P. serves as independent accountants to the
Funds.

LEGAL COUNSEL

Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.

HOW THE FUNDS ARE ORGANIZED

SHAREHOLDERS

FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS

Advise current and prospective shareholders on their Fund investments.

TRANSFER AGENT/SERVICING AGENT

State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholders' accounts.

DISTRIBUTOR AND ADMINISTRATOR

BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219

<PAGE>

As Distributor, markets the Fund and
distributes shares through Investment
Professionals. As Administrator, handles the day-to-day operations
of the Fund.

FUND ACCOUNTANT

BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219

Calculates the value of Fund shares and keeps certain Fund records.

SUB-ADMINISTRATOR

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Handles some day-to-day operations of the Fund.

CUSTODIAN

Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114

Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.

Some additional information you should know about the Funds.

<PAGE>

ADDITIONAL INFORMATION

SHARE CLASSES

The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.

YOUR RIGHTS AS A SHAREHOLDER

All shareholders have equal voting, liquidation, and other rights. As a
shareholder of a Fund, you have rights and privileges similar to those enjoyed
by other corporate shareholders. Delaware Trust law limits the liability of
shareholders.

CODE OF ETHICS

Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to the Fund must conform.
Investment personnel must refrain from certain trading practices and are
required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.

BANKING LAWS

<PAGE>

Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment adviser, transfer agent, custodian or shareholder servicing agent.
They also may purchase shares of such a company for their customers and pay
third parties for performing these functions. Should these laws ever change in
the future, the Trustees would consider selecting another qualified firm so that
all services would continue.

SHAREHOLDER COMMUNICATIONS

You will receive unaudited Semi-Annual Reports and audited Annual Reports on a
regular basis from each Fund. In addition, you will also receive updated
prospectuses or supplements to this prospectus. In order to eliminate duplicate
mailings to an address at which two or more shareholders with the same last name
reside, the Fund will send only one copy of the above communications.

If you would like to receive additional copies of any materials, please call the
Funds at 800-KEY-FUND.

The following table lists some of the types of securities each of the Funds may
choose to purchase under normal market conditions. Each Fund invests primarily
in equity securities. However, the Funds also are permitted to invest in the
non-equity securities as shown in the table below and in the SAI. For temporary
defensive purposes, each Fund may hold up to 100% of its total assets in cash or
short-term money market instruments. For more information on ratings and
detailed descriptions of each of the investments below, see the SAI.

OTHER SECURITIES AND INVESTMENT PRACTICES
<TABLE>
<CAPTION>
List of Allowable Balanced Diversified Value Stock Ohio
Investments and Fund Stock Fund Fund Index Regional

<PAGE>

Practices Fund<F5> Stock Fund
<S> <C> <C> <C> <C> <C>
U.S. EQUITY
SECURITIES. Can
include common
stock and
securities
convertible into
stock of U.S.
corporations. 40-75% 80-100% 80-100% 80-100% 80-100%

EQUITY SECURITIES
OF COMPANIES
TRADED ON A
FOREIGN EXCHANGE.
Can include
common stock
and securities
convertible into
stock of non-U.S.
corporations. 10% None None None None

EQUITY SECURITIES
OF FOREIGN
COMPANIES TRADED
ON U.S. EXCHANGES.
Can include common
stock, preferred
stock, and
securities
convertible into
stock. Also may
include American
Depositary
Receipts (ADRs)
and Global
Depositary
Receipts (GDRs). 10% 10% 10% None None

PREFERRED STOCK.
A class of stock
that pays
dividends at a
specified
rate and that

<PAGE>

has preference
over common stock
in the payment
of dividends and
the liquidation
of assets. 25% 20% None None None

U.S. CORPORATE
DEBT OBLIGATIONS.
Debt instruments
issued by U.S.
public
corporations.
They may be
secured or
unsecured. 60%<F5> 20% 20% None 20%

REAL ESTATE
INVESTMENT TRUSTS.
Shares of
ownership in real
estate investment
trusts or
mortgages on
real estate. None None None None None

U.S. GOVERNMENT
SECURITIES.
Securities issued
or guaranteed by
the U.S.
government, its
agencies, or
instrumentalities.
Some are direct
obligations of
the U.S. Treasury;
others are
obligations only
of the U.S.
agency. 60% 20% 20% None 20%

SHORT-TERM DEBT
OBLIGATIONS.
Includes bankers'

<PAGE>

acceptances,
certificates
of deposit,
prime quality
commercial paper,
Eurodollar
obligations,
variable and
floating rate
notes, cash,
and cash
equivalents. 35% 20% 20% <F3> 20%

FOREIGN DEBT
SECURITIES.
Debt securities
of foreign
issuers including
international
bonds traded
in the United
States and abroad. 10% None None None None

WARRANTS. The
right to purchase
an equity security
at a stated price
for a limited
period of time. 10% 10% 10% 10% 10%

WHEN-ISSUED AND
DELAYED-DELIVERY
SECURITIES. A
security that
is purchased
for delivery at
a later time.
The market value
may change before
the delivery date,
and the value
is included in
the NAV of the
Fund. 33 1/3% 331/3% 33 1/3% 331/3% 33 1/3%

<PAGE>

<F1>RECEIPTS.
Separately traded
interest or
principal
components of
U.S. Government
securities. 10% 20% 20% None 20%

REPURCHASE
AGREEMENTS. An
agreement to sell
and repurchase
a security at a
stated price
plus interest.
The seller's
obligation
to the Fund is
secured by
collateral.
Subject to the
receipt of an
exemptive order
from the SEC, the
Adviser may
combine repurchase
transactions among
one or more
Victory funds
into a single
transaction. 35% 20% 20% 20% 20%

ILLIQUID
SECURITIES.
Investments that
cannot be readily
sold within seven
days in the usual
course of business
at approximately
the price at which
a Fund values them,
including forward
contracts<F3> to

<PAGE>

hedge currency
risk. (<F3> Only
the Balanced Fund
and the
International
Growth Fund may 15% of 15% of 15% of 15% of 15% of
use forward net net net net net
contracts this assets assets assets assets assets
way.) <F3>

RESTRICTED
SECURITIES.
Securities that are
not registered
under federal
securities laws
but that may be
traded among
qualified
institutional
investors and
the Fund. Some
of these
securities may
be illiquid. 35% 20% 20% 20% 20%

<F1>FUTURES
CONTRACTS AND
OPTIONS ON
FUTURES
CONTRACTS.
Contracts
involving the
right or
obligation to
deliver or
receive assets
or money
depending on
the performance
of one or more
assets or a
securities index.
To reduce the

<PAGE>

effects of
leverage, liquid
assets equal to
the contract
commitment are 5% in 5% in 5% in 5% in 5% in
set aside to margins margins margins margins margins
cover the and and and and and
commitment limit. premiums; premiums; premiums; premiums;
premiums;
The Funds may 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
invest in futures subject subject subject subject subject
in an effort to to futures to futures to futures to futures to futures
hedge against or options or options or options or options or options
market risk. on futures on futures on futures on futures on futures

<F1>OPTIONS. A
Fund may write,
or sell, a covered
call option on a
security that
it owns or on an
index to hedge its
position or generate
additional income.
The Special Growth
Fund may purchase
call options,
purchase put
options, write put
options, or write
uncovered call
options for 25% in 25% in 25% in 25% in 25% in
speculative covered covered covered covered covered
investments. calls calls calls calls calls

BORROWING, REVERSE
REPURCHASE AGREEMENTS.
The borrowing of
money from banks
(up to 5% of total
assets) or through

<PAGE>

reverse repurchase
agreements (up to
33 1/3% of total
assets). The Funds
will not use
borrowing to create 5% 5% 5% 5% 5%
leverage. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

SECURITIES LENDING.
To generate additional
income, a Fund may
lend its portfolio
securities. A Fund
will receive
collateral for the
value of the security
plus any interest due.
A Fund only will
enter into
securities lending
arrangements
with entities that
the Adviser has
determined are
creditworthy.
Subject to the
receipt of an exemptive
order from the SEC,
Key Trust Company
of Ohio, N.A., the
Funds' Custodian and
lending agent, may
earn a fee based
on the amount of
income earned on the
investment of
collateral. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

INVESTMENT COMPANY
SECURITIES. Shares of
other mutual funds
with similar
investment objectives.
The following
limitations apply:
(1) No more than 5%

<PAGE>

of a Fund's total
assets may be
invested in one
mutual fund, (2) a
Fund and its
affiliates may not
own more than 3% of
the securities of any
one mutual fund,
and (3) no more
than 10% of a
Fund's total assets
may be invested 5% 5% 5% 5% 5%
in combined mutual 3% 3% 3% 3% 3%
fund holdings. 10% 10% 10% 10% 10%

<FN>
% Percentage of total assets.

<F1> Indicates a "derivative security," whose value is linked to, or derived
from another security, instrument, or index.
<F2> No limitation of usage; Fund may be using currently.

<F3> The Stock Index Fund may hold short-term Debt Obligations and may enter
into Repurchase Agreements in anticipation of redemptions.
<F4> Assets subject to S&P 500 futures are considered U.S. equity investments.

<F5> The Balanced Fund may invest up to 20% of its total assets in asset-backed
securities, including securities backed by commercial mortgages, automobile
loan receivables, credit card receivables, and rate reduction bonds.
Asset-backed securities are debt securities backed by loans or accounts
receivable originated by banks, credit card companies, or other providers
of credit. These securities may be enhanced by a bank letter of credit or
by insurance coverage provided by a third party.
</FN>
</TABLE>

List of Allowable Growth Special Special Growth International Real Estate
Investments and Fund Value Fund Fund Growth Investment
Practices Fund Fund
<S> <C> <C> <C> <C> <C>

<PAGE>

U.S. EQUITY
SECURITIES. Can
include common
stock and
securities
convertible into
stock of U.S.
corporations. 80-100% 80-100% 65-100% None 80-100%

EQUITY SECURITIES
OF COMPANIES
TRADED ON A
FOREIGN EXCHANGE.
Can include
common stock
and securities
convertible into
stock of non-U.S.
corporations. None None None 65-100% None

PREFERRED STOCK.
A class of stock
that pays
dividends at a
specified
rate and that
has preference
over common stock
in the payment

<PAGE>

of dividends and
the liquidation
of assets. 20% 20% 35% 35% 20%

U.S. CORPORATE
DEBT OBLIGATIONS.
Debt instruments
issued by U.S.
public
corporations.
They may be
secured or
unsecured. 20% 20% 35% 35% None

REAL ESTATE
INVESTMENT TRUSTS.
Shares of
ownership in real
estate investment
trusts or
mortgages on
real estate. None None None None <F2>

SHORT-TERM DEBT
OBLIGATIONS.
Includes bankers'
acceptances,
certificates
of deposit,

<PAGE>

prime quality
commercial paper,
Eurodollar
obligations,
variable and
floating rate
notes, cash,
and cash
equivalents. 20% 20% 35% 35% 20%

FOREIGN DEBT
SECURITIES.
Debt securities
of foreign
issuers including
international
bonds traded
in the United
States and abroad. None None None 20% None

WARRANTS. The
right to purchase
an equity security
at a stated price
for a limited
period of time. 10% 10% 10% 10% 10%

WHEN-ISSUED AND
DELAYED-DELIVERY
SECURITIES. A
security that
is purchased
for delivery at
a later time.
The market value
may change before
the delivery date,
and the value
is included in
the NAV of the
Fund. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

<F1>RECEIPTS.
Separately traded
interest or

<PAGE>

principal
components of
U.S. Government
securities. 20% 20% 20% 20% 20%

REPURCHASE
AGREEMENTS. An
agreement to sell
and repurchase
a security at a
stated price
plus interest.
The seller's
obligation
to the Fund is
secured by
collateral.
Subject to the
receipt of
exemptive relief
from the SEC, the
Adviser may
combine repurchase
transactions among
one or more
Victory funds
into a single
transaction. 20% 20% 35% 35% 20%

ILLIQUID
SECURITIES.
Investments that
cannot be readily
sold within
seven days in the
usual course of
business at
approximately the
price at which a
Fund values them,
including forward
contracts<F4> to
hedge currency
risk. (<F3> Only
the Balanced Fund

<PAGE>

and the
International
Growth Fund may 15% of 15% of 15% of 15% of 15% of
use forward net net net net net
contracts this assets assets assets assets assets
way.) <F3>

RESTRICTED
SECURITIES.
Securities that are
not registered under
federal securities
laws but that may
be traded among
qualified
institutional
investors and the
Fund. Some of
these securities
may be illiquid. 20% 20% 35% 35% 15%

<PAGE>

the contract
commitment are 5% in 5% in 5% in 5% in 5% in
set aside to margins margins margins margins margins
cover the and and and and and
commitment limit. premiums; premiums; premiums; premiums;
premiums;
The Funds may 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
invest in futures subject subject subject subject subject
in an effort to to futures to futures to futures to futures to futures
hedge against or options or options or options or options or options
market risk. on futures on futures on futures on futures on futures

<F1>OPTIONS. A
Fund may write,
or sell, a
covered call
option on a
security that
it owns or on
an index to
hedge its
position or
generate
additional income.
The Special Growth
Fund may purchase
call options,
purchase put
options, write put
options, 25% in 25% in 25% in 25% in 25% in
or write uncovered covered covered covered covered covered
call options for calls calls call options calls calls
speculative and 5% in call
investments. or put options and puts

BORROWING, REVERSE
REPURCHASE AGREEMENTS.
The borrowing of
money from banks
(up to 5% of total
assets) or through
reverse repurchase
agreements (up to
33 1/3% of total

<PAGE>

assets). The Funds
will not use
borrowing to create 5% 5% 5% 5% 5%
leverage. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

SECURITIES LENDING.
To generate
additional income,
a Fund may lend
its portfolio
securities. A
Fund will receive
collateral for the
value of the
security plus
any interest due.
A Fund only will
enter into
securities lending
arrangements
with entities that
the Adviser has
determined are
creditworthy.
Subject to the
receipt of exemptive
relief from the SEC,
Key Trust Company
of Ohio, N.A., the
Funds' Custodian and
lending agent, may
earn a fee based on
the amount of income
earned on the
investment of
collateral. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%

Investment Company
Securities. Shares of
other mutual funds
with similar
investment objectives.
The following
limitations apply:
(1) No more than 5%
of a Fund's total
assets may be invested
in one mutual fund,

<PAGE>

(2) a Fund and its
affiliates may not
own more than 3%
of the securities
of any one mutual
fund, and (3) no
more than 10% of
a Fund's total
assets may be
invested in 5% 5% 5% 5% 5%
combined mutual 3% 3% 3% 3% 3%
fund holdings. 10% 10% 10% 10% 10%

<FN>
% Percentage of total assets.

<F1> Indicates a "derivative security," whose value is linked to, or derived
from another security, instrument, or index.
<F2> No limitation of usage; Fund may be using currently.

This page is intentionally left blank.

Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469

LOGO(R)

<PAGE>

Victory Funds

(R)PRINTED ON RECYCLED PAPER

VF/EQTY-PRO (3/98)

<PAGE>

LOGO (R)
Victory Funds

PROSPECTUS

INSTITUTIONAL MONEY MARKET FUND

800-KEY-FUND(R) or 800-539-3863

March 1, 1998

THE VICTORY PORTFOLIOS

PROSPECTUS FOR:
THE VICTORY INSTITUTIONAL
MONEY MARKET FUND
800-KEY-FUND(R) 800-539-3863

This prospectus describes the Victory Institutional Money Market Fund (the
Fund). The Fund is a diversified money market mutual fund and is a part of The
Victory Portfolios (Victory), an open-end investment management company. You
should read this prospectus before investing in the Fund and keep it for future
reference. A detailed Statement of Additional Information (SAI) is also
available for your review. The SAI has been filed with the Securities and
Exchange Commission (SEC), and is incorporated by reference into this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference into this Prospectus and the SAI, and
other information regarding registrants that file electronically with the SEC.
If you would like a free copy of the SAI, please request one by calling us at
800-KEY-FUND.

An investment in the Fund is neither insured nor guaranteed
by the U.S. Government. There can be no assurance that the Fund will be
able to maintain a stable net asset value of $1.00 per unit.

Shares of the Fund are:
Not insured by the FDIC;

<PAGE>

Not deposits or other obligations of, or guaranteed by, any KeyBank, any of its
affiliates, or any other bank; Subject to investment risks, including
possible loss of the principal amount invested.

March 1, 1998

TABLE OF CONTENTS
Introduction 2

Fund Expenses 4

Financial Highlights 4

Investment Objective, Policies, and Strategies 6

An analysis including objective, policies and strategies

Risk Factors 7

Investment Limitations 7

Investment Performance 8

Share Price 8

Dividends, Distributions, and Taxes 9

<PAGE>

INVESTING WITH VICTORY 11

How to Purchase Shares 11

How to Exchange Shares 13

How to Redeem Shares 14

Organization and
Management of the Fund 15

Additional Information 18

Other Securities and
Investment Practices 19

KEY TO FUND INFORMATION

OBJECTIVE AND STRATEGY
The goals and the strategy the Fund plans to use in
pursuing its investment objective.

RISK FACTORS
The risks that you may assume as an investor in the Fund.

EXPENSES
The costs that you will pay as an investor in the Fund, including sales charges
and ongoing expenses.

FINANCIAL HIGHLIGHTS
A table that shows the historical performance of the Fund by share class. This
table also summarizes previous operating expenses.

INVESTMENT OBJECTIVE AND STRATEGY

OBJECTIVE
The investment objective of the INSTITUTIONAL MONEY MARKET FUND is to obtain as
high a level of current income as is consistent with preserving capital and
providing liquidity.

<PAGE>

STRATEGY
The Fund pursues its investment objective by investing in a diversified
portfolio of high-quality, short-term U.S. dollar-denominated money market
instruments. The Fund seeks to maintain a constant net asset value of $1.00 per
share, and shares are offered at net asset value.

RISK FACTORS
The Fund is not insured by the FDIC, and while it attempts to maintain a $1.00
per share price, there is no guarantee that it will be able to do so. In
addition, there are potential credit, interest rate, and market risks. These
risks are discussed in the section "Risk Factors."

WHO SHOULD INVEST
Investors seeking relative safety and easy access to investments
Investors with a low risk tolerance Investors seeking preservation of capital
Investors willing to accept lower potential returns in return for safety

FEES AND EXPENSES
No Load or sales commission is charged to investors in this Fund. You will,
however, incur expenses for investment advisory, administrative, and shareholder
services, all of which are included in the Fund's expense ratio. This prospectus
offers two classes of shares: Investor Shares and Select Shares. The Investor
Shares are available to certain institutions or individuals that meet minimum
investment requirements and are not subject to a shareholder servicing fee. The
Select Shares are available through certain financial institutions that provide
additional services to their customers who are shareholders of the Fund. The
Select Shares Class pays a shareholder servicing fee at an annual rate of up to
.25% of the average daily net assets of that class. See "Organization and
Management of the Fund--Shareholder Servicing--Select Shares."

PURCHASES
The minimum initial investment is $1,000,000 and $500 thereafter.
The initial investment must be accompanied by the Fund's Account Application.
Fund shares may be purchased by check, Automated Clearing House, or
wire. See "How to Purchase Shares."

REDEMPTIONS
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, the Fund will redeem the
shares and credit your bank account or send the proceeds

<PAGE>

to the address designated on your Account Application. See "How to
Redeem Shares."

DIVIDENDS/DISTRIBUTIONS
Income is accrued and declared daily by the Fund and is paid monthly. Any net
capital gains realized by the Fund are paid as dividends annually. The Fund can
send your dividends directly to you by mail, credit them to your bank account,
reinvest them in the Fund, or invest them in another fund of the Victory Group.
The "Victory Group" includes other funds of The Victory Portfolios. You can make
this choice when you fill out an Account Application. See "Dividends,
Distributions, and Taxes."

OTHER SERVICES
Victory offers a number of other services to better serve shareholders including
exchange privileges. See "How to Exchange Shares" and "How to Redeem Shares."
Our toll-free fax number is 800-529-2244. You can reach Victory's
Telecommunication Device for the Deaf (TDD) at 800-970-5296.

GENERAL INFORMATION ABOUT THE INSTITUTIONAL MONEY MARKET FUND
The inception date of the Fund was January 10, 1983. On June 5, 1995 the Fund
started offering Select Shares (formerly Service Shares). The estimated annual
expenses (as a percentage of net assets) are .27% for Investor Shares and .52%
for Select Shares. The newspaper abbreviation for the Investor Shares is
VictoryInst and VictoryInsts for Select Shares. All newspapers do not carry the
same abbreviation.

The following pages provide you with an overview of the Fund. Please look at the
objective, policies, strategies, risks, expenses, and financial history to
determine if this Fund will suit your risk tolerance and investment needs. You
should also review the "Other Securities and Investment Practices" section for
additional information about the individual securities in which the Fund can
invest and the risks related to these investments.

FUND EXPENSES

INSTITUTIONAL MONEY MARKET FUND

This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Institutional Money

<PAGE>

Market Fund. You will note in the table that you do not pay fees of any
kind when you buy, sell, or exchange shares of the Fund.

<TABLE>
<CAPTION>
Shareholder Investor Select
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge NONE NONE
Imposed on Purchases
Sales Charge Imposed NONE NONE
on Reinvested Dividends
Deferred Sales Charge NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>

<TABLE>
<CAPTION>
Annual Fund Investor Select
Operating Expenses Shares Shares
After expense waivers and reimbursements
(as a percentage of average daily net assets)
<S> <C> <C>
Management Fee<F1> .14% .14%
Other Expenses<F1> .13% .38%<F2>
Total Fund Operating Expenses<F1> .27% .52%
<FN>

<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .25%, Other Expenses would be .19% per Investor
Shares and .44% for Select Shares, and the Total Fund Operating Expenses
would be .44% for Investor Shares and .69% for Select Shares.
<F2> Other Expenses includes an estimate of shareholder servicing fees
the Fund expects to pay. (See "Organization and Management of the
Fund -- Shareholder Servicing Plan.")
</FN>
</TABLE>

The Annual Fund Operating Expense table illustrates the estimated operating
expenses that you will incur as a shareholder of the Fund. These expenses are
charged directly to the Fund. Expenses include management

<PAGE>

fees as well as the costs of maintaining accounts, administering the Fund,
providing shareholder services, and other activities. The expenses shown are
estimated based on historical expenses of the Fund adjusted to reflect
anticipated expenses.

This example is designed to help you understand the various costs you will bear,
directly or indirectly, as an investor in the Fund.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Investor Shares $3 $9 $15 $34
Select Shares $5 $17 $29 $65
</TABLE>

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

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

The Financial Highlights describe the Fund's returns and operating expenses over
time. This table shows the results of an investment in one share of the Fund for
each of the periods indicated.

FINANCIAL HIGHLIGHTS

The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995,
1996, and 1997 periods and by other auditors for all earlier periods. This
information should be read in conjunction with the Fund's most recent Annual
Report to shareholders, which is incorporated by reference into the SAI. If you
would like a copy of the Annual Report, write or call the Fund at 800-KEY-FUND.

VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:

[Chart depicting the variability of the Fund's year-to-year total return.]

<PAGE>

<TABLE>
INVESTOR SHARES<F5>
<CAPTION>
Year Year Six Months
Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31,
1997 1996<F5> 1995<F4>
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000
-------- -------- --------
Income from Investment Activities
Net investment income 0.053 0.053 0.290
Distributions
Net investment income (0.053) (0.053) (0.290)
-------- -------- --------
NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000
======== ======== ========
Total Return 5.46% 5.41% 2.90%<F2>
RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $585,663 $671,575 $504,536
Ratio of expenses to
average net assets 0.28% 0.27% 0.26%<F3>
Ratio of net investment
income to average net assets 5.32% 5.27% 5.69%<F3>
Ratio of expenses to
average net assets<F7> 0.48% 0.48% 0.49%<F3>
Ratio of net investment
income to average net assets<F7> 5.12% 5.06% 5.46%<F3>
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Institutional Money Market
Portfolio became the Institutional Money
Market Fund, and the Fund commenced offering
separate share classes.
<F5> Effective March 1, 1996, the Fund designated Institutional
Shares as Investor Shares and Service
Shares as Select Shares.
<F6> Through March 13, 1988, distributions were declared from the total of net
investment income, net realized gain/(loss) on investments, and unrealized
appreciation (depreciation) of investments. Subsequently, distributions
have been declared solely from net investment income.
<F7> During the period, certain fees were voluntarily reduced. If

<PAGE>

such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
<F8> Audited by other auditors.
</FN>
</TABLE>

<TABLE>
SELECT SHARES<F5>
<CAPTION>
Year Year June 5, Year Year
Ended Ended 1995 to Ended Ended
Oct. 31, Oct. 31, Oct. 31, April 30, April 30,
1997 1996<F5> 1995<F1> 1995<F8> 1994<F8>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
Income from Investment Activities
Net investment income 0.051 0.050 0.012 0.500 0.028
Distributions
Net investment income (0.051) (0.050) (0.012) (0.500) (0.028)
-------- -------- -------- -------- --------
NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Total Return 5.17% 5.16% 1.23%<F2> 4.91% 2.80%
RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $488,639 $373,090 $ 11,479 $449,814 $541,229
Ratio of expenses to
average net assets 0.55% 0.52% 0.51%<F3> 0.27% 0.55%
Ratio of net investment
income to average net assets 5.05% 4.97% 5.33%<F3> 4.91% 2.78%
Ratio of expenses to
average net assets<F7> 0.75% 0.73% 1.00%<F3> 0.51% 0.55%
Ratio of net investment
income to average net assets<F7> 4.85% 4.77% 4.84%<F3> 4.67% 2.78
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Institutional Money Market
Portfolio became the Institutional Money
Market Fund, and the Fund commenced offering
separate share classes.
<F5> Effective March 1, 1996, the Fund designated Institutional
Shares as Investor Shares and Service

<PAGE>

Shares as Select Shares.
<F6> Through March 13, 1988, distributions were declared from the total of net
investment income, net realized gain/(loss) on investments, and unrealized
appreciation (depreciation) of investments. Subsequently, distributions
have been declared solely from net investment income.
<F7> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
<F8> Audited by other auditors.
</FN>
</TABLE>

<TABLE>
SELECT SHARES<F5>
<CAPTION>
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
April 30, April 30, April 30, April 30, April 30, April 30,
1993<F8> 1992<F8> 1991<F8> 1990<F8> 1989<F8> 1988<F8>
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- --------
Income from Investment Activities
Net investment income 0.032 0.051 0.076 0.087 0.082 0.068
Distributions
Net investment income (0.032) (0.051) (0.076) (0.087) (0.082) (0.068)<F6>
-------- -------- -------- -------- -------- --------
NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ========
Total Return 3.26% 5.21% 7.83% 8.95% 8.46% 6.98%
RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (000) $155,097 $177,640 $248,515 $178,208 $133,492 $172,151
Ratio of expenses to
average net assets 0.43% 0.30% 0.30% 0.30% 0.29% 0.25%
Ratio of net investment
income to average net assets 3.19% 5.06% 7.46% 8.63% 8.21% 6.94%<F6>
Ratio of expenses to
average net assets<F7> 0.48% 0.42% 0.44% 0.43% 0.36% 0.25%
Ratio of net investment
income to average net assets<F7> 3.14% 4.94% 7.32%

<PAGE>

<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Institutional Money Market
Portfolio became the Institutional Money
Market Fund, and the Fund commenced offering
separate share classes.
<F5> Effective March 1, 1996, the Fund designated Institutional
Shares as Investor Shares and Service
Shares as Select Shares.
<F6> Through March 13, 1988, distributions were declared from the total of net
investment income, net realized gain/(loss) on investments, and unrealized
appreciation (depreciation) of investments. Subsequently, distributions
have been declared solely from net investment income.
<F7> During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
<F8> Audited by other auditors.
</FN>
</TABLE>

INVESTMENT OBJECTIVE, POLICIES, AND STRATEGIES

INVESTMENT OBJECTIVE
The investment objective of the Fund is to obtain as high a level of current
income as is consistent with preserving capital and providing liquidity.

INVESTMENT POLICIES AND STRATEGY
The Fund pursues its investment objective by primarily investing in short-term,
high-quality debt instruments.

Under normal market conditions, the Fund primarily invests in:

Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. banks and U.S. branches of foreign banks

Short-term corporate obligations, such as commercial paper, notes,
and bonds

Repurchase Agreements

Other debt obligations such as master demand notes, short-term funding
agreements, variable and floating

<PAGE>

rate securities, and private placement investments

U.S. Treasury obligations and obligations of government sponsored
agencies, such as GNMA, FNMA, SLMA, FFCB, FHL, and FHLMC*

When-issued or delayed-delivery securities

Eurodollar debt obligations

IMPORTANT CHARACTERISTICS OF THE FUND'S INVESTMENTS:

QUALITY:
The Fund invests only in instruments that are rated at the time of purchase in
the highest category by two or more NRSROs,** or in the highest category if
rated by only one NRSRO, or if unrated, determined to be of equivalent quality.
The Board of Trustees has established policies to ensure that the Fund invests
in high quality, liquid instruments. For more information on ratings, see the
Appendix to the SAI.

MATURITY: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.

The Fund is subject to credit risk, interest rate risk, inflation
risk, and market risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE
INVESTING.

For more information
about other securities in
which the Fund can invest, see
"Other Securities and Investment Practices" and the SAI.

The Board of Trustees has established policies to ensure that the Fund invests
in high quality, liquid instruments.

* Obligations of entities such as the Government National Mortgage
Association (GNMA) and the Export-Import Bank of the U.S. are backed
by the full faith and credit of the U.S. Treasury. Others, such as
the Federal National Mortgage Association (FNMA) are supported by
the right of the issuer to borrow from the Treasury. Still others,
such as the Student Loan Marketing Association (SLMA), Federal Farm
Credit Banks (FFCB), Federal Home Loan Bank (FHLB), and the Federal
Home Loan Mortgage Corporation (FHLMC) are supported only by the credit
of the federal agency.

** An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.

<PAGE>

RISK FACTORS

This prospectus describes some of the risks that you may assume as an investor
in the Fund. Some limitations on the Fund's investments are described in the
section that follows. "Other Securities and Investment Practices" at the end of
this prospectus provides additional information on the securities mentioned in
the overview of the Fund. As with any mutual fund, there is no guarantee that
the Fund will earn income. Over time, money market mutual funds have offered
investors the least amount of principal risk; therefore, the potential return is
usually lower than for other types of investments.

The following risk is common to all mutual funds:

MARKET RISK is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price the Fund
originally paid for it or less than the security was worth at an earlier time.
Market risk may affect a single issuer, an industry, a sector of the economy, or
the entire market and is common to all investments.

The following risks are common to all money market mutual funds:

CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although

<PAGE>

the Fund invests only in high-quality securities, the interest or principal
payments may not be insured or guaranteed. Credit risk is measured by NRSROs
such as S&P, Fitch, or Moody's.

Inflation risk is the risk that inflation will erode the purchasing power of the
cash flows generated by debt securities held by the Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt securities.

It is important to keep in mind one basic principle of investing:
the greater the risk, the greater the potential reward. The reverse is
also generally true: the lower the risk, the lower the potential reward.

INVESTMENT LIMITATIONS

To help reduce risk and maintain its $1.00 per share price, the Fund has adopted
limitations on some investment policies. These limits involve the Fund's ability
to borrow money and the amount it can invest in various types of securities,
including illiquid securities. Certain limitations can be changed only with the
approval of shareholders. Victory's Board of Trustees can change other
investment limitations without shareholder approval. See "Other Securities and
Investment Practices" and the SAI for more information.

The Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations and U.S. banks). The
Fund limits its borrowing to 331/3% of its total assets. Borrowing would be in
the form of selling a security that it owns and agreeing to repurchase that
security later at a higher price. The Fund does not intend to borrow for
leverage purposes.

The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.

DIVERSIFICATION REQUIREMENTS

SEC REQUIREMENT: The Fund is "diversified" according to certain federal
securities provisions regarding the diversification of its assets. Generally,
under those provisions, the Fund must invest at least 75% of its total assets so
that no more than 5% of its total assets are invested in the securities of any
one issuer.

<PAGE>

IRS REQUIREMENT: The Fund also intends to comply with certain federal tax
requirements regarding the diversification of its assets, which generally are
less restrictive than the securities provisions.

SEC MONEY MARKET MUTUAL FUND REQUIREMENT: The Fund also intends to comply with
certain more stringent federal securities diversification provisions for money
market funds. Generally, to comply with those provisions, the Fund will not
invest more than 5% of its total assets in the securities of any one issuer at
the time of purchase. These diversification provisions and requirements are
discussed in the SAI.

INVESTMENT PERFORMANCE

Past performance is not a guarantee of future results. You may obtain the
current 7-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 8:00 p.m. Eastern Time Monday
through Friday.

Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information may
also appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Performance information is contained in the annual and semi-annual reports. You
may obtain a copy free of charge by calling 800-KEY-FUND.

The "7-day yield" is an "annualized" figure--the amount you would earn if you
stayed in the Fund for a year and the Fund continued to earn the same net
interest income throughout that year. To calculate 7-day yield, net investment
income per share for the most recent 7 days is multiplied by 52 (52 weeks/year),
then divided by the NAV ($1.00) to get a percentage, which is the 7-day yield.

YIELD is a measure of net interest income.

EFFECTIVE YIELD is similar to yield, except it is assumed that dividends are
reinvested daily and compounded.

AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend income
plus capital appreciation. It is the sum of all parts of your investment return
for periods greater than one year.

<PAGE>

Total return is the sum of all parts of the Fund's investment return.

Whenever you see information on the Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.

SHARE PRICE

The Fund's share price, called its net asset value (NAV), is calculated each
business day (normally at 2:00 p.m. Eastern Time). Shares are purchased,
exchanged, and redeemed at the next share price calculated after your investment
instructions are received and accepted. A business day is a day on which the
Federal Reserve Bank of Cleveland and the New York Stock Exchange are open for
trading or any day in which enough trading has occurred in the securities held
by the Fund to affect the NAV materially. If your account is established with an
Investment Professional or a bank, you may not be able to purchase or sell
shares on other holidays when the Federal Reserve Bank of Cleveland is closed,
but the New York Stock Exchange is open.

The Fund seeks to maintain a $1.00 NAV, although there is no guarantee that it
will be able to do so. The Fund uses the "Amortized Cost Method" to value
securities. You can read about this method in the SAI.

The Fund's performance can be found once a week in The Wall Street Journal and
other local newspapers.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments less expenses. The Fund passes its earnings along to
investors in the form of dividends. Dividend distributions are the net interest
earned on investments after expenses. Money market funds usually don't
distribute capital gains; however, if the Fund does make a distribution, it is
paid once a year. As with any investment, you should consider the tax
consequences of an investment

<PAGE>

in the Fund.

Ordinarily, net income earned on securities owned by a fund accrues
daily, is declared daily, and is paid monthly. Distributions can be
received in one of the following ways:

REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of the
Fund. If you do not indicate another choice on your Account Application, this
option will be assigned to you automatically.

CASH OPTION
You will be mailed a check no later than 7 days after the pay date.

DIRECTED DIVIDENDS OPTION
You can have distributions automatically reinvested in the same class shares of
another fund of the Victory Group. If distributions are reinvested in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.

DIRECTED BANK ACCOUNT OPTION
In most cases, you can have distributions automatically transferred to your bank
checking or savings account. Under normal circumstances, dividends will be
transferred within 7 days of the dividend payment date. The bank account must
have a registration identical to that of your Fund account.

Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-KEY-FUND.

IMPORTANT INFORMATION ABOUT TAXES

The Fund intends to continue to qualify as a regulated investment

<PAGE>

company, in which case it pays no federal income tax on the earnings or capital
gains it distributes to its shareholders.

Ordinary dividends from the Fund are generally taxable as ordinary income;
dividends from the Fund's long-term capital gains are taxable as capital gain.

Dividends are treated in the same manner for federal income tax purposes whether
you receive them in cash or in additional shares. They may also be subject to
state and local taxes.

Certain dividends paid to you in January will be taxable as if they had been
paid to you in December of the previous year.

When you sell (redeem) or exchange shares of the Fund, you must recognize any
gain or loss. However, as long as the Fund's NAV per share does not deviate from
$1.00, there will be no gain or loss.

Tax statements will be mailed from the Fund every January showing the amounts
and tax status of distributions made to you.

Because your tax treatment depends on your purchase price and tax position, you
should keep your regular account statements for use in determining your tax.

You should review the more detailed discussion of federal income tax
considerations in the SAI.

THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE FUND.

INVESTING WITH VICTORY

If you are looking for a convenient way to open an account for yourself or to
add money to an existing account,

<PAGE>

Victory can help. This section will describe how to open an account, how to
access information on your account, and how to purchase, exchange, and redeem
shares of the Fund. We want to make it simple for you to do business with us.
The sections that follow will serve as a guide to your investments with Victory.
If you have questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-KEY-FUND.
They will be happy to assist you.

All you need to do to get started is to fill out an application.

HOW TO PURCHASE SHARES

Investor and Select Shares can be purchased in a number of different ways. You
can send in your investment by check, wire transfer, exchange from another fund
of the Victory Group, or through arrangements with your Investment Professional.
An Investment Professional is a salesperson, financial planner, investment
adviser, or trust officer who provides you with investment information.
Sometimes they will charge you for these services. Their fee will be in addition
to, and unrelated to, the fees and expenses charged by the Fund.

When you buy shares of the Fund, your cost will be $1.00 per share.

Make your check payable to:
The Victory Funds

Telephone
Number:
800-KEY-FUND
800-539-3863

Fax Number:
800-529-2244

<PAGE>

Telecommunication Device for the Deaf (TDD):
800-970-5296

If you would
like to make additional investments after your account
is already established, use the Investment Stub attached to your confirmation
statement and send it with your check to the address indicated.

Keep the following addresses handy for purchases, exchanges, or redemptions.

REGULAR U.S. MAIL ADDRESS

Send a completed Account Application with your check, bank draft, or money order
to:

The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527

OVERNIGHT MAIL ADDRESS

Use the following address ONLY for overnight packages.

The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

PHONE: 800-KEY-FUND

WIRE ADDRESS

The Transfer Agent does not charge
a wire fee, but your originating bank may charge a fee. Always call the Transfer
Agent at 800-KEY-FUND BEFORE wiring funds to obtain a confirmation number.

State Street Bank and Trust Co.
ABA #011000028

<PAGE>

For Credit to DDA
Account #9905-201-1

For Further Credit to Account #
(insert account number, name,
and confirmation number assigned
by the Transfer Agent)

ACH

After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up the ACH feature. Currently, the Fund does not charge a
fee for ACH transfers.

STATEMENTS AND REPORTS

You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, account activity will be detailed in their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Fund. By January 31 of each year, you will
be mailed an IRS form reporting account distributions for the previous year,
which will also be filed with the IRS.

All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order at its sole discretion. If your check is
returned for any reason, you may be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest or exchange
into fund shares legally available in your state.

HOW TO EXCHANGE SHARES

An exchange is the selling of shares of one fund of the Victory Group
to purchase shares of another. You may exchange shares of one Victory

<PAGE>

fund for shares of the same class of any other, generally without paying any
additional sales charges. (See the more complete explanation below.)

You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Fund, you should keep the
following in mind:

Shares of the Fund selected for exchange must be available for sale in your
state of residence.

The Fund whose shares you want to exchange and the fund whose shares you want to
buy must offer the exchange privilege.

Shares of the Fund may be exchanged at relative net asset value. However, if you
exchange into a fund with a sales charge, you pay the percentage-point
difference between that fund's sales charge and any sales charge you have
previously paid in connection with the shares you are exchanging. Since the Fund
does not have a sales charge, if you were to purchase another fund in the
Victory Group that has a 5.75% sales charge, you may pay up to a 5.75% sales
charge.

You must meet the minimum purchase requirements for the fund you purchase by
exchange.

The registration and tax identification numbers of the two accounts must be
identical.

You must hold the shares you buy when you establish your account for at least 7
days before you can exchange them; after the account is open 7 days, you can
exchange shares on any business day.

Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.

You can obtain
a list of funds available for exchange by
calling the Transfer Agent
at 800-KEY-FUND.

HOW TO REDEEM SHARES

<PAGE>

If we receive your request by 2:00 p.m. Eastern Time, your redemption will be
processed the same day.

BY TELEPHONE

The easiest way to redeem shares is by
calling 800-KEY-FUND. When you fill out your original application, be sure to
check the box marked "Telephone Authorization". Then when you are ready to
redeem, call us and tell us which one of the following options you would like to
use:

Mail a check to the address of record;

Wire funds to a domestic financial institution;

Mail to a previously designated
alternate address; or

Electronically transfer the funds via ACH.

If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.

BY MAIL

Redemptions over $10,000;

Your account registration has changed within the last 15 days;

The check is not being mailed

<PAGE>

to the address on your account;

The check is not being made payable
to the owner of the account; or

If the redemption proceeds are being transferred to another Victory Group
account with a different registration.

A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.

BY WIRE

If you want to redeem funds by wire, you must establish a Fund account which
will accommodate wire transactions. If you call by 2:00 p.m. Eastern Time, your
funds will be wired on the same business day.

BY ACH

Normally, your redemption will be processed on the same day or the
next day if your instructions are received after 2:00 p.m. Eastern
Time. It will be transferred by ACH as long as the transfer is to
a domestic bank.

Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividend accrued will be included with the redemption proceeds.

There are a number of convenient ways to redeem shares of the Fund. You can use
the same mailing addresses listed for purchases. You will earn dividends up to
and including the date your redemption request is processed.

ORGANIZATION AND MANAGEMENT OF THE FUND

<PAGE>

ABOUT VICTORY

The Fund is a member of the Victory Funds, a group of 30 distinct
investment portfolios. Some of the Victory Funds have been operating
since 1983.

The Board of Trustees of Victory has the overall responsibility for the
management of the Fund. They are elected by the shareholders.

THE INVESTMENT ADVISERS

One of the Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation registered as
an investment adviser with the SEC. KAM is a subsidiary of KeyBank National
Association, a wholly-owned subsidiary of KeyCorp. On February 28, 1997, KAM
became the surviving corporation after the reorganization of four indirect
investment adviser subsidiaries of KeyCorp. Affiliates of the Adviser manage
approximately $60 billion for a limited number of individual and institutional
clients.

The Advisory Agreement allows the Adviser to hire employees of its affiliates.
It also allows KAM to choose brokers or dealers to handle the purchases and
sales of the Fund's securities, subject to Board approval. Key Investments, Inc.
(KII) and/or Key Clearing Corporation (KCC) may act as clearing broker for the
Funds' security transactions in accordance with procedures adopted by the Funds,
and receive commissions or fees in connection with their services to the Funds.
Both KII and KCC are wholly-owned indirect subsidiaries of KeyCorp and are
affiliates of the adviser.

Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was
the adviser and Society Asset Management, Inc. (formerly the adviser)
was the sub-adviser to the Fund. During the fiscal year ended October
31, 1997 KeyCorp Mutual Fund Advisers, Inc. was paid an advisory fee
at an annual rate based on the average daily net assets of the Fund
(after waivers) as follows:

<PAGE>

<TABLE>

Advisory Fees
(after waivers and reimbursements)

<S> <C>
Investor Shares .16%
Select Shares .16%

</TABLE>

MANAGEMENT OF THE FUND

TRUSTEES

Supervise the Fund's activities.

INVESTMENT ADVISER

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Manages the Fund's business and investment activities.

THE ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT

BISYS Fund Services is the Administrator and the Distributor. The Fund pays
BISYS a fee as the Administrator at the following annual rate based on the
Fund's average daily net assets:

.15% for portfolio assets of $300 million and less,

.12% for the next $300 million through $600 million of portfolio
assets; and

.10% for portfolio assets greater than $600 million.

<PAGE>

We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
service the shareholders. They are paid a fee for their services.

Under a Sub-Administration Agreement, BISYS pays KAM a fee at the annual rate of
up to .05% of the Fund's average daily net assets to perform some of the
administrative duties for the Fund. The Fund does not pay BISYS a fee for its
services as Distributor. The Fund pays BISYS Fund Services Ohio, Inc. a fee for
serving as the Fund's Accountant.

The Distributor may provide sales support, including cash or other compensation,
to dealers for selling shares of the Fund. Payments may be in the form of trips,
tickets, and/or merchandise offered through sales contests. It does this at its
own expense, and not at the expense of the Fund or its shareholders.

SHAREHOLDER SERVICING--SELECT SHARES

The Fund has a Shareholder Servicing Plan for the Select Shares class of the
Fund. The shareholder servicing agent performs a number of services for its
customers who are shareholders of the Fund. It establishes and maintains
accounts and records, processes dividend and distribution payments, arranges for
bank wires, assists in transactions, and changes account information. For these
services, the Fund pays a fee at an annual rate of up to .25% of the average
daily net assets of the shares serviced by the agent. The Fund may enter into
agreements with various shareholder servicing agents, including KeyBank National
Association and its affiliates, other financial institutions, and securities
brokers. The Fund may pay a servicing fee to broker-dealers and others who
sponsor "no transaction fee" or similar programs for the purchase of shares.
Shareholder servicing agents may waive all or a portion of their fee
periodically.

DISTRIBUTION PLAN

Under Rule 12b-1 of the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for the Fund. The Fund does
not currently pay expenses under this plan.

<PAGE>

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P. serves as independent accountants to the
Fund.

LEGAL COUNSEL

Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.

The Fund is supervised by
the Board of Trustees who monitor the services provided to investors.

HOW THE FUND IS ORGANIZED

SHAREHOLDERS

FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS

Advise current and prospective shareholders on their Fund investments.

TRANSFER AGENT/SERVICING AGENT

State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholders' accounts.

DISTRIBUTOR AND ADMINISTRATOR

BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219

As Distributor, markets the Fund and
distributes shares through Investment

<PAGE>

Professionals. As Administrator, handles the day-to-day operations
of the Fund.

FUND ACCOUNTANT

BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219

Calculates the value of Fund shares and keeps certain Fund records.

SUB-ADMINISTRATOR

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Handles some day-to-day operations of the Fund.

CUSTODIAN

Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114

Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.

ADDITIONAL INFORMATION

SHARE CLASSES

The Fund offers only the classes of shares described in this prospectus, but at
some future date, the Fund may offer additional classes of shares through a
separate prospectus.

YOUR RIGHTS AS A SHAREHOLDER

<PAGE>

All shareholders of each class have equal voting, liquidation, and other rights.
As a shareholder of the Fund, you have rights and privileges similar to those
enjoyed by other corporate shareholders. Delaware Trust law limits the liability
of shareholders.

If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.

CODE OF ETHICS

BANKING LAWS

Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment adviser, transfer agent, custodian, or shareholder servicing
agent. They may also purchase shares of such a company and pay third parties for
performing these functions for their customers. Should these laws change in the
future, the Trustees would consider selecting another qualified firm so that all
services would continue.

SHAREHOLDER COMMUNICATIONS

You will receive unaudited Semi-Annual Reports and audited Annual
Reports on a regular basis from the Fund. In addition, you will also
receive updated prospectuses or supplements to this prospectus. In

<PAGE>

order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Fund will send only one copy of
the above communications.

Some additional information you should know about the Fund.

If you would like to receive additional copies of any materials, please call the
Fund at 800-KEY-FUND.

OTHER SECURITIES AND INVESTMENT PRACTICES

The following table lists some of the types of securities the Fund may choose to
purchase under normal market conditions. The majority of the portfolio for the
Fund is made up of repurchase agreements, short-term obligations, and/or U.S.
Government obligations. However, the Fund is also permitted to invest in the
securities as shown in the table below.

<TABLE>

List of Allowable Investments and Investment Practices Institutional Money Market
<S> <C>

REPURCHASE AGREEMENTS. An agreement to sell and
repurchase a security at a stated price plus interest.
The seller's obligation to the Fund is secured by
collateral. Subject to the receipt of exemptive relief
from the SEC, the Adviser may combine repurchase
transactions among one or more Victory funds into a
single transaction. <F1>

<PAGE>

COMMERCIAL PAPER. Short-term obligations issued by
banks, corporations, and other entities to finance
their current operations. <F1>

CERTIFICATES OF DEPOSIT. A commercial bank's obligation
to repay funds deposited with it, earning specified
rates of interest over given periods.<F3> <F1>

MASTER DEMAND NOTES. Unsecured obligations that permit
the investment of fluctuating amounts by the Fund at
varying interest rates. <F1>

SHORT-TERM FUNDING AGREEMENTS. Similar to guaranteed
investment contracts, or "GIC's," and issued by
insurance companies. The Fund invests cash for a
specified period and a guaranteed amount of interest as
stated in the contract. (Contracts cannot be sold and
may be considered illiquid.) 10% of net assets

U.S. GOVERNMENT SECURITIES. Securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities. Some are direct obligations of the
U.S. Treasury; others are obligations only of the U.S.
agency.<F3> <F1>

RESTRICTED SECURITIES. Securities that are not
registered under federal securities laws but that may
be traded among qualified institutional investors and
the Fund. Some of these securities may be illiquid. <F1>

TIME DEPOSITS. Non-negotiable deposits in banks that
pay a specified rate of interest over a set period of
time.<F3> <F1>

<F2>Variable & Floating Rate Securities. Investment
grade

<PAGE>

instruments, some of which may be derivatives and
illiquid, with interest rates that reset periodically. <F1>

EURODOLLAR OBLIGATIONS. Obligations of foreign branches
of U.S. Banks. Subject to 25% concentration by
industry. 25%

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security
that is purchased for delivery at a later time. The
market value may change before the delivery date and
the value is included in the NAV. 33 1/3%

<F2>MORTGAGE-BACKED SECURITIES. Securities backed by
Instruments secured by a pool of mortgages. U.S.
Government. Issued or guaranteed by the U.S. Government
or its agencies; i.e., GNMAs, FNMAs, SLMAs. Non-U.S.
Government. Secured by non-government entities. <F1>

ILLIQUID SECURITIES. Investments that cannot be sold
readily within seven days in the usual course of
business at approximately the price at which a Fund
values them. 10% of net assets

SECURITIES OF ANY ONE ISSUER. no more
than 5%

BORROWING, REVERSE REPURCHASE AGREEMENTS. The borrowing
of money from banks (up to 5% of total assets) or
through reverse repurchase agreements (up to 33 1/3% of
total assets). The Fund will not use borrowing to 5%
create leverage. 33 1/3%

<PAGE>

SECURITIES LENDING. To generate additional income, the
Fund may lend its portfolio securities. The Fund will
receive collateral for the value of the security plus
any interest due. The Fund only will enter into
securities lending arrangements with entities that the
Adviser has determined are creditworthy. Subject to the
receipt of exemptive relief from the SEC, Key Trust
Company of Ohio, N.A., the Fund's Custodian and lending
agent, may earn a fee based on the amount of income
earned on the investment of collateral. 33 1/3%

INVESTMENT COMPANY SECURITIES. Shares of other mutual
funds with similar investment objectives. The following
limitations apply: (1) No more than 5% of the Fund's
total assets may be invested in one mutual fund, (2) a
Fund and its affiliates may not own more than 3% of the
securities of any one mutual fund, and (3) no more than 5%
10% of the Fund's total assets may be invested in 3%
combined mutual fund holdings. 10%

% Percentage of total assets.

<F1> No limitation of usage; Fund may be using currently.

<F2> Indicates a "derivative security," whose value is linked to, or derived
from, another security, instrument or index.
</TABLE>

<F3> The Fund may concentrate its investments in government securities and
certain instruments issued by domestic banks, unless subject to other
restrictions.

The Fund also may hold cash for temporary defensive purposes. For more
information on ratings and detailed descriptions of each of the above investment
vehicles, see the SAI.

Bulk Rate

<PAGE>

U.S. Postage
Paid
Cleveland, OH
Permit No. 469

LOGO (R)

VICTORY FUNDS

(LOGO) Printed on recycled paper

VF/IMMF-PRO (3/98)

<PAGE>

LOGO (R)
VICTORY FUNDS

PROSPECTUS

THE
VICTORY
LAKEFRONT
FUND

800-KEY-FUND(R) or 800-539-3863 March 1, 1998

THE VICTORY PORTFOLIOS

PROSPECTUS FOR:

THE
VICTORY
LAKEFRONT
FUND

800-KEY-FUND(R) 800-539-3863

This prospectus describes the Lakefront Fund (the Fund). The Fund is a
diversified mutual fund and is a part of The Victory Portfolios (Victory), an
open-end investment management company. This prospectus explains the objective,
policies, risks, and strategies of the Fund. You should read this prospectus
before investing and keep it for future reference. A detailed Statement of
Additional Information (SAI) is also available for your review. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference into this prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
into this Prospectus and the SAI, and other information regarding registrants
that file electronically with the SEC. If you would like a free copy of the SAI,
please request one by calling us at 800-KEY-FUND.

<PAGE>

Shares of the Fund are:

Not insured by the FDIC;

Not deposits or other
obligations of, or guaranteed by,
any KeyBank, any of its affiliates,
or any other bank;

Subject to investment risks, including possible loss of the principal amount
invested.

March 1, 1998

TABLE OF CONTENTS

Introduction 2
Fund Expenses 4
Fincial Highlights 5
Investment Objective, Policies, and Strategies 6
An analysis including objectives, policies and strategies 6

<PAGE>

Risk Factors 7

Investment Limitations 8

Investment Performance 9

Share Price 9

Dividends, Distributions, and Taxes 10

INVESTING WITH VICTORY 12

How to Purchase Shares 14

How to Exchange Shares 16

How to Redeem Shares 17

Organization and
Management of the Fund 18

Additional Information 21

Other Securities and
Investment Practices 22

KEY TO
FUND INFORMATION

OBJECTIVE AND STRATEGY
The goals and the strategy that the Fund plans to use in pursuing its
investment objective.

RISK FACTORS
The risks that you may assume as an investor in the Fund.

EXPENSES
The costs that you will pay as an investor in the Fund, including sales
charges and ongoing expenses.

<PAGE>

FINANCIAL HIGHLIGHTS
A table that shows the historical performance of the Fund. This table also
summarizes previous operating expenses.

INVESTMENT OBJECTIVE AND STRATEGY

OBJECTIVE The Lakefront Fund seeks to provide long-term growth of capital
and income.

STRATEGY The Fund pursues its investment objective by investing primarily
in a diversified group of equity securities with an emphasis on
high-quality, financially strong companies whose stocks are
believed to be undervalued. In making investment decisions, the
Sub-Adviser may consider a company's demonstrated commitment to
diversity among its employees and suppliers as a means of
enhancing the company's competitive advantage. Please review
"Investment Objective, Policies, and Strategies" and "Other
Securities and Investment Practices" for an overview of the Fund.

RISK FACTORS The Fund is not insured by the FDIC. Since equity securities
fluctuate in value, the Fund's shares also will fluctuate in
value. In addition, there are other potential risks, which are
discussed in the section "Risk Factors."

WHO SHOULD INVEST
Investors willing to accept higher short-term risk along with higher potential
long-term returns

Investors seeking capital appreciation over the long-term

Investors seeking funds for the growth portion of a diversified portfolio

Investors who are investing for goals that are many years in the
future

Investors seeking to support diversity through their participation
in the Fund

<PAGE>

FEES AND EXPENSES
You may pay a sales charge of up to 5.75% of the offering price, depending on
the amount you invest. You also will incur expenses for investment advisory,
administrative, and shareholder services, all of which are included in the
Fund's expense ratio.

PURCHASES
The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. The initial investment
must be accompanied by the Fund's Account Application. Fund shares
may be purchased by check, Automated Clearing House, or wire. See
"How to Purchase Shares."

REDEMPTIONS
You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, the Fund
will redeem the shares and credit your bank account or send the proceeds
to the address designated on your Account Application. See "How to
Redeem Shares."

DIVIDENDS/DISTRIBUTIONS
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. Any net capital gains realized by the Fund are paid as dividends at
least annually. The Fund can send your dividends directly to you by mail, credit
them to your bank account, reinvest them in the Fund, or invest them in another
fund of the Victory Group. The "Victory Group" includes other funds of The
Victory Portfolios. You can make this choice when you fill out an Account
Application. See "Dividends, Distributions, and Taxes."

<PAGE>

GENERAL INFORMATION
ABOUT THE LAKEFRONT FUND
The inception date of the Fund was March 3, 1997. Estimated annual expenses
after waivers and reimbursements (as a percentage of net assets) is 0.50%. The
Fund has a maximum sales charge of 5.75%.

The following pages provide you with an overview of the Fund. Please look at the
objective, policies, strategies, risks, expenses, and financial history to
determine whether the Fund will suit your risk tolerance and investment needs.
You should also review the "Other Securities and Investment Practices" section
for additional information about the individual securities in which the Fund can
invest and the risks related to these investments.

INVESTMENT OBJECTIVE, POLICIES, AND STRATEGIES

Please read "Risk Factors" carefully before investing.

Adviser:
Key Asset
Management, Inc. (KAM)

Sub-Adviser:
Lakefront
Capital
Investors, Inc.
(Lakefront)

INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital and income.

INVESTMENT POLICIES AND STRATEGY
The Fund pursues its objective by investing primarily in a diversified group of
equity securities of established companies, emphasizing (a) companies with
above-average total return potential and (b) companies that have a demonstrated
commitment to diversity among their employees and their suppliers. The Fund's
portfolio securities usually are listed

<PAGE>

on a nationally recognized exchange. The Sub-Adviser seeks equity securities
that it considers undervalued in relation to historical and projected earnings
and the value of the issuer's underlying assets.

COMMITMENT TO DIVERSITY
The Sub-Adviser believes that a company's commitment to diversity is likely to
enhance the company's competitive advantage and shareholder value. Commitment to
diversity may include, among other things, participation of women and minorities
on the board of directors and senior management; having a written or
demonstrated policy concerning diversity; and having an active program that
identifies and uses suppliers that are owned by women and minorities. The
Sub-Adviser will invest in securities issued by these companies only if the
securities meet the Fund's investment criteria.

UNDER NORMAL MARKET CONDITIONS, THE FUND:
Will invest at least 80% of its total assets in equity securities or securities
convertible into common stock

May invest up to 20% of its total assets in:

Preferred stocks

Investment-grade corporate
debt securities

Short-term debt obligations

U.S. Government obligations

The Fund is designed for long-term investors. The Fund is subject to the risks
common to all mutual funds and the risks common to mutual funds that invest in
equity securities, debt securities and opportunity risk. By itself, the Fund
does not constitute a complete investment plan and should be considered a
long-term investment for investors who can afford to weather changes in the
value of their investment.

PORTFOLIO MANAGEMENT

<PAGE>

Nathaniel E. Carter is the Portfolio Manager of the Fund, a position he has held
since the Fund's inception in March 1997. He is the President of Lakefront
Capital Investors, Inc., and has been in the investment business since 1987.

Lakefront Capital Investors, Inc. (Lakefront) will serve as Sub-Adviser to the
Fund. Lakefront is a registered investment advisory firm that has been providing
equity investment services to public and corporate pension funds since its
founding in 1991. Lakefront is the largest African-American owned institutional
investment advisory firm in the state of Ohio.

FUND EXPENSES

This section will help you understand the costs and expenses you will pay,
directly or indirectly, if you invest in the Fund.

<TABLE>

SHAREHOLDER
TRANSACTION CLASS A
EXPENSES<F1> SHARES
<S> <C>

Maximum Sales Charge 5.75%
Imposed on Purchases
(as a percentage of the offering price)

Sales Charge Imposed NONE
on Reinvested Dividends

Deferred Sales Charge NONE

Redemption Fees NONE

Exchange Fees NONE

<FN>

<PAGE>

<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>

The Annual Fund Operating Expenses table illustrates the estimated operating
expenses that you will incur as a shareholder of the Fund. These expenses are
charged directly to the Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical expenses of the Fund adjusted to reflect anticipated expenses.

<TABLE>

ANNUAL FUND CLASS A
OPERATING EXPENSES SHARES

After Expense Waivers and Reimbursements
(as a percentage of average daily net assets)

<S> <C>

Management Fee<F1> 0.50%

Other Expenses<F1>,<F2> .00%
----
Total Fund
Operating Expenses<F1> 0.50%
====

<FN>

<F1>These fees and expenses have been voluntarily waived or reimbursed.
Without

<PAGE>

the waiver and reimbursement, the annual Management Fee would be 1.00%,
other expenses would be 6.27%, and the Fund's Total Operating Expenses
would be 7.27%.

<F2>Other Expenses includes an estimate of shareholder servicing fees
the Fund expects to pay. See "Organization and Management of the Fund --
Shareholder Servicing Plan."
</FN>
</TABLE>

This example is designed to help you understand the various costs you will bear,
directly or indirectly, as an investor in the Fund.

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

<TABLE>

1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A Shares $62 $73 $84 $117

</TABLE>

THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.

<PAGE>

FINANCIAL HIGHLIGHTS

The Financial Highlights describe the Fund's returns and operating expenses over
time. This table shows the results of an investment in one share of the Fund
(after waivers and reimbursements) for the period indicated.

Variability, as shown by year-to-year total return:

[Chart depicting the variability of the Fund's year-to-year total return.]

<TABLE>

March 3, 1997
through
October 31, 1997<F2>
<S> <C>

NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
Investment Activities
Net investment income 0.12
Net realized and unrealized gains (losses)
from investments 1.27
-------
Total from Investment Activities $ 1.39
Distributions
Net investment income (0.10)
-------
Total Distributions (0.10)
-------
NET ASSET VALUE, END OF PERIOD $ 11.29
=======
Total Return (excludes sales charges) 13.87%<F3>
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 1,255
Ratio of expenses to average net assets 0.00%<F4>
Ratio of net investment income to average
net assets 1.67%<F4>
Ratio of expenses to average net assets<F1> 7.27%<F4>
Ratio of net investment income to average
net assets<F1> (5.60%)<F4>

<PAGE>

Portfolio turnover 36%
Average commission rate paid<F5> $0.0798

The Financial Highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Fund's most recent Annual
Report to shareholders, which is incorporated by reference in the SAI. If you
would like a copy of the Annual Report, write or call us at 800-KEY-FUND.

<FN>

<F1> During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had
not occurred, the ratios would have been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and
sold by the Fund for which commissions were charged.
</FN>
</TABLE>

RISK FACTORS

It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally true:
the lower the risk, the lower the potential reward.

This prospectus describes some of the risks that you may assume as an investor
in the Fund. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Fund's investments are described in the section that follows. "Other
Securities and Investment Practices" at the end of this prospectus provides
additional information on the securities mentioned in the overview of the Fund.
As with any mutual fund, there is no guarantee that the Fund will earn income or
show a positive total return over time. The Fund's price, yield, and total
return will fluctuate. You may lose money if the Fund's investments do not
perform well.

<PAGE>

The following risks are common to all mutual funds:

MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth less than the price the Fund
originally paid for it or less than the security was worth at an earlier time.
Market risk may affect a single security, an industry, a sector of the economy,
or the entire market and is common to all investments.

MANAGER RISK is the risk that the Fund's Portfolio Manager may use a strategy
that does not produce the intended result.

The following risk is common to mutual funds that invest in equity securities:

The following risks are common to mutual funds that invest in debt securities:

INTEREST RATE RISK. The value of a

<PAGE>

debt security typically changes in the opposite direction from a change in
interest rates. When interest rates go up, the value of a fixed-rate security
typically goes down. When interest rates go down, the value of these securities
typically goes up. Generally, the market values of securities with longer
maturities are more sensitive to changes in interest rates.

INFLATION RISK is the risk that inflation will erode the purchasing power of the
cash flows generated by debt securities held by the Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt securities.

CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security will be
unable to make timely payments of interest or principal. Although the Fund
generally invests only in high-quality securities, the interest or principal
payments may not be insured or guaranteed on all securities. Credit risk is
measured by NRSROs* such as S&P, Fitch, or Moody's.

The following risk is particular to the Fund:

Opportunity risk is the risk that the Fund may pass up an opportunity to invest
in a company that offers above-average total return potential, but, in the
Sub-Adviser's opinion, has not made a commitment to diversity.

<PAGE>

The following risk is common to mutual funds that invest in domestically-traded
securities of foreign companies:

Investments in securities of foreign companies could be affected by factors not
present in the U.S., including expropriation, confiscation of property, and
difficulties in enforcing contracts. All of these factors can make foreign
investments, especially those in developing countries, more volatile than U.S.
investments.

*An NRSRO is a nationally recognized statistical ratings organization such as
Standard and Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.

The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.

INVESTMENT LIMITATIONS

To help reduce risk, the Fund has adopted limitations on some investment
policies. These limits involve the Fund's ability to borrow money and the amount
it can invest in various types of securities, including illiquid securities.
Certain limitations can be changed only with the approval of shareholders.
Victory's Board of Trustees can change other investment limitations without
shareholder approval. See "Other Securities and Investment Practices" and the
SAI for more information.

The Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations). The Fund limits its
borrowing to 331/3% of its total assets. Borrowing would be in the form of
selling a security that it owns and agreeing to repurchase that security later
at a higher price. The Fund will not borrow for leverage purposes.

DIVERSIFICATION REQUIREMENTS

SEC REQUIREMENT: The Fund is "diversified" according to certain federal

<PAGE>

securities provisions regarding diversification of its assets. Generally, under
these provisions, the Fund must invest at least 75% of its total assets so that
no more than 5% of its total assets are invested in the securities of any one
issuer.

INVESTMENT PERFORMANCE

Past performance does not guarantee future results.
You may obtain the current 30-day yield by calling 800-KEY-FUND. Our
Shareholder Servicing representatives are available from 8:00 a.m.
to 8:00 p.m. Eastern Time Monday through Friday.

The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in the Fund for a year and the Fund continued to earn the same net
interest income throughout that year. To calculate 30-day yield, the Fund's net
investment income per share for the most recent 30 days is divided by the
maximum offering price per share.

To calculate "total return," the Fund starts with the total number of shares
that you can buy for $1,000 at the beginning of the period. Then the Fund adds
all dividends and distributions paid as if they were reinvested in additional
shares. (This takes into account the Fund's dividend distributions, if any.) The
total number of shares is multiplied by the net asset value on the last day of
the period

<PAGE>

and the result is divided by the initial $1,000 investment to determine the
percentage gain or loss. For periods of more than one year, the cumulative total
return is adjusted to get an average annual total return.

YIELD is a measure of net dividend income.

AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend income
plus capital appreciation. It is the sum of all parts of a Fund's investment
return for periods greater than one year.

TOTAL RETURN is the sum of all parts of a Fund's investment return.

The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own, gives you the dollar amount and value of your
investment.

SHARE PRICE

The Fund's share price, called its net asset value (NAV) is calculated each
business day as of the close of the New York Stock Exchange (normally at 4:00
p.m. Eastern Time). Shares are purchased, exchanged, and redeemed at the next
share price calculated after your investment instructions are received and
accepted. A business day is a day on which the New York Stock Exchange is open
for trading or any day in which enough trading has occurred in the securities
held by the Fund to affect the NAV materially. If your account is established
with an Investment Professional or a bank, you may not be able to purchase or
sell shares on other holidays when the Federal Reserve Bank of Cleveland is
closed, but the New York Stock Exchange is open.

The NAV is calculated by adding up the total value of the Fund's investments and
other assets, subtracting its liabilities, and then dividing that

<PAGE>

figure by the number of outstanding shares of the Fund.

Total Assets--Liabilities
NAV=---------------------------------
Number of Shares Outstanding

DIVIDENDS, DISTRIBUTIONS, AND TAXES

Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-KEY-FUND.

Buying a Dividend.
You should check the Fund's distribution schedule before you invest. If you buy
shares of the fund shortly before it makes a distribution, some of your
investment may come back to you as a taxable distribution.

As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of dividends. Dividend distributions are the net dividends or interest
earned on investments after expenses. If the Fund makes a capital gain
distribution, it is paid once a year. As with any investment, you should
consider the tax consequences of an investment in the Fund.

Ordinarily, the Fund declares and pays dividends from its net investment
income quarterly. The Fund pays any net capital gains realized as
dividends at least annually. Distributions can be received in one
of the following ways:

REINVESTMENT OPTION
You can have distributions automatically reinvested in additional
shares of the Fund. If you do not indicate another choice on your

<PAGE>

Account Application, this option will be assigned to you automatically.

CASH OPTION
A check will be mailed to you no later than 7 days after the pay date.

INCOME EARNED OPTION
Dividends can be reinvested automatically in the Fund and your capital gains can
be paid in cash, or capital gains can be reinvested and dividends paid in cash.

DIRECTED DIVIDENDS OPTION

IMPORTANT INFORMATION ABOUT TAXES

The Fund intends to continue to qualify as a regulated investment company, in
which case it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders.

Ordinary dividends from the Fund are taxable as ordinary income;
dividends from the Fund's long-term capital gains are taxable as capital
gain.

Dividends are treated in the same manner for federal income tax purposes whether
you receive them in cash or in additional shares. They may also be subject to
state and local taxes.

<PAGE>

Certain dividends paid to you in January will be taxable as if they had been
paid to you the previous December.

Tax statements will be mailed from
the Fund every January showing the amounts and tax status of distributions
made to you.

Because your tax treatment depends on your purchase price and tax position, you
should keep your regular account statements for use in determining your tax.

You should review the more detailed discussion of federal income tax
considerations in the SAI.

Under certain circumstances, the Fund may be in a position to (in which case it
would) "pass through" to you the right to a credit or deductions for income or
other tax credits earned from foreign investments.

THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE FUND.

INVESTING WITH VICTORY

All you need to do to get started is to fill out an application.

If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
sections that follow will serve as a guide to your investments with Victory. The
following sections will describe how to open an account, how to access
information on your account, and how to purchase, exchange, and redeem shares of
the Fund. We want to make it simple for you to do business with us. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives

<PAGE>

at 800-KEY-FUND. They will be happy to assist you.

The Fund in this prospectus offers only Class A shares. Class A shares have a
front-end sales charge of 5.75%. Please look at the "Fund Expenses" section of
the Fund to find the sales charge.

CALCULATION OF SALES CHARGES

Shares are sold at their public offering price, which includes the initial sales
charge. The sales charge as a percentage of your investment decreases as the
amount you invest increases. The current sales charge rates and commissions paid
to Investment Professionals are as follows:

<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER REALLOWANCE
AS A PERCENTAGE AS A PERCENTAGE AS A PERCENTAGE
OF OFFERING OF YOUR OF OFFERING
YOUR INVESTMENT PRICE INVESTMENT PRICE
<S> <C> <C> <C>
Up to $50,000 5.75% 6.10% 5.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.50% 2.56% 2.00%
$500,000 up to $1,000,000 2.00% 2.04% 1.75%
$1,000,000 and above<F1> 0.00% 0.00% <F1>
<FN>
<F1>There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed in
the first year after purchase, or at .50% within two years of purchase. This
charge will be based on either the cost of the shares or net asset value at
the time of redemption, whichever is lower. There will be no CDSC on
reinvested distributions. Investment Professionals may be paid at a rate of
up to 1.00% of the purchase price.

</FN>
</TABLE>

The Distributor reserves the right to pay the entire commission to dealers. If
that occurs, the dealer may be considered an "underwriter" under federal
securities laws.

<PAGE>

SALES CHARGE REDUCTIONS AND WAIVERS
There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.

You may qualify for reduced sales charges in the following cases:

A Letter of Intent lets you purchase Class A shares of the Fund over a 13-month
period and receive the same sales charge as if all shares had been purchased at
one time. You must start with a minimum initial investment of 5% of the total
amount.

Rights of Accumulation allow you to add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.

You can combine Class A shares
of multiple Victory Funds (except money market funds) for purposes of
calculating the sales charge. The combination privilege also allows you to
combine the total investments from the accounts of household members of your
immediate family (spouse and children under the age of 21) for a reduced sales
charge at the time of purchase.

Waivers for certain investors:

(a) Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers"*, dealers
who have an agreement with the Distributor, and any trade organization to
which the Advisers or the Administrator belong.

(b) Investors who purchase shares for trust or other advisory
accounts established with KeyCorp or its affiliates.

(c) Investors who reinvest a distribution from a deferred compensation plan,
agency, trust, or custody account that was maintained by KeyBank National
Association and its affiliates, the Victory Group, or who invested in a fund
of the Victory Group.

<PAGE>

(d) Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales charge
for those shares.

(e) Investment Professionals who purchase Fund shares for fee-based investment
products or accounts, and selling brokers and their sales representatives.

*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.

HOW TO PURCHASE SHARES
All you need to do to get started is to fill out an application.

Shares can be purchased in a number of different ways. You can send in your
investment by check, wire transfer, exchange from another Fund of the Victory
Group, or through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by the Fund.

Keep the following addresses handy for purchases, exchanges, or redemptions.

REGULAR U.S. MAIL ADDRESS
Send completed Account Application with your check, bank draft, or money order
to:

The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527

OVERNIGHT MAIL ADDRESS
Use the following address ONLY for overnight packages:

<PAGE>

The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND

WIRE ADDRESS

The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a confirmation number.

State Street Bank and Trust Co.
ABA #011000028

For Credit to DDA
Account #9905-201-1

For Further Credit to Account # (insert account number, name, and confirmation
number assigned by the Transfer Agent)

TELEPHONE
800-KEY-FUND
800-539-3863

Fax Number:
800-529-2244

Telecommunication Device for the Deaf (TDD):
800-970-5296

Make your check payable to:
THE VICTORY FUNDS

ACH

After your account is set up, your purchase amount can be transferred
by Automated Clearing House (ACH). Only domestic members banks may
be used. It takes about 15 days to set up the ACH feature. Currently,

<PAGE>

the Fund does not charge a fee for ACH transfers.

STATEMENTS AND REPORTS
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, account activity will be detailed in their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Fund. By January 31 of each year, you will
be mailed an IRS form reporting distributions for the previous year, which will
also be filed with the IRS.

RETIREMENT PLANS

You can use the Fund as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Fund for
details regarding an IRA or other retirement plan that works best for your
financial situation.

If you would like to make additional investments after your account is already
established, use the Investment Stub attached to your statement and send it with
your check to the address indicated.

<PAGE>

fees and/or losses. Third party checks will not be accepted. You may only invest
or exchange into fund shares legally available in your state. If your account
falls below $500, we may ask you to re-establish the minimum investment. If you
do not do so within 60 days, we may close your account and send you the value of
your account.

HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges.

You can obtain
a list of funds available for exchange by
calling the Transfer Agent
at 800-KEY-FUND.

You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Fund, you should keep the
following in mind:

Shares of the fund selected for exchange must be available for sale in your
state of residence.

The Fund whose shares you want to exchange and the fund whose shares you want to
buy must offer the exchange privilege.

You must meet the minimum purchase requirements for the fund you purchase by
exchange.

The registration and tax identification numbers of the two accounts must be
identical.

You must hold the shares you buy when you establish your account for at least 7
days before you can exchange them; after the account is open 7 days, you can
exchange shares on any business day.

<PAGE>

Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.

HOW TO REDEEM SHARES
If we receive your request by 4:00 p.m. Eastern Time, your redemption will be
processed the same day.

There are a number of convenient ways to redeem shares of the Fund. You can use
the same mailing addresses listed for purchases. You will earn dividends up to
the date your redemption request is processed.

BY TELEPHONE
The easiest way to redeem shares is by calling 800-KEY-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization". Then when you are ready to redeem, call us and tell us which one
of the following options you would like to use:

Mail a check to the address of record;

Wire funds to a domestic financial institution;

Mail to a previously designated alternate address; or

Electronically transfer the funds via ACH.

All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, the Sub-Adviser, nor the
Transfer Agent will be responsible for any losses. If these procedures are not
followed, the Transfer Agent may be liable to you for losses resulting from
unauthorized instructions.

If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.

BY MAIL

Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.

<PAGE>

Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. All account owners must sign. A
signature guarantee is required for the following redemption requests:

Redemptions over $10,000;

Your account registration has changed within the last 15 days;

The check is not being mailed to the address on your account;

The check is not being made payable to the owner of the account;or

If the redemption proceeds are being transferred to another Victory Group
account with a different registration.

A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.

BY WIRE

BY ACH

Normally, your redemption will be processed on the same day or the
next day if your instructions are received after 4:00 p.m. Eastern
Time. It will be transferred by ACH as long as the transfer is to
a domestic bank.

SYSTEMATIC WITHDRAWAL PLAN

If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate.

<PAGE>

The minimum withdrawal is $25, and you must have an account value of $5,000 or
more to start withdrawals. Once again, we will need a voided personal check to
activate this feature. You should be aware that your account eventually may be
depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your account value falls below $500, we may ask
you to bring the account back to the $500 minimum. If you decide not to increase
your account to the minimum balance, your account may be closed and the proceeds
mailed to you.

If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate.

ORGANIZATION AND MANAGEMENT OF THE FUND

We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
service its shareholders. They are paid a fee for their services.

The Funds are supervised by the Board of Trustees, who monitor the services
provided to investors.

ABOUT VICTORY

The Fund is a member of the Victory Funds, a group of 30 distinct investment
portfolios, organized as a Delaware business trust. Some of the Victory Funds
have been operating continuously since 1983.

The Board of Trustees of Victory has the overall responsibility for the
management of the Fund. They are elected by the shareholders.

THE INVESTMENT ADVISERS

One of the Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation

<PAGE>

registered as an investment adviser with the SEC. KAM is a subsidiary of KeyBank
National Association, a wholly-owned subsidiary of KeyCorp. Affiliates of the
Adviser manage approximately $60 billion for a limited number of individual and
institutional clients.

The Adviser has hired a sub-adviser, Lakefront Capital Investors, Inc. (the
Sub-Adviser, and together with KAM, the Advisers) to manage the Fund. The
advisory and sub-advisory agreements authorize the Advisers to choose brokers or
dealers to handle the purchases and sales of the Fund's securities. Subject to
Board approval, Key Investments, Inc. (KII) and/or Key Clearing Corporation
(KCC) may act as clearing broker for the Funds' security transactions in
accordance with procedures adopted by the Funds, and receive commissions or fees
in connection with their services to the Funds. Both KII and KCC are
wholly-owned indirect subsidiaries of KeyCorp and are affiliates of the Adviser.
KAM will be paid a monthly fee of 1.00% of the average annual daily net assets
of the Fund.

The Advisory Agreement also allows the Adviser to hire employees of its
affiliates. KAM will pay the Sub-Adviser a monthly fee of .50% of the Fund's
average annual daily net assets from its advisory fee. KAM has an option to
purchase 19.9% of the capital stock of Lakefront Capital Investors, Inc.

During the period ended October 31, 1997, KAM and the Sub-Adviser were paid fees
at an annual rate based on the average daily net assets of the Fund (after
waivers) as follows:

<TABLE>
<CAPTION>
Advisory
Fund Fees
<S> <C>
Lakefront Fund .30%
</TABLE>

MANAGEMENT OF THE FUND

TRUSTEES
Supervise the Fund's activities.

INVESTMENT ADVISER

<PAGE>

Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114

Manages the Fund's business and investment activities.

INVESTMENT SUB-ADVISER
Lakefront Capital Investors, Inc.
127 Public Square
Cleveland, OH 44114

Provides portfolio management services to the Fund.

Additional
information
about the Organization
and Management of the Fund.

THE ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT

BISYS Fund Services is the Administrator and the Distributor. The Fund pays
BISYS a fee as the Administrator at the following annual rate based on each
Fund's average daily net assets :

.15% for portfolio assets of $300
million and less,

.12% for the next $300 million through $600 million of portfolio
assets; and

.10% for portfolio assets greater
than $600 million.

Under a Sub-Administration Agreement, BISYS pays KAM a fee at the annual rate of
up to .05% of the Fund's average daily net assets to perform some of the
administrative duties for the Fund. The Fund does not pay BISYS a fee for its
services as Distributor, although BISYS receives the sales charge. The Fund pays
BISYS Fund Services Ohio, Inc., a fee for serving as the Fund's Accountant.

<PAGE>

The Distributor may provide sales support, including cash or other compensation
to dealers for selling shares of the Fund. Payments may be in the form of trips,
tickets, and/or merchandise offered through sales contests. It does this at its
own expense, and not at the expense of the Fund or its shareholders.

BISYS Fund Services has retained Lakefront Capital Investors, Inc.
as a consultant and from time to time may pay Lakefront a fee for
its services.

SHAREHOLDER SERVICING PLAN

The Fund has adopted a Shareholder Servicing Plan. The shareholder servicing
agent performs a number of services for its customers who are shareholders of
the Fund. It establishes and maintains accounts and records, processes dividend
and distribution payments, arranges for bank wires, assists in transactions, and
changes account information. For these services the Fund pays a fee at an annual
rate of up to .25% of the average daily net assets of the Fund serviced by the
agent. The Fund may enter into agreements with various shareholder servicing
agents, including KeyBank National Association and its affiliates, other
financial institutions, and securities brokers. The Fund may pay a servicing fee
to broker-dealers and others who sponsor "no transaction fee" or similar
programs for the purchase of shares. Shareholder servicing agents may waive all
or a portion of their fee periodically.

DISTRIBUTION PLAN
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for the Fund. The Fund does
not currently pay expenses under this plan.

BROKERAGE
The Fund may buy and sell securities through an affiliate of KAM. The Board of
Trustees has adopted procedures to ensure that these transactions are fair and
in the best interest of the Fund.

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as independent accountants to the
Fund.

LEGAL COUNSEL
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.

<PAGE>

HOW THE FUND IS ORGANIZED

SHAREHOLDERS

FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS
Advise current and prospective
shareholders on their Fund investments.

TRANSFER AGENT/SERVICING AGENT

State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171

Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholders' accounts.

FUND ACCOUNTANT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219

Calculates the value of Fund shares and keeps certain Fund records.

CUSTODIAN
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114

Provides for safekeeping of the Fund's investments and cash, and settles trades
made by the Fund.

DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219

<PAGE>

As Distributor, markets the Fund and distributes shares through Investment
Professionals. As Administrator, handles the day-to-day operations of the Fund.

SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Handles some day-to-day
operations of the Fund.

ADDITIONAL INFORMATION

Some additional information you should know about the Fund.

SHARE CLASSES
The Fund offers only the class of shares described in this prospectus, but at
some future date, the Fund may offer additional classes of shares through a
separate prospectus.

YOUR RIGHTS AS A SHAREHOLDER
All shareholders have equal voting, liquidation, and other rights. As a
shareholder of the Fund, you have rights and privileges similar to those enjoyed
by other corporate shareholders. Delaware Trust law limits the liability of
shareholders.

If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.

CODE OF ETHICS
Victory and the Advisers have each adopted a Code of Ethics to which all
investment personnel and all other access persons to the Fund must conform.
Investment personnel must refrain from certain trading practices and are
required to report certain personal investment activities.

<PAGE>

Violations of the Code of Ethics can result in penalties, suspension, or
termination of employment.

BANKING LAWS
Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment adviser, transfer agent, custodian or shareholder servicing agent.
They may also purchase shares of such a company and pay third parties for
performing these functions for their customers. Should these laws ever change in
the future, the Trustees would consider selecting another qualified firm so that
all services would continue.

SHAREHOLDER COMMUNICATIONS
You will receive unaudited Semi-Annual Reports and audited Annual Reports on a
regular basis from the Fund. In addition, you will also receive updated
prospectuses or supplements to this prospectus. In order to eliminate duplicate
mailings to an address at which two or more shareholders with the same last name
reside, the Fund will send only one copy of the above communications.

THE SECURITIES DESCRIBED IN THIS PROSPECTUS AND THE SAI ARE NOT OFFERED IN ANY
STATE IN WHICH THEY MAY NOT BE SOLD LAWFULLY. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE SAI.

If you would like to receive additional copies of any materials, please call the
Fund at 800-KEY-FUND.

OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists the types of securities the Fund may choose to
purchase. The majority of the portfolio for the Fund is made up of equity
securities. However, the Fund is also permitted to invest in the securities
listed in the table below and the SAI.

<PAGE>

<TABLE>
<CAPTION>
List of Allowable Investments and Investment Practices The Lakefront
Fund
<S> <C>
U.S. EQUITY SECURITIES. Can include common stock and securities convertible
80-100% or exchangeable into common stock.

PREFERRED STOCK. A class of stock that pays dividends at a specified 20%
rate and that has preference over common stock in the payment of dividends
and theliquidation of assets.

CORPORATE DEBT OBLIGATIONS. Debt instruments issued by public corporations 20%
which are traded on major exchanges. They may be secured or unsecured by
property.

<F2> FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Contracts involving the 5% in margins
right or obligation to deliver or receive assets or money depending on the and premium
performance of one or more assets or a securities index. To reduce the 33 1/3% subject to
effects of leverage, liquid assets equal to the contract commitment are set futures or options on
aside to cover the commitment. The Fund may invest in futures in an effort futures
to hedge against market risk.

<F2>OPTIONS. The Fund may write, or sell, a covered call option on a 25% in
security that the Fund owns or on an index. covered calls

WARRANTS. The right to purchase an equity security at a stated price 10%
for a limited period of time.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that is purchased 33 1/3%
for delivery at a later time. The market value may change before the
delivery date.

<F2>VARIABLE & FLOATING RATE SECURITIES. Investment grade instruments, 20%
some of which may be derivatives and illiquid, with interest rates that
reset periodically.

<F2>SHORT-TERM DEBT OBLIGATIONS. Including bankers' acceptances, certificates 20%
of deposit, prime quality commercial paper, Eurodollar obligations, cash
and cash equivalents.

U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the 20%

<PAGE>

U.S. Government, its agencies or instrumentalities. Some are direct
obligations of the U.S. Treasury; others are obligations only of the
U.S. agency.

<F2>RECEIPTS. Separately traded interest or principal components of 20%
U.S. Government securities.

REPURCHASE AGREEMENTS. An agreement to sell and repurchase a security 33 1/3%
at the same price plus interest. The seller's obligation to the Fund
is secured with collateral.Subject to the receipt of exemptive relief
from the SEC, the Adviser may combine repurchase transactions among one
or more Victory funds into a single transaction.

INVESTMENT COMPANY SECURITIES. Shares of other mutual funds with similar 5%
investment objectives. The following limitations apply: (1) No more 3%
than 5% of the Fund's total assets may be invested in one mutual fund, 10%
(2) a Fund and its affiliates may not own more than 3% of the securities
of any one mutual fund, and (3) no more than 10% of the Fund's total
assets may be invested in combined mutual fund holdings.

RESTRICTED SECURITIES. Securities that are not registered under federal 20%
securities laws but that may be traded among qualified institutional
investors and the Fund. Someof these securities may be illiquid.

ILLIQUID SECURITIES. Investments that cannot be sold readily within 15% of
seven days in the usual course of business at approximately the price net assets
at which the Fund values them.

SHORT-TERM TRADING. Selling a security soon after purchasing it.
Short-term trading increases turnover and transaction costs.

BORROWING; REVERSE REPURCHASE AGREEMENTS. The borrowing of money from 5%
banks (up to 5% of total assets) or through reverse repurchase 33 1/3%
agreements (up to 33 1/3% of total assets). The Fund will not use
borrowing to create leverage.

SECURITIES LENDING. To generate additional income, a Fund may lend 33 1/3%
its portfolio securities. The Fund will receive collateral for the
value of the security plus any interest due. The Fund only will enter
into securities lending arrangements with entities that the Adviser
has determined are creditworthy. Subject to the receipt of
exemptive relief from the SEC, Key Trust Company of Ohio, N.A., the
Fund's Custodian and lending agent, may earn a fee based on the amount
of income earned on the investment of collateral.

<PAGE>

EQUITY SECURITIES OF FOREIGN COMPANIES TRADED ON U.S. EXCHANGES. 10%
Can include common stock, preferred stock, and securities convertible
into stock. Also may include American Depositary Receipts (ADRs) and
Global Depositary Receipts (GDRs).

<FN>

% Percentage of total assets.

<F1> No limitation of usage; Fund may be using currently.

<F2> Indicates a "derivative security," whose value is linked to, or derived
from, another security, instrument or index.
</FN>
For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in U.S. Government securities, or short-term, high quality debt
obligations. For more information on ratings and detailed descriptions of each
of the above investment vehicles, see the SAI.

</TABLE>

This page is intentionally left blank.

Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469

LOGO (R)
Victory Funds

PRINTED ON RECYCLED PAPER VF/VLF-PRO (3/98)

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

THE VICTORY PORTFOLIOS

The Victory Balanced Fund
The Victory Diversified Stock Fund
The Victory Financial Reserves Fund
The Victory Fund For Income
The Victory Government Mortgage Fund
The Victory Growth Fund
The Victory Institutional Money Market Fund
The Victory Intermediate Income Fund
The Victory International Growth Fund
The Victory Investment Quality Bond Fund
The Victory Lakefront Fund
The Victory Limited Term Income Fund
The Victory National Municipal Bond Fund
The Victory New York Tax-Free Fund
The Victory Ohio Municipal Bond Fund
The Victory Ohio Municipal Money Market Fund
The Victory Ohio Regional Stock Fund
The Victory Prime Obligations Fund
The Victory Real Estate Investment Fund
The Victory Special Growth Fund
The Victory Special Value Fund
The Victory Stock Index Fund
The Victory Tax-Free Money Market Fund
The Victory U.S. Government Obligations Fund
The Victory Value Fund

March 1, 1998

<PAGE>

This Statement of Additional Information is not a prospectus, but should be read
in conjunction with each prospectus of The Victory Portfolios (individually, a
"Prospectus," and collectively, the "Prospectuses"), each of which is dated the
same date as the date hereof as amended or supplemented from time to time. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectuses. Copies of the Prospectuses may be obtained by writing The
Victory Portfolios at P.O Box 8527, Boston, MA 02266-8527, or by calling toll
free 800-KEY FUND(R) or 800-539-3863.

INVESTMENT ADVISER
Key Asset Management Inc.

ADMINISTRATOR
BISYS Fund Services

SUB-ADMINISTRATOR
Key Asset Management Inc.

DISTRIBUTOR
BISYS Fund Services

TRANSFER AGENT
State Street Bank and Trust Company

DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services, Inc.

CUSTODIAN
Key Trust Company of Ohio, N.A.

INDEPENDENT CERTIFIED ACCOUNTANTS
Coopers & Lybrand L.L.P.

COUNSEL
Kramer, Levin, Naftalis & Frankel

- 2 -

<PAGE>

Table of Contents

INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS.............. 7

FUNDAMENTAL RESTRICTIONS OF THE FUNDS ..................................... 8
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS ................................. 17
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST ................................. 19
Eligible Securities for Money Market Funds ....................... 19
U.S. Corporate Debt Obligations .................................. 19
Short-Term Obligations ........................................... 20
Short-Term Corporate Obligations ................................. 20
Demand Features .................................................. 20
Bankers' Acceptances ............................................. 20
Certificates of Deposit .......................................... 20
Eurodollar Certificates of Deposit ............................... 21
Yankee Certificates of Deposit ................................... 21
Eurodollar Time Deposits ......................................... 21
Canadian Time Deposits ........................................... 21
Commercial Paper ................................................. 21
International Bonds .............................................. 21
Foreign Debt Securities .......................................... 21
Repurchase Agreements ............................................ 21
Reverse Repurchase Agreements .................................... 22
Short-Term Funding Agreements .................................... 22
Variable Amount Master Demand Notes .............................. 22
Variable Rate Demand Notes ....................................... 22
Variable and Floating Rate Notes ................................. 22
Extendible Debt Securities ....................................... 23
Receipts ......................................................... 23
Zero-Coupon Bonds ................................................ 23
High-Yield Debt Securities ....................................... 24
Loans and Other Direct Debt Instruments .......................... 24
Securities of Other Investment Companies ......................... 25
U.S. Government Obligations ...................................... 25
Municipal Securities ............................................. 25
Ohio Tax-Exempt Obligations ...................................... 28
Municipal Lease Obligations ...................................... 29
Lower-Rated Municipal Securities ................................. 30
Federally Taxable Obligations .................................... 30
Refunded Municipal Bonds ......................................... 30
When-Issued Securities ........................................... 31
Delayed-Delivery Transactions .................................... 31
Mortgage-Backed Securities ....................................... 31
In General .............................................. 31
U.S. Government Mortgage-Backed Securities .............. 32
GNMA Certificates ....................................... 32
FHLMC Securities ........................................ 32
FNMA Securities ......................................... 33
Collateralized Mortgage Obligations ..................... 33
Non-Government Mortgage-Backed Securities ............... 33
Asset-Backed Securities .......................................... 33

- 3 -

<PAGE>

Futures and Options ............................................. 34
Futures Contracts ...................................... 34
Restrictions on the Use of Futures Contracts ........... 35
Risk Factors in Futures Transactions ................... 36
Options ................................................ 36
Puts ................................................... 37
Illiquid Investments ............................................ 37
Restricted Securities ........................................... 38
Securities Lending Transactions ................................. 38
Short Sales Against-the-Box ..................................... 39
Investment-Grade and High Quality Investments ................... 39
Participation Interests ......................................... 39
Warrants ........................................................ 39
Refunding Contracts ............................................. 39
Standby Commitments ............................................. 39
Foreign Investment .............................................. 40
Miscellaneous Securities ........................................ 40
Additional Information Concerning Ohio Issuers .................. 41
Additional Information Concerning New York Issuers .............. 44

DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS ................... 64

VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS ............ 65

VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE
TAX-FREE BOND FUNDS ...................................................... 66

VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS ................... 66

PERFORMANCE OF THE MONEY MARKET FUNDS .................................... 67

PERFORMANCE OF THE NON-MONEY MARKET FUNDS ................................ 70

ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION ................ 80

DIVIDENDS AND DISTRIBUTIONS ..................................... 83

TAXES ........................................................... 84

TRUSTEES AND OFFICERS ........................................... 92

ADVISORY AND OTHER CONTRACTS .................................... 99

ADDITIONAL INFORMATION .......................................... 112

APPENDIX ........................................................ 121

- 4 -

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

The Victory Portfolios (the "Victory Portfolios") is an open-end management
investment company. The Victory Portfolios consists of 30 series (each a "Fund,"
and collectively, the "Funds") of units of beneficial interest ("shares"). The
outstanding shares represent interests in the 30 separate investment portfolios.
This Statement of Additional Information (the "SAI") relates to the shares of 25
of the 30 Funds and their respective classes, and are listed below. Much of the
information contained in this Statement of Additional Information expands on
subjects discussed in the Prospectuses. Capitalized terms not defined herein are
used as defined in the Prospectuses. No investment in shares of a Fund should be
made without first reading that Fund's Prospectus.

THE VICTORY PORTFOLIOS:

The Victory Balanced Fund
Class A Shares
Class B Shares
The Victory Diversified Stock Fund
Class A Shares
Class B Shares
The Victory Financial Reserves Fund
The Victory Fund For Income Fund
The Victory Government Mortgage Fund
The Victory Growth Fund
The Victory Institutional Money Market Fund
Select Shares
Investor Shares
The Victory Intermediate Income Fund
The Victory International Growth Fund
Class A Shares
Class B Shares
The Victory Investment Quality Bond Fund
The Victory Lakefront Fund
The Victory Limited Term Income Fund
The Victory National Municipal Bond Fund
Class A Shares
Class B Shares
The Victory New York Tax-Free Fund
Class A Shares
Class B Shares
The Victory Ohio Municipal Bond Fund
The Victory Ohio Municipal Money Market Fund
The Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
The Victory Prime Obligations Fund
The Victory Real Estate Investment Fund
The Victory Special Growth Fund
The Victory Special Value Fund
Class A Shares
Class B Shares
The Victory Stock Index Fund

- 5 -

<PAGE>

The Victory Tax-Free Money Market Fund
The Victory U.S. Government Obligations Fund
Select Shares
Investor Shares
The Victory Value Fund

- 6 -

<PAGE>

INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS

Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.

ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.

The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectuses. The Funds' investments in the following
securities and other financial instruments are subject to the other investment
policies and limitations described in the Prospectuses and this SAI.

Unless otherwise noted in the prospectus or this SAI, a Fund may invest no more
than 5% of its total assets in any of the securities or financial instruments
described below (unless the context requires otherwise).

Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset except in the case of
borrowing (or other activities that may be deemed to result in the issuance of a
"senior security" under the Investment Company Act of 1940 (the "1940 Act")).
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with a
Fund's investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.

The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.

The following sections list each Fund's investment objective and its investment
policies, limitations, and restrictions. The securities in which the Funds can
invest and the risks associated with these securities are discussed in the
section "Instruments in Which the Funds Can Invest."

DEFINED TERMS. All capitalized terms listed in a Fund's Investment Policies and
Limitations section referring to permissible investments are described in the
section "Instruments in Which the Funds Can Invest."

The following terms are used throughout the Investment Objective and Investment
Policies and Limitations sections.
S&P: Standard & Poor's Ratings Group
Moody's: Moody's Investors Service, Inc.
Fitch: Fitch Investors Service, Inc.
NRSRO: Nationally Recognized Statistical Ratings Organization

- 7 -

<PAGE>

FUNDAMENTAL RESTRICTIONS OF THE FUNDS

1. SENIOR SECURITIES

No fund may:

Issue any senior security (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")), except that (a) each Fund may engage in transactions
that may result in the issuance of senior securities to the extent permitted
under applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) each Fund may acquire other securities, the acquisition of which may
result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Fund may borrow money as authorized by the
1940 Act.

2. UNDERWRITING

The Funds may not:

Underwrite securities issued by others, except to the extent that the Fund may
be considered an underwriter within the meaning of the Securities Act of 1933
(the "1933 Act") in the disposition of restricted securities.

3. BORROWING

The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, New York Tax-Free Fund,
Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Real
Estate Investment Fund, Special Growth Fund, Special Value Fund, Stock Index
Fund, Tax-Free Money Market Fund, U.S. Government Obligations Fund and Value
Fund may not:

Borrow money, except that (a) each Fund may enter into commitments to purchase
securities in accordance with its investment program, including delayed-delivery
and when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3 % of the Fund's total
assets; and (b) each Fund may borrow money for temporary or emergency purposes
in an amount not exceeding 5% of the value of its total assets at the time when
the loan is made. Any borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.

The Financial Reserves Fund and Institutional Money Market Fund may not:

Borrow money, except (a) from a bank for temporary or emergency purposes (not
for leveraging or investment) or (b) by engaging in reverse repurchase
agreements, provided that (a) and (b) in combination ("borrowings") do not
exceed an amount equal to one third of the current value of its total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made. This fundamental limitation is
construed in conformity with the 1940 Act, and if at any time Fund borrowings
exceed an amount equal to 33 1/3 of the current value of the Fund's total assets
(including the amount borrowed) less liabilities (other than borrowings) at the
time the borrowing is made due to a decline in net assets, such borrowings will
be reduced within three days (not including Sundays and holidays) to the extent
necessary to comply with the 33 1/3% limitation.

The Fund for Income may not:

- 8 -

<PAGE>

Borrow money, except for temporary or emergency purposes and not for investment
purposes, and then only in an amount not exceeding 5% of the value of its total
assets at the time of the borrowing.

The National Municipal Bond Fund may not:

Borrow money, except that the Fund may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) and engage in reverse
repurchase agreements in an amount not exceeding 33 1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed this amount will be reduced
within three days (exclusive of Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation.

The Ohio Municipal Money Market Fund:

(a) May borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of the Fund's net assets including the amounts
borrowed, and (b) purchase securities on a when-issued or delayed delivery
basis. The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the Fund by enabling the Fund to meet
redemption requests when the liquidation of Fund securities would be
inconvenient or disadvantageous. The Fund will not purchase any securities while
any such borrowings (including reverse repurchase agreements) are outstanding.

4. REAL ESTATE

The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, Ohio Municipal Bond Fund,
Ohio Regional Stock Fund, Prime Obligations Fund, Special Growth Fund, Special
Value Fund, Stock Index Fund, Tax-Free Money Market Fund and Value Fund may not:

Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.

The National Municipal Bond Fund may not:

The Financial Reserves Fund may not:

Buy or sell real estate, commodities, or commodities (futures) contracts.

The Institutional Money Market Fund may not:

Buy or sell real estate, commodities, or commodity (futures) contracts or invest
in oil, gas or other mineral exploration or development programs.

The Intermediate Income Fund may not:

- 9 -

<PAGE>

The Ohio Municipal Money Market Fund will not:

Purchase or sell real estate, although it may invest in Ohio Municipal
Securities secured by real estate or interests in real estate.

The U.S. Government Obligations Fund may not:

Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments.

The Real Estate Investment Fund may not:

Purchase or sell real estate, except that the Fund may purchase securities
issued by companies in the real estate industry and will, as a matter of
fundamental policy, concentrate its investments in such securities.

5. LENDING

The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, National Municipal Bond
Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Special Growth Fund, Special Value Fund,
Stock Index Fund, Tax-Free Money Market Fund, U.S. Government Obligations Fund
and Value Fund may not:

Lend any security or make any other loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.

The Financial Reserves Fund and Institutional Money Market Fund may not:

Make loans to other persons, except (a) by the purchase of debt obligations in
which the Fund is authorized to invest in accordance with its investment
objective, and (b) by engaging in repurchase agreements. In addition, each Fund
may lend its portfolio securities to broker-dealers or other institutional
investors, provided that the borrower delivers cash or cash equivalents as
collateral to the Fund and agrees to maintain such collateral so that it equals
at least 100% of the value of the securities loaned. Any such securities loan
may not be made if, as a result thereof, the aggregate value of all securities
loaned exceeds 33 1/3% of the total assets of the Fund.

The Fund for Income may not:

Make loans to other persons except through the use of repurchase agreements or
the purchase of commercial paper. For these purposes, the purchase of a portion
of an issue of debt securities which is part of an issue to the public shall not
be considered the making of a loan.

The New York Tax-Free Fund may not:

Make loans to other persons except through the use of repurchase agreements, the
purchase of commercial paper or by lending portfolio securities. For these
purposes, the purchase of a portion of an issue of debt securities which is part
of an issue to the public shall not be considered the making of a loan.

- 10 -

<PAGE>

The Ohio Municipal Money Market Fund:

Will not lend any of its assets, except through the purchase of a position of
publicly distributed debt instruments or repurchase agreements and through the
lending of its portfolio securities. The Fund may lend its securities if
collateral values are continuously maintained at no less than 100% of the
current market value of such securities by marking to market daily.

6. COMMODITIES

The Diversified Stock Fund, Government Mortgage Fund, Intermediate Income Fund,
International Growth Fund, Investment Quality Bond Fund, Lakefront Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime
Obligations Fund, Real Estate Investment Fund, Special Growth Fund, Stock Index
Fund and Tax-Free Money Market Fund may not:

Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).

The New York Tax-Free Fund and Ohio Municipal Money Market Fund may not:

Purchase or sell commodities or commodity contracts.

The Balanced Fund, Growth Fund, Special Value Fund, U.S. Government Obligations
Fund and Value Fund may not:

Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments.

The Fund for Income may not:

Purchase or sell commodities or commodity contracts, oil, gas or other mineral
exploration or development programs.

The National Municipal Bond Fund may not:

Purchase or sell physical commodities (but this shall not prevent the Fund from
purchasing or selling futures contracts and options on futures contracts or from
investing in securities or other instruments backed by physical commodities).

7. JOINT TRADING ACCOUNTS

The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Limited Term Income Fund, Ohio Municipal Bond Fund, Ohio Regional
Stock Fund, Prime Obligations Fund, Special Growth Fund, Special Value Fund,
Stock Index Fund, Tax-Free Money Market Fund and Value Fund may not:

Participate on a joint or joint and several basis in any securities trading
account.

8. DIVERSIFICATION

- 11 -

<PAGE>

The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Limited Term Income Fund, Ohio Regional Stock Fund, Special Growth
Fund, Special Value Fund, Stock Index Fund and Value Fund may not:

The Prime Obligations Fund may not:

With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (b)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer. (Note: In accordance with Rule 2a-7 under the 1940 Act, the Fund may
invest up to 25% of its total assets in securities of a single issuer for a
period of up to three days.)

The New York Tax-Free Fund may not:

Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities, and the State of New York and its
municipalities) if as a result more than 25% of its total assets are invested in
the securities of a single issuer, and with regard to 50% of total assets, if as
a result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency, of which such state is a member, is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
With respect to non-municipal bond investments, in addition to the foregoing
limitations, the Fund will not purchase securities (other than securities of the
United States government, its agencies or instrumentalities), if as a result of
such purchase 25% or more of the total Fund's assets would be invested in any
one industry, or enter into a repurchase agreement if, as a result thereof, more
than 10% of its total assets would be subject to repurchase agreements maturing
in more than seven days.

The National Municipal Bond Fund:

To meet federal tax requirements for qualification as a "regulated investment
company," the Fund limits its investments so that at the close of each quarter
of its taxable year: (a) with regard to at least 50% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer, and
(b) no more than 25% of total assets are invested in the securities of a single
issuer. Limitations (a) and (b) do not apply to "Government Securities" as
defined for federal tax purposes. (For such purposes, municipal obligations are
not treated as "Government Securities," and consequently they are subject to
limitations (a) and (b).)

The Ohio Municipal Money Market Fund will limit:

With respect to 75% of the Fund's total assets, investments in one issuer to not
more than 10% of the value of its total assets. The total amount of the
remaining 25% of the value of the Fund's total assets could be invested in a
single issuer if the Adviser believes such a strategy to be prudent. Under Rule
2a-7 under the 1940 Act, the Fund is also subject to certain diversification
requirements.

The Tax-Free Money Market Fund may not:

- 12 -

<PAGE>

Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities if,
immediately after such purchase, more than 5% of the value of its total assets
would be invested in such issuer, except that up to 25% of the value of the
Tax-Free Money Market Fund's total assets may be invested without regard to such
5% limitation. For purposes of this limitation, a security is considered to be
issued by the government entity (or entities) whose assets and revenues
guarantee or back the security; with respect to a private activity bond that is
backed only by the assets and revenues of a non-governmental issuer, a security
is considered to be issued by such non-governmental issuer.

The Fund for Income may not:

Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities), with regard to 75% of total assets, if as a
result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency of which such state is a member is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.

9. CONCENTRATION

The Balanced Fund, Diversified Stock Fund, Growth Fund, Intermediate Income
Fund, International Growth Fund, Investment Quality Bond Fund, Limited Term
Income Fund, Ohio Regional Stock Fund, Special Value Fund, Stock Index Fund and
Value Fund may not:

The Prime Obligations Fund may not:

Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. Notwithstanding the
foregoing, there is no limitation with respect to certificates of deposit and
banker's acceptances issued by domestic banks, or repurchase agreements secured
thereby. In the utilities category, the industry shall be determined according
to the service provided. For example, gas, electric, water and telephone will be
considered as separate industries.

The Tax-Free Money Market Fund may not:

Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; but for these purposes only, industrial development bonds
that are backed by the assets and revenues of a non-governmental user shall not
be deemed to be Municipal Securities. Notwithstanding the foregoing, there is no
limitation with respect to certificates of deposit and banker's acceptances
issued by domestic banks, or repurchase agreements secured thereby. In the
utilities category, the industry shall

- 13 -

<PAGE>

be determined according to the service provided. For example, gas, electric,
water and telephone will be considered as separate industries.

The Ohio Municipal Bond Fund may not:

Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; but for these purposes only, industrial development bonds
that are backed only by the assets and revenues of a non-governmental user shall
not be deemed to be Municipal Securities. In the utilities category, the
industry shall be determined according to the service provided. For example,
gas, electric, water and telephone will be considered as separate industries.

The National Municipal Bond Fund may not:

Purchase securities (other than those issued or guaranteed by the U.S.
government or any securities of its agencies or instrumentalities or tax-exempt
obligations issued or guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of the foregoing) if, as a result,
more than 25% of the Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry; for the
purpose of this restriction, utility companies will be divided according to
their services, for example, gas, gas transmission, electric and gas and
telephone will each be considered a separate industry. Industrial development
revenue bonds which are issued by nongovernmental entities within the same
industry shall be subject to this industry limitation.

The Ohio Municipal Money Market Fund:

The Fund will not purchase securities (other than securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities) if, as a
result of such purchase, 25% or more of the value of the Fund's total assets
would be invested in any one industry. The Fund will not invest 25% or more of
its assets in securities, the interest upon which is paid from revenues of
similar type projects. The Fund may invest 25% or more of its assets in
industrial development bonds.

The Financial Reserves Fund and Institutional Money Market Fund may not:

Purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States government, its
agencies or instrumentalities) if, as a result thereof: (i) more than 5% of its
total assets would be invested in the securities of such issuer, provided,
however, that in the case of certificates of deposit, time deposits and bankers'
acceptances, up to 25% of the Fund's total assets may be invested without regard
to such 5% limitation, but shall instead be subject to a 10% limitation; (ii)
more than 25% of its total assets would be invested in the securities of one or
more issuers having their principal business activities in the same industry,
provided, however, that it may invest more than 25% of its total assets in the
obligations of domestic banks. Neither finance companies as a group nor utility
companies as a group are considered a single industry for purposes of this
policy (i.e., finance companies will be considered a part of the industry they
finance and utilities will be divided according to the types of services they
provide).

The Real Estate Investment Fund may not:

- 14 -

<PAGE>

same industry. In the utilities category, the industry shall be determined
according to the service provided. For example, gas, electric, water and
telephone will be considered as separate industries. Notwithstanding the
foregoing, the Fund will concentrate its investments in securities in the real
estate industry.

The New York Tax-Free Fund may not:

With respect to non-municipal investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the Fund's total assets would be
invested in any one industry, or enter into a repurchase agreement if, as a
result thereof, more than 10% of its total assets would be subject to repurchase
agreements maturing in more than seven days.

The Special Growth Fund may not:

The Fund for Income and New York Tax-Free Fund may not:

Invest more than 25% of the Fund's total assets in securities whose interest
payments are derived from revenue from similar projects.

10. MISCELLANEOUS

a. TAX-EXEMPT INCOME

The Ohio Municipal Money Market Fund may not:

Invest its assets so that less than 80% of its annual interest income is exempt
from the federal income tax and Ohio taxes.

b. USE OF ASSETS AS SECURITY

The Fund for Income may not:

Pledge, mortgage, or hypothecate its assets, except that, to secure borrowings
permitted by its fundamental restriction on borrowing, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value of
its total assets.

- 15 -

<PAGE>

NON-FUNDAMENTAL RESTRICTIONS

1. ILLIQUID SECURITIES

The Balanced Fund, Diversified Stock Fund, Fund for Income, Government Mortgage
Fund, Growth Fund, Intermediate Income Fund, International Growth Fund,
Investment Quality Bond Fund, Lakefront Fund, Limited Term Income Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Ohio
Regional Stock Fund, Real Estate Investment Fund, Special Growth Fund, Special
Value Fund, Stock Index Fund and Value Fund:

Will not invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the 1933 Act ("Restricted
Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc. determines whether a particular security
is deemed to be liquid based on the trading markets for the specific security
and other factors.

The Financial Reserves Fund, Institutional Money Market Fund, Ohio Municipal
Money Market Fund, Prime Obligations Fund, Tax-Free Money Market Fund, and U.S.
Government Obligations Fund:

Will not invest more than 10% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the 1933 Act ("Restricted
Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc. determines whether a particular security
is deemed to be liquid based on the trading markets for the specific security
and other factors.

2. SHORT SALES AND PURCHASES ON MARGIN

The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, Investment Quality Bond Fund, Limited Term
Income Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime
Obligations Fund, Special Growth Fund, Special Value Fund, Stock Index Fund,
Tax-Free Money Market Fund, U.S. Government Obligations Fund and Value Fund:

Will not make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and related options,
in the manner otherwise permitted by the investment restrictions, policies and
investment program of the Fund.

The International Growth Fund may not:

- 16 -

<PAGE>

The Financial Reserves Fund and Institutional Money Market Fund may not:

1. Purchase securities on margin (but the Fund may obtain such credits as may be
necessary for the clearance of purchases and sales of securities).
2. Make short sales of securities.

The Fund for Income and New York Tax-Free Fund:

Will not make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.

The National Municipal Bond Fund:

1. May not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short.
2. May not purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions.

The Ohio Municipal Money Market Fund:

Will not sell any securities short or purchase any securities on margin but may
obtain such short-term credits as may be necessary for clearance of purchases
and sales of securities.

The Special Growth Fund:

Does not currently intend to purchase securities on margin, except that the Fund
may obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts shall not constitute purchasing securities on margin.

3. OTHER INVESTMENT COMPANIES

The Victory Balanced, Victory Diversified Stock Fund, Victory Financial Reserves
Fund, Victory Fund For Income, Victory Government Mortgage Fund, Victory Growth
Fund, Victory Institutional Money Market Fund, Victory Intermediate Income Fund,
Victory International Growth Fund, Victory Investment Quality Bond Fund, Victory
Lakefront Fund, Victory Limited Term Income Fund, Victory National Municipal
Bond Fund, Victory New York Tax-Free Fund , Victory Ohio Municipal Bond Fund,
Victory Ohio Municipal Money Market Fund, Victory Ohio Regional Stock Fund,
Victory Prime Obligations Fund, Victory Real Estate Investment Fund, Victory
Special Growth Fund, Victory Special Value Fund, Victory Stock Index Fund,
Victory Tax-Free Money Market Fund, Victory U.S. Government Obligations Fund,
Victory Value Fund:

May invest up to 5% of their total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies. Pursuant to an exemptive order received by the
Victory Portfolios from the Securities and Exchange Commission (the "SEC"), the
Funds may invest in the other money market funds of the Victory Portfolios. Each
Fund will waive the portion of its fee attributable to the assets of each Fund
invested in such money market funds to the extent required by the laws of any
jurisdiction in which shares of the Funds are registered for sale.

The Funds may not:

- 17 -

<PAGE>

Purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act, which permits operation as a "fund of funds."

The National Municipal Bond Fund may not:

Purchase securities of other investment companies, except in the open market
where no commission except the ordinary broker's commission is paid. Such
limitation does not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.

4. MISCELLANEOUS

a. INVESTMENT GRADE OBLIGATIONS

The National Municipal Bond Fund, New York Tax-Free Fund and Ohio Municipal Bond
Fund may not:

Hold more than five percent of its total assets in securities that have been
downgraded below investment grade.

b. CONCENTRATION

The Fund for Income may not:

With respect to non-municipal bond investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the total Fund's assets would be
invested in any one industry.

- 18 -

<PAGE>

INSTRUMENTS IN WHICH THE FUNDS CAN INVEST

The instruments in which the Funds can invest, according to their investment
policies and limitations are described below.

The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest in accordance with their investment
objective, policies, and limitations, including certain transactions the Funds
may make and strategies they may adopt. The following also contains a brief
description of certain risk factors. The Funds may, following notice to their
shareholders, take advantage of other investment practices which presently are
not contemplated for use by the Funds or which currently are not available but
which may be developed, to the extent such investment practices are both
consistent with a Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in a Fund's Prospectus and
this Statement of Additional Information.

ELIGIBLE SECURITIES FOR MONEY MARKET FUNDS. High-quality investments are those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from an NRSRO or (ii) possess, in the case of multiple-rated
securities, one of the two highest short-term ratings by at least two NRSROs; or
(iii) do not possess a rating (i.e. are unrated) but are determined by the
Adviser to be of comparable quality to the rated instruments described in (i)
and (ii). For purposes of these investment limitations, a security that has not
received a rating will be deemed to possess the rating assigned to an
outstanding class of the issuer's short-term debt obligations if determined by
the Adviser to be comparable in priority and security to the obligation selected
for purchase by a Fund. (The above described securities which may be purchased
by the money market Funds are hereinafter referred to as "Eligible Securities.")

A security subject to a tender or demand feature will be considered an Eligible
Security only if both the demand feature and the underlying security possess a
high quality rating, or, if such do not possess a rating, are determined by the
Adviser to be of comparable quality; provided, however, that where the demand
feature would be readily exercisable in the event of a default in payment of
principal or interest on the underlying security, this obligation may be
acquired based on the rating possessed by the demand feature or, if the demand
feature does not possess a rating, a determination of comparable quality by the
Adviser. A security which at the time of issuance had a maturity exceeding 397
days but, at the time of purchase, has remaining maturity of 397 days or less,
is not considered an Eligible Security if it does not possess a high quality
rating and the long-term rating, if any, is not within the two highest rating
categories.

Pursuant to Rule 2a-7 under the 1940 Act (the "Rule"), the Money Market Funds
maintain a dollar-weighted average portfolio maturity which does not exceed 90
days.

The weighted average maturity of the U.S. Government Obligations Fund will
usually be 60 days or less since rating agencies normally require shorter
maturities. However, the permitted weighted average maturity for the U.S.
Government Obligations Fund is 90 days.

The Appendix of this SAI identifies each NRSRO which may be utilized by the
Adviser with regard to portfolio investments for the Funds and provides a
description of relevant ratings assigned by each such NRSRO. A rating by an
NRSRO may be utilized only where the NRSRO is neither controlling, controlled
by, or under common control with the issuer of, or any issuer, guarantor, or
provider of credit support for, the instrument.

U.S. CORPORATE DEBT OBLIGATIONS. U.S. Corporate Debt Obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government

- 19 -

<PAGE>

securities, and zero coupon obligations. Bonds, notes, and debentures in which
the Funds may invest may differ in interest rates, maturities, and times of
issuance. The market value of a Fund's fixed income investments will change in
response to interest rate changes and other factors. During periods of falling
interest rates, the values of outstanding fixed income securities generally
rise. Conversely, during periods of rising interest rates, the values of such
securities generally decline. Moreover, while securities with longer maturities
tend to produce higher yields, the price of longer maturity securities are also
subject to greater market fluctuations as a result of changes in interest rates.

Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Except under conditions of default, changes in
the value of a Fund's securities will not affect cash income derived from these
securities but will affect the Fund's net asset value.

SHORT-TERM OBLIGATIONS. These include high quality, short-term obligations such
as domestic and foreign commercial paper (including variable-amount master
demand notes), bankers' acceptances, certificates of deposit and demand and time
deposits of domestic and foreign branches of U.S. banks and foreign banks, and
repurchase agreements. (See "Foreign Securities" for a description of risks
associated with investments in foreign securities.)

SHORT-TERM CORPORATE OBLIGATIONS. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of an NRSRO that
possess many favorable investment attributes. In the lower end of this category,
credit quality may be more susceptible to potential future changes in
circumstances.

DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.

BANKERS' ACCEPTANCES. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).

CERTIFICATES OF DEPOSIT. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Certificates of Deposit and demand and time deposits invested in by a Fund will
be those of domestic and foreign banks and savings and loan associations, if (a)
at the time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund.

EURODOLLAR CERTIFICATES OF DEPOSIT ("ECDs") are U.S. dollar-denominated
certificates of deposit issued by branches of foreign and domestic banks located
outside the United States.

- 20 -

<PAGE>

YANKEE CERTIFICATES OF DEPOSIT ("Yankee CDs") are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States.

EURODOLLAR TIME DEPOSITS ("ETDs") are U.S. dollar-denominated deposits in a
foreign branch of a U.S. bank or a foreign bank.

CANADIAN TIME DEPOSITS ("CTDs") are U.S. dollar-denominated certificates of
deposit issued by Canadian offices of major Canadian Banks.

COMMERCIAL PAPER. Commercial paper is unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.

The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this Statement of Additional Information.

INTERNATIONAL BONDS. International Bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International Bonds also
include Canadian and Supranational Agency Bonds (e.g., International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)

FOREIGN DEBT SECURITIES. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there generally is less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation, or
confiscatory taxation; limitations on the removal of securities, property, or
other assets of a Fund; there may be political or social instability; there may
be increased difficulty in obtaining legal judgments; or diplomatic developments
which could affect U.S. investments in those countries. The Adviser will take
such factors into consideration in managing a Fund's investments. A Fund will
not hold foreign currency in amounts exceeding 5% of its assets as a result of
such investments.

REPURCHASE AGREEMENTS. Securities held by a Fund may be subject to Repurchase
Agreements. Under the terms of a Repurchase Agreement, a Fund would acquire
securities from financial institutions or registered broker-dealers deemed
creditworthy by the Adviser pursuant to guidelines adopted by the Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).

If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.

- 21 -

<PAGE>

REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds for temporary purposes by
entering into reverse Repurchase Agreements. Reverse Repurchase Agreements are
considered to be borrowings under the 1940 Act. Pursuant to such agreement, a
Fund would sell a portfolio security to a financial institution such as a bank
and a broker-dealer, and agree to repurchase such security at a mutually
agreed-upon date and price. At the time a Fund enters into a Reverse Repurchase
Agreement, it will place in a segregated custodial account assets (such as cash
or other liquid high-grade securities) consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest). The collateral will be marked-to-market on a daily basis, and will be
monitored continuously to ensure that such equivalent value is maintained.
Reverse Repurchase Agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price at which the Fund is
obligated to repurchase the securities.

SHORT-TERM FUNDING AGREEMENTS. A Fund may invest in Short-Term Funding
Agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to such agreements, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
the Fund, on a monthly basis, guaranteed interest which is based on an index.
The Short-Term Funding Agreement provides that this guaranteed interest will not
be less than a certain minimum rate. Because the principal amount of a
Short-Term Funding Agreement may not be received from the insurance company on
seven days notice or less, the agreement is considered to be an illiquid
investment and, together with other instruments in a Fund which are not readily
marketable, will not exceed, for money market funds, 10% of the Fund's net
assets, and for all other funds, 15% of the Fund's net assets. In determining
dollar-weighted average portfolio maturity, a Short-Term Funding Agreement will
be deemed to have a maturity equal to the period of time remaining until the
next readjustment of the guaranteed interest rate.

VARIABLE AMOUNT MASTER DEMAND NOTES. Variable Amount Master Demand Notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a Variable
Amount Master Demand Note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of Variable Amount Master Demand Notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and ability to make payments due
under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
Variable Amount Master Demand Note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.

VARIABLE RATE DEMAND NOTES. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Funds also may invest in participation Variable Rate
Demand Notes, which provide a Fund with an undivided interest in underlying
Variable Rate Demand Notes held by major investment banking institutions. Any
purchase of Variable Rate Demand Notes will meet applicable diversification and
concentration requirements.

VARIABLE AND FLOATING RATE NOTES. A Variable Rate Note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A Floating Rate Note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market

- 22 -

<PAGE>

value that approximates its par value. Such notes frequently are not rated by
credit rating agencies; however, unrated Variable and Floating Rate Notes
purchased by the Fund will only be those determined by the Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, the Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular Variable or Floating Rate Note purchased by a Fund, the
Fund may resell the note at any time to a third party. The absence of an active
secondary market, however, could make it difficult for a Fund to dispose of a
Variable or Floating Rate Note in the event that the issuer of the note
defaulted on its payment obligations and a Fund could, for this or other
reasons, suffer a loss to the extent of the default. Variable or Floating Rate
Notes may be secured by bank letters of credit.

Variable or Floating Rate Notes may have maturities of more than one year, as
follows:

1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.

2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.

3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.

4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.

As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.

EXTENDIBLE DEBT SECURITIES. Extendible Debt Securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.

RECEIPTS. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES"). These instruments are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS").

ZERO-COUPON BONDS. Zero-Coupon Bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest

- 23 -

<PAGE>

payments. The effect of owning instruments which do not make current interest
payments is that a fixed yield is earned not only on the original investment but
also, in effect, on accretion during the life of the obligations. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest distributions at a rate as high as the implicit yields on the
Zero-Coupon Bond, but at the same time eliminates the holder's ability to
reinvest at higher rates. For this reason, Zero-Coupon Bonds are subject to
substantially greater price fluctuations during periods of changing market
interest rates than are comparable securities which pay interest currently,
which fluctuation increases in accordance with the length of the period to
maturity.

HIGH-YIELD DEBT SECURITIES. High-Yield Debt Securities are lower-rated debt
securities, commonly referred to as "junk bonds" (those rated Ba to C by Moody's
or BB to C by S&P), that have poor protection with respect to the payment of
interest and repayment of principal, or may be in default. These securities are
often considered to be speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices of
High-Yield Debt Securities may fluctuate more than those of higher-rated debt
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates.

While the market for High-Yield Debt Securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of High-Yield Debt Securities that defaulted rose significantly above
prior levels, although the default rate decreased in 1992.

The market for High-Yield Debt Securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, High-Yield
Debt Securities will be valued in accordance with procedures established by the
Victory Portfolios' Board of Trustees, including the use of outside pricing
services.

Judgment plays a greater role in valuing High-Yield Debt Securities than is the
case for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value High-Yield Debt
Securities and a Fund's ability to sell these securities.

Since the risk of default is higher for High-Yield Debt Securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by a Fund. In considering investments for
a Fund, the Adviser will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. Analysis of the Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.

A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.

LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Loans and Other Direct Debt Instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct Debt Instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct Debt

- 24 -

<PAGE>

Instruments may also include standby financing commitments that obligate a Fund
to supply additional cash to the borrower on demand.

SECURITIES OF OTHER INVESTMENT COMPANIES. A Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Victory Portfolios from the SEC,
a Fund may invest in the money market funds of the Victory Portfolios. The
Adviser will waive its investment advisory fee with respect to assets of a Fund
invested in any of the money market funds of the Victory Portfolios, and, to the
extent required by the laws of any state in which a Fund's shares are sold, the
Adviser will waive its investment advisory fee as to all assets invested in
other investment companies.

U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.

MUNICIPAL SECURITIES. Municipal Securities are obligations, typically bonds and
notes, issued by or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities, and instrumentalities, the interest on which, in the
opinion of the issuer's bond counsel at the time of issuance, is both exempt
from federal income tax and not treated as a preference item for individuals for
purposes of the federal alternative minimum tax.

Two specific types of Municipal Securities are "Ohio Tax-Exempt Obligations" and
"New York Tax-Exempt Obligations." Ohio Tax-Exempt Obligations are Municipal
Securities issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel at the time of
issuance, excluded from gross income for purposes of both federal income
taxation and Ohio personal income tax. New York Tax-Exempt Obligations are
Municipal Securities issued by the State of New York and its political
subdivisions, the interest on which is, in the opinion of the issuer's bond
counsel at the time of issuance, excluded from gross income for purposes of both
federal income taxation and New York personal income tax.

Generally, Municipal Securities are issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Municipal Securities may include fixed, variable,
or floating rate obligations. Municipal Securities may be purchased on a
when-issued or delayed-delivery basis (including refunding contracts).

The two principal categories of Municipal Securities are "general obligation"
issues and "revenue" issues. Other categories of Municipal Securities are "moral
obligation" issues, private activity bonds, and industrial development bonds.

The prices and yields on Municipal Securities are subject to change from time to
time and depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer (or other entities whose
financial resources are supporting the Municipal Security), general conditions
in the market for tax-exempt obligations, the size of a particular offering, the
maturity of the obligation, and the rating(s) of the issue. There are variations
in the quality of Municipal Securities, both within a particular category of
Municipal Securities and

- 25 -

<PAGE>

between categories. Current information about the financial condition of an
issuer of tax-exempt bonds or notes usually is not as extensive as that which is
made available by corporations whose securities are publicly traded.

The term Municipal Securities, as used in this SAI, includes private activity
bonds issued and industrial development bonds by or on behalf of public
authorities to finance various privately-operated facilities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax. The term Municipal Securities also includes short-term instruments issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues, such as short-term general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax-exempt
commercial paper, construction loan notes, and other forms of short-term
tax-exempt loans. Additionally, the term Municipal Securities includes project
notes, which are issued by a state or local housing agency and are sold by the
Department of Housing and Urban Development.

An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code. Congress or state
legislatures may enact laws extending the time for payment of principal or
interest, or both, or imposing other constraints upon the enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal, or political developments might affect all or a substantial portion of
the Fund's tax-exempt bonds and notes in the same manner.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. The U.S. Supreme Court has held that Congress has the constitutional
authority to enact such legislation. It is not possible to determine what effect
the adoption of such proposals could have on the availability of tax-exempt
bonds for investment by the Fund and the value of its portfolio. Proposals also
may be introduced before state legislatures that would affect the state tax
treatment of Municipal Securities. If such proposals were enacted, the
availability of Municipal Securities and their value would be affected.

The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
continuing requirements on issuers of tax-exempt bonds regarding the use,
expenditure and investment of bond proceeds and the payment of rebate to the
United States of America. Failure by the issuer to comply with certain of these
requirements subsequent to the issuance of tax-exempt bonds could cause interest
on the bonds to become includable in gross income retroactive to the date of
issuance.

General obligation issues are backed by the full taxing power of a state or
municipality and are payable from the issuer's general unrestricted revenues and
not from any particular fund or source. The characteristics and method of
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue issues or special obligation issues are backed
only by the revenues from a specific tax, project, or facility. "Moral
obligation" issues are normally issued by special purpose authorities.

Private activity bonds and industrial development bonds generally are revenue
bonds and not payable from the resources or unrestricted revenues of the issuer.
The credit and quality of industrial development revenue bonds is usually
directly related to the credit of the corporate user of the facilities. Payment
of principal of and interest on industrial development revenue bonds is the
responsibility of the corporate user (and any guarantor).

- 26 -

<PAGE>

Private activity bonds, as discussed above, may constitute Municipal Securities
depending on their tax treatment. The source of payment and security for such
bonds is the financial resources of the private entity involved; the full faith
and credit and the taxing power of the issuer normally will not be pledged. The
payment obligations of the private entity also will be subject to bankruptcy as
well as other exceptions similar to those described above. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain local facilities for water supply
or other heating or cooling facilities. Other private activity bonds and
industrial development bonds issued to fund the construction, improvement or
equipment of privately-operated industrial, distribution, research or commercial
facilities may also be Municipal Securities, but the size of such issues is
limited under current and prior federal tax law. The aggregate amount of most
private activity bonds and industrial development bonds is limited (except in
the case of certain types of facilities) under federal tax law by an annual
"volume cap." The volume cap limits the annual aggregate principal amount of
such obligations issued by or on behalf of all government instrumentalities in
the state. Such obligations are included within the term Municipal Securities if
the interest paid thereon is, in the opinion of bond counsel, at the time of
issuance, excluded from gross income for purposes of both federal income
taxation (including any alternative minimum tax) and state personal income tax.
The Fund may not be a desirable investment for "substantial users" of facilities
financed by private activity bonds or industrial development bonds or for
"related persons" of substantial users.

Project notes are secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the U.S. government will lend the issuer an amount equal to the principal of and
interest on the project notes, although the issuing agency has the primary
obligation with respect to its project notes.

Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. Insured investments are covered by an insurance policy applicable to a
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance. Such
policies are noncancellable and continue in force as long as the municipal bonds
are outstanding and the respective insurers remain in business.

The insurer unconditionally guarantees the timely payment of the principal of
and interest on the insured municipal bonds when and as such payments become due
but shall not be paid by the issuer, except that in the event of any
acceleration of the due date of the principal by reason of mandatory or optional
redemption (other than acceleration by reason of a mandatory sinking fund
payment), default, or otherwise, the payments guaranteed will be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer will be responsible for such payments
less any amounts received by the bondholder from any trustee for the municipal
bond issuers or from any other source. The insurance does not guarantee the
payment of any redemption premium, the value of the shares of a Fund, or
payments of any tender purchase price upon the tender of the municipal bonds.
With respect to small issue industrial development municipal bonds and pollution
control revenue municipal bonds, the insurer guarantees the full and complete
payments required to be made by or on behalf of an issuer of such municipal
bonds if there occurs any change in the tax-exempt status of interest on such
municipal bonds, including principal, interest, or premium payments, if any, as
and when required to be made by or on behalf of the issuer pursuant to the terms
of such municipal bonds. This insurance is intended to reduce financial risk,
but the cost thereof will reduce the yield available to shareholders of a Fund.

The ratings of NRSROs represent their opinions as to the quality of Municipal
Securities. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality, and Municipal
Securities with the same maturity, interest rate, and rating may have different
yields, while Municipal Securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by

- 27 -

<PAGE>

a Fund, an issue of Municipal Securities may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the Fund. The
Adviser will consider such an event in determining whether the Fund should
continue to hold the obligation.

The Adviser believes that it is likely that sufficient Municipal Securities will
be available to satisfy the Fund's investment objective and policies. In meeting
its investment policies, the Fund may invest all or any part of its total assets
in Municipal Securities which are private activity bonds. Moreover, although the
Fund does not presently intend to do so on a regular basis, it may invest more
than 25% of its total assets in Municipal Securities which are related in such a
way that an economic, business or political development or change affecting one
such security would likewise affect the other Municipal Securities. Examples of
such securities are obligations, the repayment of which is dependent upon
similar types of projects or projects located in the same state. Such
investments would be made only if deemed necessary or appropriate by the
Adviser.

OHIO TAX-EXEMPT OBLIGATIONS. As used in the Prospectus and this Statement of
Additional Information, the term "Ohio Tax-Exempt Obligations" refers to debt
obligations issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel, at the time
of issuance, excluded from gross income for purposes of both federal income
taxation and Ohio personal income tax (as used herein the terms "income tax" and
"taxation" do not include any possible incidence of any alternative minimum
tax). Ohio Tax-Exempt Obligations are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, roads, schools, water and sewer works, and other
utilities. Other public purposes for which Ohio Tax-Exempt Obligations may be
issued include refunding outstanding obligations and obtaining funds to lend to
other public institutions and facilities. In addition, certain debt obligations
known as "private activity bonds" may be issued by or on behalf of
municipalities and public authorities to obtain funds to provide certain water,
sewage and solid waste facilities, qualified residential rental projects,
certain local electric, gas and other heating or cooling facilities, qualified
hazardous waste facilities, high-speed inter-city rail facilities,
government-owned airports, docks and wharves and mass commuting facilities,
certain qualified mortgages, student loan and redevelopment bonds and bonds used
for certain organizations exempt from federal income taxation. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain local facilities for water supply
or other heating or cooling facilities. Other private activity bonds and
industrial development bonds issued to fund the construction, improvement or
equipment of privately-operated industrial, distribution, research or commercial
facilities may also be Ohio Tax-Exempt Obligations, but the size of such issues
is limited under current and prior federal tax law. The aggregate amount of most
private activity bonds and industrial development bonds is limited (except in
the case of certain types of facilities) under federal tax law by an annual
"volume cap." The volume cap limits the annual aggregate principal amount of
such obligations issued by or on behalf of all government instrumentalities in
the state. Such obligations are included within the term Ohio Tax-Exempt
Obligations if the interest paid thereon is, in the opinion of bond counsel, at
the time of issuance, excluded from gross income for purposes of both federal
income taxation (including any alternative minimum tax) and Ohio personal income
tax. A Fund which invests in Ohio Tax-Exempt Obligations may not be a desirable
investment for "substantial users" of facilities financed by private activity
bonds or industrial development bonds or for "related persons" of substantial
users. See "Dividends, Distributions, and Taxes" in the Prospectus.

Prices and yields on Ohio Tax-Exempt Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the market for tax-exempt obligations, the
size of a particular offering, the maturity of the obligation and ratings of
particular issues, and are subject to change from time to time. Current
information about the financial condition of an issuer of tax-exempt bonds or
notes is usually not as extensive as that which is made available by
corporations whose securities are publicly traded.

- 28 -

<PAGE>

Obligations of subdivision issuers of tax-exempt bonds and notes may be subject
to the provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, as amended, affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time for
payment of principal or interest, or both, or to impose other constraints upon
enforcement of such obligations. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal or political developments might affect all or a substantial portion of the
Funds' tax-exempt bonds and notes in the same manner.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. A recent decision of the U.S. Supreme Court has held that Congress has
the constitutional authority to enact such legislation. It is not possible to
determine what effect the adoption of such proposals could have on the
availability of tax-exempt bonds for investment by a Fund and the value of its
portfolio.

The Code imposes certain continuing requirements on issuers of tax-exempt bonds
regarding the use, expenditure and investment of bond proceeds and the payment
of rebate to the United States of America. Failure by the issuer to comply
subsequent to the issuance of tax-exempt bonds with certain of these
requirements could cause interest on the bonds to become includable in gross
income retroactive to the date of issuance.

A Fund may invest in Ohio Tax-Exempt Obligations either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Ohio Tax-Exempt Obligations, provided that, in the opinion of counsel to the
initial seller of each such certificate or instrument, any discount accruing on
such certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related Ohio Tax-Exempt Obligations will be
exempt from federal income tax and Ohio personal income tax to the same extent
as interest on such Ohio Tax-Exempt Obligations. A Fund may also invest in Ohio
Tax-Exempt Obligations by purchasing from banks participation interests in all
or part of specific holdings of Ohio Tax-Exempt Obligations. Such participations
may be backed in whole or in part by an irrevocable letter of credit or
guarantee of the selling bank. The selling bank may receive a fee from the Fund
in connection with the arrangement. A Fund will not purchase participation
interests unless it receives an opinion of counsel or a ruling of the Internal
Revenue Service that interest earned by it on Ohio Tax-Exempt Obligations in
which it holds such a participation interest is exempt from federal income tax
and Ohio personal income tax.

MUNICIPAL LEASE OBLIGATIONS. A Fund may invest a portion of its assets in
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, Funds will not
hold such obligations directly as a lessor of the property, but will purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives a Fund a specified, undivided interest in
the obligation in proportion to its purchased interest in the total amount of
the obligation.

Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under

- 29 -

<PAGE>

the lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations.

LOWER-RATED MUNICIPAL SECURITIES. The Funds do not currently intend to invest in
lower-rated municipal securities. However, certain Funds may hold up to 5% of
its assets in municipal securities that have been downgraded below investment
grade. While the market for New York municipal securities is considered to be
substantial, adverse publicity and changing investor perceptions may affect the
ability of outside pricing services used by the Fund to value portfolio
securities, and the Fund's ability to dispose of lower-rated securities. Outside
pricing services are consistently monitored to assure that securities are valued
by a method that the Board of Trustees believes accurately reflects fair value.
The impact of changing investor perceptions may be especially pronounced in
markets where municipal securities are thinly traded.

The Fund may choose, at its expense, or in conjunction with others, to pursue
litigation seeking to protect the interests of security holders if it determines
this to be in the best interest of shareholders.

FEDERALLY TAXABLE OBLIGATIONS. None of the tax-exempt Funds intend to invest in
securities whose interest is federally taxable; however, from time to time,
these Funds may invest a portion of their assets on a temporary basis in
fixed-income obligations whose interest is subject to federal income tax. For
example, these Funds may invest in obligations whose interest is federally
taxable pending the investment or reinvestment in municipal securities of
proceeds from the sale of its shares of portfolio securities.

Should these Funds invest in federally taxable obligations, they would purchase
securities which in the Adviser's judgment are of high quality. This would
include obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of domestic banks; and repurchase agreements.
These Funds' standards for high quality taxable obligations are essentially the
same as those described by Moody's in rating corporate obligations within its
two highest ratings of Prime-1 and Prime-2, and those described by S&P in rating
corporate obligations within its two highest ratings of A-1 and A-2. In making
high quality determinations the Fund may also consider the comparable ratings of
other nationally recognized rating services.

The Supreme Court has held that Congress may subject the interest on municipal
obligations to federal income tax. Proposals to restrict or eliminate the
federal income tax exemption for interest on municipal obligations are
introduced before Congress from time to time. Proposals also may be introduced
before the New York legislature that would affect the state tax treatment of the
Fund's distributions. If such proposals were enacted, the availability of
municipal obligations and the value of the Fund's holdings would be affected and
the Trustees would reevaluate the Fund's investment objective and policies.

These Funds anticipate being as fully invested as practicable in municipal
securities; however, there may be occasions when, as a result of maturities of
portfolio securities, sales of Fund shares, or in order to meet redemption
requests, the Fund may hold cash that is not earning income. In addition, there
may be occasions when, in order to raise cash to meet redemptions, these Funds
may be required to sell securities at a loss.

REFUNDED MUNICIPAL BONDS. Investments by a Fund in refunded municipal bonds that
are secured by escrowed obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities are considered to be investments in U.S.
Government obligations for purposes of the diversification requirements to which
the Funds is subject under the 1940 Act. As a result, more than 5% of a Fund's
total assets may be invested in such refunded bonds issued by a particular
municipal issuer. The escrowed securities securing such refunded municipal bonds
will consist exclusively of U.S. Government obligations, and will be held by an
independent escrow agent or be subject to an irrevocable pledge of the escrow
account to the debt service on the original bonds.

- 30 -

<PAGE>

WHEN-ISSUED SECURITIES. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when issued basis, the
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous. The
Funds do not intend to purchase when issued securities for speculative purposes,
but only in furtherance of its investment objective.

DELAYED-DELIVERY TRANSACTIONS. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Fund may
receive fees for entering into delayed delivery transactions.

When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.

The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.

MORTGAGE-BACKED SECURITIES--IN GENERAL. Mortgage-Backed Securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. A Fund may purchase Mortgage-Backed Securities at a
premium or at a discount. Among the U.S. Government securities in which a Fund
may invest are Government Mortgage-Backed Securities (or government guaranteed
mortgage-related securities). Such guarantees do not extend to the value of
yield of the Mortgage-Backed Securities themselves or of the Fund's shares.

- 31 -

<PAGE>

U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.

The principal governmental (i.e., backed by the full faith and credit of the
U.S. Government) guarantor of Mortgage-Backed Securities is GNMA. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC, respectively, but
are not backed by the full faith and credit of the U.S. Government.

GNMA CERTIFICATES. Certificates of the GNMA are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.

The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the U.S. Government. GNMA is also empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.

The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures usually will
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.

FHLMC SECURITIES. The FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. The FHLMC
issues two types of mortgage pass-through securities ("FHLMC Certificates"),
mortgage participation certificates, and collateralized mortgage obligations
("CMOs"). Participation Certificates resemble GNMA Certificates in that each
Participation Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. The FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal.
Recently introduced FHLMC Gold Participation Certificates guarantee the timely
payment of both principal and interest.

FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. Government.

- 32 -

<PAGE>

FNMA SECURITIES. The FNMA was established in 1938 to create a secondary market
in mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S. Government.

COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-Backed Securities in which a Fund
may invest may also include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.

NON-GOVERNMENTAL MORTGAGE-BACKED SECURITIES. A Fund may invest in
mortgage-related securities issued by non-governmental entities. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers also may be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are not direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool, and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers, thereof
will be considered in determining whether a Non-Governmental Mortgage-Backed
Security meets a Fund's investment quality standards. There can be no assurance
that the private insurers can meet their obligations under the policies. A Fund
may buy NonGovernmental Mortgage-Backed Related Securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if, as a result, more
than 15% of the value of the Fund's net assets will be invested in illiquid
securities.

A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.

ASSET-BACKED SECURITIES. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.

- 33 -

<PAGE>

FUTURES AND OPTIONS

FUTURES CONTRACTS. The Funds may enter into futures contracts, options on
futures contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant 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 trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. Government agency.

The Funds may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
securities index.

Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. A futures
contract on a securities index is an agreement obligating either party to pay,
and entitling the other party to receive, while the contract is outstanding,
cash payments based on the level of a specified securities index. The
acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified price, to sell
or to purchase the underlying futures contract, upon exercise of the option, at
any time during the option period. Brokerage commissions are incurred when a
futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.

After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.

When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.

- 34 -

<PAGE>

The Funds will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase.

The Funds' ability to use futures trading effectively depends on several
factors. First, it is possible that there will not be a perfect price
correlation between a futures contract and its underlying stock index. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that a Fund could lose more than the original margin deposit required to
initiate a futures transaction.

Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if a Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities, limiting a Fund's ability
to hedge effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Funds will not enter into
futures contract transactions for purposes other than bona fide hedging purposes
or as a substitute for the underlying securities to gain market exposure to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of a Fund's total assets. In
addition, a Fund will not enter into futures contracts to the extent that the
value of the futures contracts held would exceed 1/3 of the Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain a
Fund's qualification as a regulated investment company.

The Victory Portfolios have undertaken to restrict their futures contract
trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios will not market its funds to the public as commodity pools or
otherwise as vehicles for trading in the commodities futures or commodity
options markets; third, the Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios will submit to the CFTC special calls
for information. Accordingly, registration as a Commodities Pool Operator with
the CFTC is not required.

In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on deposit).
For a short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund may also cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the

- 35 -

<PAGE>

instruments underlying the futures contract. A Fund could also cover this
position by holding a separate call option permitting it to purchase the same
futures contract at a price no higher than the strike price of the call option
sold by a Fund.

In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.

RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge them. A Fund will minimize
the risk that they will be unable to close out a futures contract by only
entering 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 the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Funds are only for hedging purposes, the
Adviser does not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. The Funds would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.

Use of futures transactions by the Funds involve the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It is also possible that
the Funds could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.

OPTIONS. The Funds may sell (write) call options which are traded on national
securities exchanges with respect to common stock in its portfolio. A Fund must
at all times have in its portfolio the securities which it may be obligated to
deliver if the option is exercised, except the Special Growth Fund, which may
write uncovered calls, that is, call options on securities that it does not own.
The risk of writing uncovered call options is that the writer of the option may
be forced to acquire the underlying security at a price in excess of the
exercise price of the option, that is, the price at which the writer has agreed
to sell the underlying security to the purchaser of the option. A Fund may write
call options in an attempt to realize a greater level of current income than
would be realized on the securities alone. A Fund may also write call options as
a partial hedge against a possible stock market decline or to extend a holding
period on a stock which is under consideration for sale in order to create a
long-term capital

- 36 -

<PAGE>

gain. In view of their investment objective, a Fund generally would write call
options only in circumstances where the Adviser does not anticipate significant
appreciation of the underlying security in the near future or has otherwise
determined to dispose of the security. As the writer of a call option, a Fund
receives a premium for undertaking the obligation to sell the underlying
security at a fixed price during the option period, if the option is exercised.
So long as a Fund remains obligated as a writer of a call option, it forgoes the
opportunity to profit from increases in the market price of the underlying
security above the exercise price of the option, except insofar as the premium
represents such a profit. A Fund retains the risk of loss should the value of
the underlying security decline. A Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although the writing of call options only
on national securities exchanges increases the likelihood of a Fund's ability to
make closing purchase transactions, there is no assurance that a Fund will be
able to effect such transactions at any particular time or at any acceptable
price. The writing of call options could result in increases in a Fund's
portfolio turnover rate, especially during periods when market prices of the
underlying securities appreciate.

PUTS. A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. A Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to a
Fund upon its exercise of a "put" is normally (i) a Fund's acquisition cost of
the securities (excluding any accrued interest which a Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period a Fund owned the securities, plus (ii)
all interest accrued on the securities since the last interest payment date
during that period.

Puts may be acquired by a Fund to facilitate the liquidity of its portfolio
assets. Puts may also be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets. See "Variable and Floating Rate Notes"
and "Valuation" in this SAI.

A Fund generally will acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for puts either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities). The Funds intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.

The Special Value Fund may write put options from time to time. Such options may
be listed on a national securities exchange and issued by the Options Clearing
Corporation or traded over-the-counter. The Special Growth Fund may seek to
terminate its position in a put option it writes before exercise by closing out
the option in the secondary market at its current price. If the secondary market
is not liquid for a put option the Special Growth Fund has written, however, the
Special Growth Fund must continue to be prepared to pay the strike price while
the option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position. Upon the exercise of an option, the Fund is
not entitled to the gains, if any, on securities underlying the options. The
Special Growth Fund also may purchase index put and call options and write index
options. Through the writing or purchase of index options, the Special Growth
Fund can achieve many of the same objectives as through the use of options on
individual securities. Utilizing options is a specialized investment technique
that entails a substantial risk of a complete loss of the amounts paid as
premiums to writers of options.

ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.

- 37 -

<PAGE>

Under the supervision of the Victory Portfolios' Board of Trustees, the Adviser
determines the liquidity of the Funds' investments and, through reports from the
Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of a Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Funds' rights and obligations
relating to the investment).

Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options, non-government stripped fixed-rate
mortgage-backed securities, and Restricted Securities.

Also, the Adviser may determine some securities to be illiquid.

However, with respect to over-the-counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.

In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.

If through a change in values, net assets, or other circumstances, a Fund were
in a position where more than 15% of its net assets were invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.

RESTRICTED SECURITIES. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
1933 Act, or in a registered public offering.

Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.

If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.

SECURITIES LENDING TRANSACTIONS. The Funds (with the exception of the tax-exempt
funds) may from time to time lend securities from their portfolio to
broker-dealers, banks, financial institutions and institutional borrowers of
securities and receive collateral in the form of cash or U.S. Government
Obligations. Key Trust Company of Ohio, N.A., an affiliate of the Investment
Adviser, serves as lending agent for the Funds, except the tax-exempt funds,
pursuant to a Securities Lending Agency Agreement that was adopted by the
Trustees of the Funds. Under the Funds' current practices (which are subject to
change), a Fund must receive initial collateral equal to 102% of the market
value of the loaned securities, plus any interest due in the form of cash or
U.S. Government Obligations. The Funds will not lend portfolio securities to:
(a) any "affiliated person" (as that term is defined in the 1940 Act)) of any
Fund; (b) any affiliated person of the Investment Adviser; or (c) any affiliated
person of such an affiliated person. This collateral must be valued daily and
should the market value of the loaned securities increase, the borrower must
furnish additional collateral to a Fund sufficient to maintain the value of the
collateral equal to at least 100% of the value of the loaned securities. During
the time portfolio securities are on loan, the borrower will pay the Fund any
dividends or interest paid on such securities plus any interest negotiated
between the parties to the lending agreement. Loans will be subject to
termination by the Funds or the borrower at any time. While a Fund will not have
the right to vote securities on loan, they intend to terminate loans and regain
the right to vote if that is considered important with respect to the
investment. A Fund will only enter into loan arrangements

- 38 -

<PAGE>

with broker-dealers, banks or other institutions which the Adviser has
determined are creditworthy under guidelines established by the Trustees. The
Funds will limit their securities lending to 33 1/3% of total assets.

SHORT SALES AGAINST-THE-BOX. The Funds will not make short sales of securities,
other than short sales "against-the-box." In a short sale against-the-box, a
Fund sells a security that it owns, or a security equivalent in kind and amount
to the security sold short that the Fund has the right to obtain, for delivery
at a specified date in the future. A Fund will enter into short sales
against-the-box to hedge against unanticipated declines in the market price of
portfolio securities or to defer an unrealized gain. If the value of the
securities sold short increases prior to the scheduled delivery date, a Fund
loses the opportunity to participate in the gain. Any gains realized by a Fund
on such sales will be recognized at the time the Fund enters into the short
sale.

INVESTMENT GRADE AND HIGH QUALITY SECURITIES. The Funds may invest in
"investment grade" obligations, which are those rated at the time of purchase
within the four highest rating categories assigned by an NRSRO or, if unrated,
are obligations that the Adviser determines to be of comparable quality. The
applicable securities ratings are described in the Appendix. "High-quality"
short-term obligations are those obligations which, at the time of purchase, (1)
possess a rating in one of the two highest ratings categories from at least one
NRSRO (for example, commercial paper rated "A-1" or "A-2" by S&P or "P-1" or
"P-2" by Moody's) or (2) are unrated by an NRSRO but are determined by the
Adviser to present minimal credit risks and to be of comparable quality to rated
instruments eligible for purchase by the Funds under guidelines adopted by the
Board of Trustees.

PARTICIPATION INTERESTS. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Funds invest in these participation
interests, in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.

WARRANTS. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specific price (the strike price) for a limited
period of time. The strike price of warrants typically is much lower than the
current market price of the underlying securities, yet they are subject to
greater price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss.

REFUNDING CONTRACTS. A Fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by SEC guidelines, a Fund will place liquid assets in a segregated
custodial account equal in amount to its obligations under refunding contracts.

STANDBY COMMITMENTS. A Fund may enter into standby commitments, which are puts
that entitle holders to same-day settlement at an exercise price equal to the
amortized cost of the underlying security plus accrued interest, if any, at the
time of exercise. The Funds may acquire standby commitments to enhance the
liquidity of portfolio securities.

Ordinarily, the Funds may not transfer a standby commitment to a third party,
although they could sell the underlying municipal security to a third party at
any time. The Funds may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Funds would pay a higher price for the securities acquired,
thus reducing their yield to maturity.

Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by

- 39 -

<PAGE>

the Funds; and the possibility that the maturities of the underlying securities
may be different from those of the commitments.

FOREIGN INVESTMENTS. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including sponsored and
unsponsored American Depository Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject the Fund to
significant investment risks that are different from, and additional to, those
related to investments in obligations of U.S. domestic issuers or in U.S.
securities markets. Unsponsored ADRs may involve additional risks.

The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.

Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.

Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Advisers will be able to
anticipate these potential events or counter their effects.

The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.

A Fund may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.

The International Growth Fund currently invests in the securities of issuers
based in a number of foreign countries. The Adviser continuously evaluates
issuers based in countries all over the world. Accordingly, the Fund may invest
in the securities of issuers based in any country, subject to approval by the
Trustees, when such securities met the investment criteria of the Adviser and
are consistent with the investment objectives and policies of the Fund.

MISCELLANEOUS SECURITIES. The Funds can invest in various securities issued by
domestic and foreign corporations, including preferred stocks and investment
grade corporate bonds, notes, and warrants. Bonds are long-term corporate debt
instruments secured by some or all of the issuer's assets, debentures are
general corporate debt obligations backed only by the integrity of the borrower,
and warrants are instruments that entitle the holder to

- 40 -

<PAGE>

purchase a certain amount of common stock at a specified price, which price is
usually higher than the current market price at the time of issuance. Preferred
stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights.

ADDITIONAL INFORMATION CONCERNING OHIO ISSUERS

The Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund will invest
most of their net assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Ohio Municipal
Bond Fund and Ohio Municipal Money Market Fund are therefore susceptible to
general or particular economic, political or regulatory factors that may affect
issuers of Ohio Obligations. The following information constitutes only a brief
summary of some of the many complex factors that may have an effect on the
performance of the Funds. The information does not apply to "conduit"
obligations on which the public issuer itself has no financial responsibility.
This information is derived from official statements of certain Ohio issuers
published in connection with their issuance of securities and from other
publicly available information, and is believed to be accurate. No independent
verification has been made of any of the following information.

Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.

There may be specific factors that at particular times apply in connection with
investment in particular Ohio Obligations or in those obligations of particular
Ohio issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors apply.
However, the information below is intended only as a general summary, and is not
intended as a discussion of any specific factors that may affect any particular
obligation or issuer.

Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1996 is
11,173,000.

While diversifying more into the service and other non-manufacturing areas, the
Ohio economy continues to rely in part on durable goods manufacturing largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.

In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
six years, the State rates were below the national rates (4.9% versus 5.4% in
1996). The unemployment rate and its effects vary among geographic areas of the
State.

There can be no assurance that future national, regional or state-wide economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund or the
ability of particular obligors to make timely payments of debt service on (or
lease payments relating to) those Obligations.

The State operates on the basis of a fiscal biennium for its appropriations and
expenditures, and is precluded by law from ending its July 1 to June 30 fiscal
year ("FY") or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund ("GRF"), for which the personal income
and sales-use taxes are the major sources. Growth and depletion of GRF ending
fund balances show a consistent pattern related to national economic conditions,
with the ending FY balance reduced during less favorable and increased during
more favorable economic periods. The State has well-established procedures for,
and has timely taken, necessary actions to ensure resource/expenditure balances
during less favorable economic periods. Those procedures included general and
selected reductions in appropriations spending.

The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF

-41-
<PAGE>

debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the Budget Stabilization Fund ("BSF," a cash and
budgetary management fund) to the GRF in FY 1992.

Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected and
then timely addressed an FY 1992 imbalance in GRF resources and expenditures. In
response, the Governor ordered most State agencies to reduce GRF spending in the
last six months of FY 1992 by a total of approximately $184 million; the $100.4
million BSF balance and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments were made in the timing
of certain tax payments.

A significant GRF shortfall (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to
replenishment, $21 million was deposited in the BSF.

None of the spending reductions were applied to appropriations needed for debt
service or lease rentals relating to any State obligations.

The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium ended June 30, 1995 with a GRF ending fund balance of $928 million, of
which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.

From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100 million
was transferred for elementary and secondary school computer network purposes
and $30 million to a new State transportation infrastructure fund. Approximately
$400.8 million served as a basis for temporary 1996 personal income tax
reductions aggregating that amount. The 1996-97 biennium-ending GRF fund balance
was $834.9 million. Of that, $250 million goes to school building construction
and renovation, $94 million to the school computer network, $44.2 million for
school textbooks and instructional materials and a distance learning program,
and $34 million to the BSF (which had a February 6, 1998 balance of $862.7
million), with the $263 million balance to a State income tax reduction fund.

The GRF appropriations act for the 1997-98 biennium was passed on June 25, 1997
and promptly signed (after selective vetoes) by the Governor. All necessary GRF
appropriations for State debt service and lease rental payments then projected
for the biennium were included in that act. Recently passed (but, as of February
16, not yet acted on by the Governor) legislation increases the fiscal year 1999
GRF appropriate on level for elementary and secondary education, with the
increase to be funded in part by mandated small percentage reductions in State
appropriations for various State agencies and institutions. Expressly exempt
from those reductions are all appropriations for debt service, including lease
rental payments.

The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional provisions.
The State may incur debt, limited in amount to $750,000, to cover casual
deficits or failures in revenues or to meet expenses not otherwise provided for.
The Constitution expressly precludes the State from assuming the debts of any
local government or corporation. (An exception is made in both cases for any
debt incurred to repel invasion, suppress insurrection or defend the State in
war.)

By 14 constitutional amendments approved from 1921 to date (the latest adopted
in 1995) Ohio voters authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At February 6, 1998, $1.07 billion (excluding
certain highway bonds payable primarily from highway use receipts) of this debt
was outstanding or sold

-42-
<PAGE>

and awaiting delivery. The only such State debt at that date still authorized to
be incurred were portions of the highway bonds, and the following: (a) up to
$100 million of obligations for coal research and development may be outstanding
at any one time ($30.9 million outstanding); (b) $240 million of obligations
previously authorized for local infrastructure improvements, no more than $120
million of which may be issued in any calendar year ($946.9 million outstanding
or sold and awaiting delivery), and (c) up to $200 million in general obligation
bonds for parks, recreation and natural resources purposes which may be
outstanding at any one time ($90.9 million outstanding, with no more than $50
million to be issued in any one year).

The electors in 1995 approved a constitutional amendment extending the local
infrastructure bond program (authorizing an additional $1.2 billion of State
full faith and credit obligations to be issued over 10 years for the purpose),
and authorizing additional highway bonds (expected to be payable primarily from
highway use receipts). The latter supersedes the prior $500 million outstanding
authorization, and authorizes not more than $1.2 billion to be outstanding at
any time and not more than $220 million to be issued in a fiscal year.

The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations issued
by the Ohio Public Facilities Commission and the Ohio Building Authority, and
certain obligations issued by the State Treasurer, over $4.9 billion of which
were outstanding or sold and awaiting delivery at February 6, 1998.

A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).

A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)

The General Assembly has placed on the May 1998 primary election ballot a
proposed constitutional amendment dealing with State debt. If approved by
voters, it will authorize State general obligation debt to pay costs of
facilities for a system of common schools throughout the State and for state
supported and assisted institutions of higher education. That and other debt
represented by direct obligations of the State (such as that authorized by the
OPFC and OBA) could not be issued if future fiscal year total debt service on
those obligations to be paid from the GRF or net lottery proceeds exceeds 5% of
total State expenditures from the GRF and net lottery proceeds during the then
preceding fiscal year.

State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.

Local school districts in Ohio receive a major portion (state-wide aggregate
approximately 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 119 districts from
voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, has been pending questioning the
constitutionality of Ohio's system of school funding. The Ohio Supreme Court has
concluded that aspects of the system (including basic operating assistance and
the loan program referred to below) are unconstitutional, and ordered the State
to provide for and fund a system complying with the Ohio Constitution, staying
its order for a year (to March 1998) to permit time for responsive corrective
actions, some of which to February 16, 1998 are above mentioned. A small number
of the State's 612 local school districts have

-43-
<PAGE>

in any year required special assistance to avoid year-end deficits. A program
has provided for school district cash need borrowing directly from commercial
lenders, with diversion of State subsidy distributions to repayment if needed.
Recent borrowings under this program totalled $41.1 million for 28 districts in
FY 1994, $71.1 million for 29 districts in FY 1995 (including $29.5 million for
one), $87.2 million for 20 districts in FY 1996 (including $42.1 million for
one), and $113.2 million for 12 districts in 1997 (including $90 million to one
for restructuring its prior loans).

Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.

For those few municipalities and school districts that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
24 cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated (one village is in preliminary "fiscal watch" status). As
of February 6, 1998, the 1996 school district "fiscal emergency" provision was
applied to four districts, and 12 were on preliminary "fiscal watch" status.

At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions, without
a vote of the electors or a municipal charmer provision, and statutes limit the
amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten- mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to amount or
rate.

Additional Information Concerning New York Issuers

The New York Tax-Free Fund will invest substantially all of its assets in New
York municipal securities. In addition, the specific New York municipal
securities in which the New York Tax-Free Fund will invest will change from time
to time. The New York Tax-Free Fund is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may affect issuers of New York municipal
securities and does not purport to be a complete or exhaustive description of
all adverse conditions to which issuers of New York municipal securities may be
subject. Such information is derived from official statements utilized in
connection with the issuance of New York municipal securities, as well as from
other publicly available documents. Such information has not been independently
verified by the New York Tax-Free Fund, and the New York Tax-Free Fund assumes
no responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have a material adverse impact on the financial condition of such
issuers. The New York Tax- Free Fund cannot predict whether or to what extent
such factors or other factors may affect the issuers of New York municipal
securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities acquired by the Fund to pay
interest on or principal of such securities. The creditworthiness of obligations
issued by local New York issuers may be unrelated to the creditworthiness of
obligations issued by the State of New York, and there is no responsibility on
the part of the State of New York to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within New York, and it is
possible the Fund will invest in obligations of particular issuers as to which
such specific factors are applicable. However, the information set forth below
is intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New York municipal securities.

-44-
<PAGE>

The New York Tax-Free Fund may invest in municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") and/or by
other entities located within the State, including the City of New York (the
"City") and political subdivisions thereof and/or their agencies.

NEW YORK STATE. The State's current fiscal year commenced on April 1, 1997, and
ends on March 31, 1998, and is referred to herein as the State's 1997-98 fiscal
year. The State's budget for the 1997-98 fiscal year was adopted by the
Legislature on August 4, 1997, more than four months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for State-supported debt
service. The State Financial Plan for the 1997-98 fiscal year was formulated on
August 11, 1997 and is based on the State's budget as enacted by the
Legislature, as well as actual results for the first quarter of the current
fiscal year. The 1997-98 State Financial Plan is expected to be updated in
October and January.

The adopted 1997-98 budget projects an increase in General Fund disbursements of
$1.7 billion or 5.2 percent over 1996-97 levels. The average annual growth rate
over the last three fiscal years is approximately 1.2 percent. State Funds
disbursements (excluding federal grants) are projected to increase by 5.4
percent from the 1996-97 fiscal year. All Governmental Funds projected
disbursements increase by 7.0 percent over the 1996-97 fiscal year.

The 1997-98 State Financial Plan is projected to be balanced on a cash basis.
The Financial Plan projections include a reserve for future needs of $530
million. As compared to the Governor's Executive Budget as amended in February
1997, the State's adopted budget for 1997-98 increases General Fund spending by
$1.7 billion, primarily from increases for local assistance ($1.3 billion).
Resources used to fund these additional expenditures include increased revenues
projected for the 1997-98 fiscal year, increased resources produced in the
1996-97 fiscal year that will be utilized in 1997-98, reestimates of social
service, fringe benefit and other spending, and certain non-recurring resources.
Total non-recurring resources included in the 1997-98 Financial Plan are
projected by DOB to be $270 million, or 0.7 percent of total General Fund
receipts.

The 1997-98 adopted budget includes multi-year tax reductions, including a State
funded property and local income tax reduction program, estate tax relief,
utility gross receipts tax reductions, permanent reductions in the State sales
tax on clothing, and elimination of assessments on medical providers. These
reductions are intended to reduce the overall level of State and local taxes in
New York and to improve the State's competitive position vis-a-vis other states.
The various elements of the State and local tax and assessment reductions have
little or no impact on the 1997-98 Financial Plan, and do not begin to
materially affect the out year projections until the State's 1999-2000 fiscal
year. The adopted 1997-98 budget also makes significant investments in
education, and proposes a new $2.4 billion general obligation bond proposal for
school facilities to be submitted to the voters in November 1997.

The 1997-98 Financial Plan also includes: a projected General Fund reserve of
$530 million; a projected balance of $332 million in the Tax Stabilization
Reserve Fund; and a projected $65 million balance in the Contingency Reserve
Fund.

The projections do not include any subsequent actions that the Governor may take
to exercise his line item veto (or vetoing any companion legislation) before
signing the 1997-98 budget appropriation bills into law. Under the Constitution,
the Governor may veto any additions to the Executive Budget within 10 days after
the submission of appropriation bills for his approval. If the Governor were to
take such action, the resulting impact on the Financial Plan would be positive.

The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the federal government, that are not under the
control of the State. In addition, the State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies'. The Division of Budget believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the

-45-
<PAGE>

assumptions on which they are based, are reasonable. Actual results, however,
could differ materially and adversely from the projections set forth in this
Annual Information Statement, and those projections may be changed materially
and adversely from time to time. See the section entitled "Special
Considerations" below for a discussion of risks and uncertainties faced by the
State.

1997-98 STATE FINANCIAL PLAN. The four governmental fund types that comprise the
State Financial Plan are the General Fund, the Special Revenue Funds, the
Capital Projects Funds, and the Debt Service Funds. This fund structure adheres
to accounting standards of the Governmental Accounting Standards Board. This
section discusses first the General Fund and then the other governmental funds.
Receipts and disbursements trends are presented in tabular form for each
component of the General Fund.

GENERAL FUND. The General Fund is the principal operating fund of the State and
is used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1997-98 fiscal year, the General Fund is expected to account for
approximately 48 percent of total Governmental Funds disbursements and 71
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.

Total General Fund receipts and transfers from other funds are projected to be
$35.09 billion, an increase of $2.05 billion from the 1996-97 fiscal year.
General Fund receipts are projected as follows: Personal Income Tax 53.8 %, User
Taxes and Fees 20.0%, Business Taxes 13.8%, Other Taxes 2.8%, Miscellaneous
Receipts/Other 9.7%. Total General Fund disbursements and transfers to other
funds are projected to be $34.60 billion, an increase of $1.70 billion from the
1996-97 fiscal year. General Fund disbursements are projected as follows: Local
Assistance 68.3%, State Operations 18%, Debt Service 6%, General State Charges
6.3%, Capital/Other 1.4%.

Projected General Fund Receipts

Total General Fund receipts and transfers from other funds in the 1997-98 fiscal
year are projected to be $35.09 billion, an increase of over $2 billion or
roughly 6 percent from the $33.04 billion recorded in the 1996-97 fiscal year.
This total includes $31.68 billion in tax receipts, $1.48 billion in
miscellaneous receipts, and $1.94 billion in transfers from other funds.

The projected $2 billion increase in receipts exaggerates the underlying
year-to-year growth in State tax revenues. This increase is largely the result
of actions undertaken by the State to utilize the $1.4 billion 199697 budget
surplus reported by DOB to finance costs in the State's 1997-98 fiscal year.
This transaction reduced reported receipts in the 1996-97 fiscal year and
increased projected receipts in the State's 1997-98 fiscal year. Conversely, the
incremental cost of tax reductions newly effective in 1997-98 and the impact of
new earmarking statutes which divert receipts from the General Fund to other
funds work to depress apparent growth below the underlying growth in the
receipts base attributable to expansion of the State's economy. After adjusting
for these actions, tax receipts are projected to grow by approximately 5 percent
in 1997-98.

The discussion below summarizes the State's projections of General Fund tax
revenues and other receipts for the 1997-98 fiscal year.

- -------------------------------------------------------------------------------
PERSONAL INCOME TAX
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$17,590 $16,998 $16,371 $18,865
- -------------------------------------------------------------------------------

The Personal Income Tax is imposed on the income of individuals, estates and
trusts and is based on federal definitions of income and deductions with certain
modifications. In 1995, the State enacted a tax reduction program

-46-
<PAGE>

designed to reduce receipts from the personal income tax by 20 percent over
three years. The maximum rate was reduced from the 7.875 percent rate in effect
in taxable year 1994 to 6.85 percent for taxable year 1997 and thereafter. For
the 1997-98 fiscal year, this tax-reduction program is estimated to reduce
receipts by approximately $4 billion, compared to what tax receipts would have
been under the pre 1995 rate structure. On a current law basis, 1997 income tax
liability is expected to fall slightly, reflecting the tax cut. On a constant
law basis, liability growth during taxable year 1997 would be between 6 and 7
percent.

Net personal income tax collections are projected to reach $18.87 billion, over
half of all General Fund receipts and $2.5 billion above the reported 1996-97
fiscal year total. Virtually all of the projected annual growth in this
category, however, is provided by tax refund and refund reserve transactions
which affect reported receipts levels in the 1995-96 through 1997-98 fiscal
years. Without these transactions between years, income tax receipts in 1997- 98
would be virtually flat.

- -------------------------------------------------------------------------------
USER TAXES AND FEES
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$6,624 $6,631 $6,800 $7,004
- -------------------------------------------------------------------------------

User taxes and fees are comprised of three-quarters of the State four percent
sales and use tax (the balance, one percent, flows to support Local Government
Assistance Corporation ("LGAC") debt service requirements), cigarette, alcoholic
beverage container, and auto rental taxes, and a portion of the motor fuel
excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage license fees. A portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.

Receipts from user taxes and fees are projected to total $7 billion in the
1997-98 fiscal year, an increase of $204 million from reported collections in
the prior year. The sales tax component of this category accounts for all of the
projected 1997-98 growth in this category, as receipts from all other sources
are projected to decline by $3 million. The yield of most of the excise taxes in
this category show a long-term declining trend, particularly cigarette and
alcoholic beverage taxes. These declines in the 1997-98 fiscal year are
projected to be offset by an increase in anticipated motor vehicle fees arising,
in large part, from legislative actions that raise additional receipts from this
source.

- -------------------------------------------------------------------------------
BUSINESS TAXES
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$5,069 $4,908 $5,078 $4,825
- -------------------------------------------------------------------------------

Business taxes include franchise taxes based generally on net income of general
business, bank and insurance corporations, as well as gross-receipts-based taxes
on utilities and gallonage-based petroleum business taxes. Beginning in 1994, a
15 percent surcharge on these levies began to be phased out and, for most
taxpayers, there will be no surcharge liability for taxable periods ending in
1997 and thereafter.

Total business tax collections in 1997-98 are now projected to be $4.83 billion,
$253 million less than received in the prior fiscal year. The year-over-year
decline in projected receipts in this category is a function of both statutory
changes between the two years - 1997 is the first "surcharge free" taxable
period in this decade - and a number of essentially one-time transactions that
increased receipts in the base year, including unusually large audit receipts
under the bank tax.

- -------------------------------------------------------------------------------
OTHER TAXES
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)

-47-
<PAGE>

- -------------------------------------------------------------------------------
$1,108 $1,099 $1,081 $982
- -------------------------------------------------------------------------------

Other taxes include estate, gift and real estate transfer taxes, a tax on gains
from the sale or transfer of certain real estate (this tax was repealed in
1996), a pari-mutuel tax and other minor levies. This is the first fiscal year
that real estate transfer tax receipts have been diverted from the General Fund
to the Clean Water/Clean Air Fund to provide debt service coverage for general
obligation bonds.

Total receipts from this category in the State's 1997-98 fiscal year are
projected to total $982 million, nearly $100 million below last year's amount.
This figure masks the significant increase in estate tax collections during the
first four months of the fiscal year, and results largely from the dedication of
the proceeds of the real estate transfer tax to meet debt service obligations on
the new Clean Water/Clean Air bond act and from the full-year impact of the
repeal of the real property gains tax.

- -------------------------------------------------------------------------------
MISC. RECEIPTS
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$1,261 $1,420 $2,072 $1,482
- -------------------------------------------------------------------------------

Miscellaneous receipts include investment income, abandoned property receipts,
medical provider assessments, minor federal grants, receipts from public
authorities, and certain other license and fee revenues. Total miscellaneous
receipts are projected to reach $1.48 billion, down almost $600 million from the
prior year. The reduction reflects a significant diminution in the amount of
nonrecurring resources used in the 1997-98 Financial Plan as compared to
1996-97.

- -------------------------------------------------------------------------------
TRANSFERS FROM OTHER FUNDS
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$1,506 $1,680 $1,641 $1,936
- -------------------------------------------------------------------------------

Transfers from other funds to the General Fund consist primarily of tax revenues
in excess of debt service requirements, particularly the one percent sales tax
used to support payments to LGAC. In the 1997-98 fiscal year, tax revenues
transferred in support of debt service are projected to be $1.48 billion, or $58
million more than in the 1996-97 fiscal year. All other transfers are projected
to increase by $237 million, primarily reflecting the nonrecurring transfer of
$200 million for retroactive reimbursement to the State of certain social
services claims from the federal government.

Projectional General Fund Disbursements

General Fund disbursements and transfers to capital, debt service and other
funds are projected at $34.60 billion, an increase of $1.7 billion (5 percent)
from 1996-97 fiscal year levels. Over the last two years, spending growth for
most State agencies and programs has been negative or flat, producing an overall
decline in General Fund spending during that period. The 1997-98 adopted budget
reflects negotiated increases for State employee salaries, increased transfers
for debt service, and other mandated increases, as well as increased investments
in school aid, higher education, mental health, and public protection.

- -------------------------------------------------------------------------------
GRANTS TO LOCAL GOVERNMENTS
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$23,302 $22,537 $22,884 $23,634
- -------------------------------------------------------------------------------

-48-
<PAGE>

Grants to local governments is the largest category of General Fund
disbursements, and accounts for approximately 68 percent of overall General Fund
spending. Disbursements from this category are projected to total $23.63 billion
in the 1997-98 State Financial Plan, an increase of $750 million (3.3 percent)
from 1996-97 levels. This includes $11.57 billion in aid for elementary,
secondary, and higher education, accounting for 49 cents of every dollar spent
in this category. On a school year basis, school aid increases by $750 million,
including formula-based elementary and secondary education aid increases of $650
million. This category of the Financial Plan is affected by the reclassification
of costs formerly budgeted as City University local assistance that are now
included in the transfers for debt service category. This has the effect of
decreasing disbursements in this category by a projected $262 million, and
raising projected transfers by the same amount.

General Fund payments for Medicaid are projected to be $5.42 billion, virtually
unchanged from the level of $5.38 billion in 1996-97. This slow growth is due
primarily to continuation of cost containment measures enacted in 1995- 96 and
1996-97, new reforms included in the 1997-98 adopted budget and forecasts for
slower underlying growth. Other social service spending is forecast to increase
by only $115 million to $3.15 billion in 1997-98. This slow growth stems from
continued State efforts to reduce welfare fraud, declining caseloads, and
changes produced by federal welfare legislation enacted in 1996.

Remaining disbursements primarily support community-based mental hygiene
programs, community and public health programs, local transportation programs,
and revenue sharing payments to local governments. Revenue sharing and other
general purpose aid is projected at $802 million, an increase of approximately
$54 million from 1996-97.

- -------------------------------------------------------------------------------
STATE OPERATIONS
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$6,308 $5,953 $5,780 $6,221
- -------------------------------------------------------------------------------

State operations spending reflects the administrative costs of operating the
State's agencies, including the prison system, mental hygiene institutions, the
State University system ("SUNY"), the Legislature, and the court system.
Personal service costs account for approximately 71 percent of this category.
Since January 1995, the State's workforce has been reduced by about 10 percent,
and is projected to reach a level of approximately 191,000 persons by the end of
the 1997-98 fiscal year. Collective bargaining agreements have been ratified by
employee bargaining units representing most State employees subject to such
agreements, and the 1997-98 projections reflect salary increases under these
agreements. For more information on the State's workforce, see the section
entitled "State Organization-State Government Employment."

Disbursements for State operations are projected at $6.22 billion, an increase
of $441 million or 7.6 percent over the 1996-97 fiscal year. About $200 million
of this increase results from approved collective bargaining agreements and the
impact of binding arbitration settlements. Other major increases include growth
in SUNY operations, increased mental hygiene costs resulting from increased
assessments on State operated programs, public protection agency spending, which
is increasing to reflect the impact of sentencing reforms and prison expansion,
and higher spending by the Judiciary and Legislature.

- -------------------------------------------------------------------------------
GENERAL STATE CHARGES
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$2,081 $2,081 $2,184 $2,183
- -------------------------------------------------------------------------------

General State charges primarily reflect the costs of providing fringe benefits
for State employees, including contributions to pension systems, the employer's
share of social security contributions, employer contributions toward the cost
of health insurance, and the costs of providing worker's compensation and
unemployment insurance

-49-
<PAGE>

benefits. This category also reflects certain fixed costs such as payments in
lieu of taxes, and payments of judgments against the State or its public
officers.

Disbursements in this category are projected to total $2.18 billion in the
1997-98 State Financial Plan virtually unchanged from 1996-97 levels. Pension
costs are projected to grow moderately year over year, while most of the
projected growth in fixed costs is related to increased payments to localities
for State owned lands. These increases are fully offset by continued savings
from health care and worker's compensation reforms, which account for most of
the cost containment savings in this area.

- -------------------------------------------------------------------------------
DEBT SERVICE
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98(PROJ)
- -------------------------------------------------------------------------------
$7 $7 $10 $11
- -------------------------------------------------------------------------------

Debt service paid from the General Fund for 1997-98 reflects only the $11
million interest cost of the State's commercial paper program. This is
approximately the same level as last year, reflecting projections for stable
interest rates for the balance of the fiscal year. The State's annual TRAN
borrowing has been eliminated, as discussed in the section entitled "Debt and
Other Financing Activities-Local Government Assistance Corporation." Debt
service on long-term obligations is paid from Debt Service Funds as described
below.

- -------------------------------------------------------------------------------
TRANSFERS TO OTHER FUNDS
($ MILLIONS)
- -------------------------------------------------------------------------------
1994-95 1995-96 1996-97 1997-98 (PROJ.)
- -------------------------------------------------------------------------------
$1,701 $2,101 $2,039 $2,551
- -------------------------------------------------------------------------------

Transfer to other funds from the General Fund are made primarily to finance
certain portions of State capital project spending and debt service on long-term
bonds, where these costs are not funded from other sources. Transfers to other
funds for debt service are projected at $2.07 billion in 1997-98, an increase of
$496 million. This reflects the increased debt service impact of prior year bond
sales (net of refunding savings), the reclassification of City University debt
service costs that had been previously included in grants to local governments,
and the inclusion of costs associated with the 1996-97 bonding of previous
pension liabilities at lower interest rates. This action has the effect of
adding $159 million in costs that would have otherwise been included with
general State charges (for a description of this action, see the section
entitled "Debt and Other Financing - Lease-Purchase and Contractual Obligation
Financing Programs").

Transfers for capital projects provide General Fund support for projects not
otherwise financed through bond proceeds, dedicated taxes and other revenues and
federal grants. These transfers are projected at $184 million for 1997-98, an
increase of $46 million. The 1997-98 State Financial Plan also includes $299
million for subsidies or transfers to other State funds, a decrease of $30
million from last year's level.

NON-RECURRING RESOURCES

The Division of the Budget estimates that the 1997-98 State Financial Plan
contains actions that provide non-recurring resources or savings totaling
approximately $270 million. These include the use of $200 million in federal
reimbursement funds available from retroactive social service claims approved by
the federal government in April 1997. The balance is composed of various other
actions, primarily the transfer of unused special revenue fund balances to the
General Fund.

OUT YEAR PROJECTIONS OF RECEIPTS AND DISBURSEMENTS. The State closed projected
budget gaps of $5.0 billion, $3.9 billion, and $2.3 billion for the 1995-96
through 1997-98 fiscal years, respectively. The 1998-99 budget gap was projected
at $1.68 billion (before the application of any assumed efficiencies) in the
outyear projections submitted to the Legislature in February 1997. As a result
of changes made in the adopted budget, the 1998-99 gap

-50-
<PAGE>

is now expected to be about the same or smaller than the amount previously
projected, after application of the $530 million reserve for future needs. The
expected gap is smaller than the three previous budget gaps closed by the State.
The Governor has indicated that he will propose to close any potential imbalance
primarily through General Fund expenditure reductions and without increases in
taxes or deferrals of scheduled tax reductions.

The revised expectations for the 1998-99 fiscal year reflect the loss of $1.4
billion in surplus resources from 1996- 97 operations that are being utilized to
finance current year spending, and an incremental effect of approximately $300
million in legislated State and local tax reductions in the outyear. Other
factors include the annualized costs of certain program increases in the 1997-98
adopted budget, most of which are subject to annual appropriation.

Certain actions taken in the State's 1997-98 fiscal year, such as Medicaid and
welfare reforms, are expected to provide recurring savings in future fiscal
years. Continued controls on State agency spending will also provide recurring
savings. The availability of $530 million in reserves created as a part of the
1997-98 adopted budget and included in the Financial Plan is expected to benefit
the 1998-99 fiscal year. Sustained growth in the State's economy and continued
declines in welfare caseload and health care costs would also produce additional
savings in the 1998-99 Financial Plan. Finally, various federal actions,
including the potential beneficial effect on State tax receipts from changes to
the federal tax treatment of capital gains, could potentially provide
significant benefits to the State over the next several years.

See "Special Considerations" below in this section for a description of other
risks and uncertainties associated with the State Financial Plan process.

FUND BALANCES. The 1997-98 General Fund opening fund balance of $433 million
includes $317 million on deposit in the Tax Stabilization Reserve Fund ("TSRF"),
available for use in the event of an unanticipated General Fund deficit, $41
million on deposit in the Contingency Reserve Fund ("CRF") available for
potential litigation costs against the State, and a $75 million balance in the
Community Projects Fund. The projected closing fund balance in the General Fund
of $927 million reflects a balance of $332 million in the TSRF, following an
additional payment of $15 million at the end of the fiscal year, $65 million in
the CRF, following a deposit of $24 million in 1997-98, and a reserve for future
needs of $530 million.

OTHER GOVERNMENTAL FUNDS. In addition to the General Fund, the State Financial
Plan includes Special Revenue Funds, Capital Projects Funds and Debt Service
Funds which are discussed below. Amounts below do not include other sources and
uses of funds transferred to or from other fund types.

Special Revenue Funds. Special Revenue Funds are used to account for the
proceeds of specific revenue sources such as federal grants that are legally
restricted, either by the Legislature or outside parties, to expenditures for
specified purposes. Although activity in this fund type is expected to comprise
approximately 42 percent of total governmental funds receipts in the 1997-98
fiscal year, three-quarters of that activity relates to federally-funded
programs.

Projected receipts in this fund type total $28.22 billion, an increase of $2.51
billion (9.7 percent) over the prior year. Projected disbursements in this fund
type total $28.45 billion, an increase of $2.43 billion (9.3 percent) over
1996-97 levels. Disbursements from federal funds, primarily the federal share of
Medicaid and other social services programs, are projected to total $21.19
billion in the 1997-98 fiscal year. Remaining projected spending of $7.26
billion primarily reflects aid to SUNY supported by tuition and dormitory fees,
education aid funded from lottery receipts, operating aid payments to the
Metropolitan Transportation Authority funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs which
deliver services financed by user fees.

Capital Projects Funds. Capital Projects Funds account for the financial
resources used for the acquisition, construction, or rehabilitation of major
State capital facilities and for capital assistance grants to certain local
governments or public authorities. This fund type consists of the Capital
Projects Fund, which is supported by tax receipts transferred from the General
Fund, and various other capital funds established to distinguish specific
capital

-51-
<PAGE>

construction purposes supported by other revenues. In the 1997-98 fiscal year,
activity in these funds is expected to comprise 5 percent of total governmental
receipts.

Total receipts in this fund type are projected at $3.30 billion. Bond and note
proceeds are expected to provide $605 million in other financing sources.
Disbursements from this fund type are projected to be $3.70 billion, an increase
of $154 million (4.3 percent) over prior-year levels. The Dedicated Highway and
Bridge Trust Fund is the single largest dedicated fund, comprising an estimated
$982 million (27 percent) of the activity in this fund type. Total spending for
capital projects will be financed through a combination of sources: federal
grants (29 percent), public authority bond proceeds (31 percent), general
obligation bond proceeds (15 percent), and pay-as-you-go revenues (25 percent).

Debt Service Funds. Debt Service Funds are used to account for the payment of
principal of, and interest on, long-term debt of the State and to meet
commitments under lease-purchase and other contractual-obligation financing
arrangements (see the section entitled "Debt and Other Financing Activities
outstanding Debt of the State and Certain Authorities" below). This fund type is
expected to comprise 4 percent of total governmental fund receipts and 4.7
percent of total government disbursements in the 1997-98 fiscal year. Receipts
in these funds in excess of debt service requirements may be transferred to the
General Fund and Special Revenue Funds, pursuant to law.

The Debt Service fund type consists of the General Debt Service Fund, which is
supported primarily by tax receipts transferred from the General Fund, and other
funds established to accumulate moneys for the payment of debt service. In the
1997-98 fiscal year, total disbursements in this fund type are projected at
$3.17 billion, an increase of $641 million or 25.3 percent, most of which is
explained by increases in the General Fund transfer as discussed earlier. The
projected transfer from the General Fund of $2.07 billion is expected to finance
65 percent of these payments.

The remaining payments are expected to be financed by pledged revenues,
including $2.03 billion in taxes and $601 million in dedicated fees and other
miscellaneous receipts. After required impoundment for debt service, $3.77
billion is expected to be transferred to the General Fund and other funds in
support of State operations. The largest transfer-$1.86 billion-is made to the
Special Revenue fund type in support of operations of the mental hygiene
agencies. Another $1.47 billion in excess sales taxes is expected to be
transferred to the General Fund, following payment of projected debt service on
LGAC bonds.

GAAP-BASIS UPDATE FOR THE CURRENT FISCAL YEAR. The State issued its first update
to the GAAP-basis Financial Plan for the State's 1997-98 fiscal year on August
11, 1997, in conjunction with the release of the cash-basis 1997- 98 Financial
Plan. A second GAAP basis update will be issued in connection with the
Governor's submission of the 1998-99 Executive Budget.

The major factor affecting the General Fund GAAP-basis results for 1996-97 and
the projections for 1997-98 is the 1996-97 cash-basis surplus, which helped
produce a GAAP-basis surplus in the 1996-97 fiscal year of $1.93 billion. The
use of this cash-basis surplus to fund liabilities in the 1997-98 fiscal year,
offset by the $494 million change in the projected 1997-98 cash-basis fund
balance, is the primary reason for the projected 1997-98 GAAP-basis deficit of
$959 million. This represents an increase of $191 million from the prior
projection, issued in January 1997 as part of the 1997-98 Executive Budget. The
new projection reflects the impact of legislative changes to the Executive
Budget, and the increase in the 1996-97 cash-basis surplus since that time.
Across the two fiscal years, the General Fund accumulated deficit is projected
to be reduced by $974 million to $1.95 billion.

For 1997-98, total revenues in the General Fund are projected at $33.37 billion,
total expenditures are projected at $34.66 billion, and net operating sources
and uses are projected to contribute $331 million. For all governmental funds,
total revenues are projected at $67.48 billion, total expenditures are projected
at $68.24 billion, and financing uses are projected to exceed financing sources
by $220 million. The all governmental funds GAAP-basis Financial Plan
projections show a deficiency of revenues and other financing sources over
expenditures and other financing uses of $979 million, after a reported 1996-97
all funds surplus of $2.1 billion.

-52-
<PAGE>

SPECIAL CONSIDERATIONS. The economic and financial condition of the State may be
affected by various financial, social, economic and political factors. These
factors can be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and its agencies
and instrumentalities, but also by entities, such as the federal government,
that are not under the control of the State. Because of the uncertainty and
unpredictability of the changes, their impact cannot, as a practical matter, be
included in the assumptions underlying the State's projections at this time.

The State Financial Plan is based upon forecasts of national and State economic
activity developed through both internal analysis and review of State and
national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, and the condition of the world economy, which could
have an adverse effect on the State. There can be no assurance that the State
economy will not experience results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.

Projections of total State receipts in the State Financial Plan are based on the
State tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year estimates for
taxes that are based on a computation of annual liability, such as the business
and personal income taxes, are consistent with estimates of total liability
under such taxes.

Projections of total State disbursements are based on assumptions relating to
economic and demographic factors, levels of disbursements for various services
provided by local governments (where the cost is partially reimbursed by the
State), and the results of various administrative and statutory mechanisms in
controlling disbursements for State operations. Factors that may affect the
level of disbursements in the fiscal year include uncertainties relating to the
economy of the nation and the State, the policies of the federal government, and
changes in the demand for and use of State services.

The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this Annual
Information Statement. In the past, the State has taken management actions and
made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.

In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.

Other actions taken in the 1997-98 adopted budget add further pressure to future
budget balance in New York State. For example, the fiscal effects of tax
reductions adopted in the 1997-98 budget are projected to grow more
substantially beyond the 1998-99 fiscal year, with incremental costs averaging
in excess of $1.3 billion annually

-53-
<PAGE>

over the last three years of the tax reduction program. These incremental costs
reflect the phase-in of State-funded school property tax and local income tax
relief, the phase-out of the assessments on medical providers, and reductions in
estate and gift levies, utility gross receipts taxes, and the State sales tax on
clothing. The full annual cost of the enacted tax reduction package is estimated
at approximately $4.8 billion when fully effective in State fiscal year 2001-02.
In addition, the 1997-98 budget included multi-year commitments for school aid
and pre- kindergarten early learning programs which could add as much as $1.4
billion in costs when fully annualized in fiscal year 2001-02. These spending
commitments are subject to annual appropriation.

CASH-BASIS RESULTS FOR PRIOR FISCAL YEARS. The State reports its financial
results on two bases of accounting: the cash basis, showing receipts and
disbursements; and the modified accrual basis, prescribed by Generally Accepted
Accounting Principles ("GAAP"), showing revenues and expenditures.

GENERAL FUND 1994-95 THROUGH 1996-97. The General Fund is the principal
operating fund of the State and is used to account for all financial
transactions, except those required to be accounted for in another fund. It is
the State's largest fund and receives most State taxes and other resources not
dedicated to particular purposes. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types. A narrative description of cash-basis results in
the General Fund is presented below, followed by a tabular presentation of the
actual General Fund results for the prior three fiscal years.

New York State's financial operations have improved during recent fiscal years.
During the period 1989-90 through 1991-92, the State incurred General Fund
operating deficits that were closed with receipts from the issuance of tax and
revenue anticipation notes ("TRANs"). A national recession, followed by the
lingering economic slowdown in New York and the regional economy, resulted in
repeated shortfalls in receipts and three budget deficits during those years.
During its last five fiscal years, however, the State has recorded balanced
budgets on a cash basis, with positive fund balances as described below.

1996-97 Fiscal Year

The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a cash
basis, with a General Fund cash surplus as reported by DOB of approximately $1.4
billion. The cash surplus was derived primarily from higher- than-expected
revenues and lower-than-expected spending for social services programs. The
Governor in his Executive Budget applied $1.05 billion of the cash surplus
amount to finance the 1997-98 Financial Plan, and the additional $373 million is
available for use in financing the 1997-98 Financial Plan when enacted by the
State Legislature.

The General Fund closing fund balance was $433 million. Of that amount, $317
million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the event
of any future General Fund deficit, as provided under the State Constitution and
State Finance Law. In addition, $41 million remains on deposit in the CRF. This
fund assists the State in financing any extraordinary litigation costs during
the fiscal year. The remaining $75 million reflects amounts on deposit in the
Community Projects Fund. This fund was created to fund certain legislative
initiatives. The General Fund closing fund balance does not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the Local Government Assistance Corporation ("LGAC")
financing program and was required to be on deposit as of March 31, 1997.

General Fund receipts and transfers from other funds for the 1996-97 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the previous fiscal year
(excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.

1995-96 Fiscal Year

-54-
<PAGE>

The State ended its 1995-96 fiscal year on March 31, 1996 with a General Fund
cash surplus, as reported by DOB, of $445 million. Of that amount, $65 million
was deposited into the TSRF, and $380 million was used to reduce 1996-97
Financial Plan liabilities.

The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance included $237
million on deposit in the TSRF. In addition, $41 million was on deposit in the
CRF. The remaining $9 million reflected amounts then on deposit in the Revenue
Accumulation Fund. The General Fund closing balance does not include $678
million in the tax refund reserve account of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1996.

General Fund receipts and transfers from other funds totaled $32.81 billion, a
decrease of 1.1 percent from 1994-95 levels. General Fund disbursements and
transfers to other funds totaled $32.68 billion for the 1995-96 fiscal year, a
decrease of 2.2 percent from 1994-95 levels.

1994-95 Fiscal Year

The State ended its 1994-95 fiscal year with the General Fund in balance. There
was a $241 million decline in the fund balance reflecting the planned use of
$264 million from the CRF, partially offset by the required deposit of $23
million to the TSRF. In addition, $278 million was on deposit in the tax refund
reserve account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.

General Fund receipts and transfers from other funds totaled $33.16 billion, an
increase of 2.9 percent from 1993-94 levels. General Fund disbursements and
transfers to other funds totaled $33.40 billion for the 1994-95 fiscal year, an
increase of 4.7 percent from the previous fiscal year.

OTHER GOVERNMENTAL FUNDS (1994-95 THROUGH 1996-97). Activity in the three other
governmental funds has remained relatively stable over the last three fiscal
years, with federally-funded programs comprising approximately two-thirds of
these funds. The most significant change in the structure of these funds has
been the redirection of a portion of transportation related revenues from the
General Fund to two new dedicated funds in the Special Revenue and Capital
Projects fund types. These revenues are used to support the capital programs of
the Department of Transportation and the Metropolitan Transportation Authority
("MTA").

In the Special Revenue Funds, disbursements increased from $24.38 billion to
$26.02 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.

Disbursements in the Capital Projects Funds declined from $3.62 billion to $3.54
billion over the last three years, as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health and
environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased. The increase in the negative fund balance in 1994-95
resulted from delays in reimbursements caused by delays in the timing of public
authority bond sales.

Activity in the Debt Service Funds reflected increased use of bonds during the
three-year period for improvements to the State's capital facilities and the
continued implementation of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund. (See "Debt and Other Financing Activities Local Government
Assistance Corporation").

-55-
<PAGE>

GAAP-BASIS RESULTS FOR PRIOR FISCAL YEARS

The Comptroller prepares a comprehensive annual financial report on the GAAP
basis for governments as promulgated by the Governmental Accounting Standards
Board. The report, generally released in July each year, contains general
purpose financial statements with a Combined Balance Sheet and its Combined
Statement of Revenues, Expenditures and Changes in Fund Balances. These
statements are audited by independent certified public accountants.

1996-97 FISCAL YEAR

The State completed its 1996-97 fiscal year with a combined Governmental Funds
operating surplus of $2.1 billion, which included an operating surplus in the
General Fund of $1.9 billion, in Capital Projects Funds of $98 million and in
the Special Revenue Funds of $65 million, offset in part by an operating deficit
of $37 million in the Debt Service Funds.

General Fund. The State reported a General Fund operating surplus of $1.93
billion for the 1996-97 fiscal year, as compared to an operating surplus of $380
million for the prior fiscal year. The 1996-97 fiscal year GAAP operating
surplus reflects several major factors, including the cash basis operating
surplus, the benefit of bond proceeds which reduced the State's pension
liability, an increase in taxes receivable of $493 million, and a reduction in
tax refund liabilities of $196 million. This was offset by an increased payable
to local governments of $244 million.

Revenues increased $1.91 billion (nearly 6.6 percent) over the prior fiscal year
with increases in all revenue categories. Personal income taxes grew $620
million, an increase of nearly 3.6 percent, despite the implementation of
scheduled tax cuts. The increase in personal income taxes was caused by moderate
employment and wage growth and the strong financial markets during 1996.
Consumption and use taxes increased $179 million or 2.7 percent as a result of
increased consumer confidence. Business taxes grew $268 million, an increase of
5.6 percent, primarily as a result of the strong financial markets during 1996.
Other taxes increased primarily because revenues from estate and gift taxes
increased. Miscellaneous revenues increased $743 million, a 33.1 percent
increase, because of an increase in receipts from the Medical Malpractice
Insurance Association and from medical provider assessments.

Expenditures increased $830 million (2.6 percent) from the prior fiscal year,
with the largest increase occurring in pension contributions and State aid for
education spending. Pension contribution expenditures increased $514 million
(198.2 percent) primarily because the State paid off its 1984-85 and 1985-86
pension amortization liability. Education expenditures grew $351 million (3.4
percent) due mainly to an increase in spending for support for public schools
and physically handicapped children offset by a reduction in spending for
municipal and community colleges. Modest increases in other State aid spending
was offset by a decline in social services expenditures of $157 million (1.7
percent). Social services spending continues to decline because of cost
containment strategies and declining caseloads.

Net other financing sources increased $475 million (62.6 percent) due mainly to
bond proceeds provided by the Dormitory Authority of the State of New York
("DASNY") to pay the outstanding pension amortization, offset by elimination of
prior year LGAC proceeds.

Special Revenue, Debt Service and Capital Projects Fund Types. An operating
surplus of $65 million was reported for the Special Revenue Funds for the
1996-97 fiscal year, increasing the accumulated fund balance to $532 million.
Revenues increased $583 million over the prior fiscal year (2.2 percent) as a
result of increases in tax and lottery revenues. Expenditures increased $384
million (1.6 percent) as a result of increased costs for departmental
operations. Net other financing uses decreased $275 million (8.0 percent)
primarily because of declines in amounts transferred to other funds.

-56-
<PAGE>

Debt Service Funds ended the 1996-97 fiscal year with an operating deficit of
$37 million and, as a result, the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6 percent) because of increases in
both dedicated taxes and mental hygiene patient fees. Debt service expenditures
increased $48 million (2.0 percent). Net other financing sources decreased $22
million (92.6 percent) due primarily to an increase in payments on advance
refundings.

An operating surplus of $98 million was reported in the Capital Projects Funds
for the State's 1996-97 fiscal year and, as a result, the accumulated fund
balance decreased to a deficit of $614 million. Revenues increased $100 million
(5.0 percent) primarily because a larger share of the real estate transfer tax
was shifted to the Environmental Protection Fund and federal grant revenues
increased for transportation and local waste water treatment projects.
Expenditures decreased $359 million (10.0 percent) because of declines in
capital grants for education, housing and regional development programs and
capital construction spending. Net other financing sources decreased by $637
million as a result of a decrease in proceeds from financing arrangements.

1995-96 FISCAL YEAR

The State completed its 1995-96 fiscal year with a combined Governmental Funds
operating surplus of $432 million, which included an operating surplus in the
General Fund of $380 million, in the Capital Projects Funds of $276 million and
in the Debt Service Funds of $185 million, offset in part by an operating
deficit of $409 million in the Special Revenue Funds.

General Fund. The State reported a General Fund operating surplus of $380
million for the 1995-96 fiscal year, as compared to an operating deficit of
$1.43 billion for the prior fiscal year. The 1995-96 fiscal year surplus
reflects several major factors, including the cash-basis surplus and the benefit
of $529 million in LGAC bond proceeds which were used to fund various local
assistance programs. This was offset in part by a $437 million increase in tax
refund liability primarily resulting from the effects of ongoing tax reductions
and (to a lesser extent) changes in accrual measurement policies, and increases
in various other expenditure accruals.

Revenues increased $530 million (nearly 1.7 percent) over the prior fiscal year
with an increase in personal income taxes and miscellaneous revenues offset by
decreases in business and other taxes. Personal income taxes grew $715 million,
an increase of 4.3 percent. The increase in personal income taxes was caused by
moderate employment and wage growth and the strong financial markets during
1995. Business taxes declined $295 million or 5.8 percent, resulting primarily
from changes in the tax law that modified the distribution of taxes between the
General Fund and other fund types, and reduced business tax liability.
Miscellaneous revenues increased primarily because of an increase in receipts
from medical provider assessments.

Expenditures decreased $716 million (2.2 percent) from the prior fiscal year
with the largest decrease occurring in State aid for social services program and
State operations spending. Social services expenditures decreased $739 million
(7.5 percent) due mainly to implementation of cost containment strategies by the
State and local governments, and reduced caseloads. General purpose and health
and environment expenditures grew $139 million (20.2 percent) and $121 million
(33.3 percent), respectively. Health and environment spending increased as a
result of increases enacted with the 1995-96 Budget. In State operations,
personal service costs and fringe benefits declined $241 million (3.8 percent)
and $55 million (3.6 percent), respectively, due to staffing reductions. The
decline in non-personal service costs of $170 million (8.6 percent) was caused
by a decline in the litigation accrual. Pension contributions increased $103
million (66.4 percent) as a result of the return to the aggregate cost method
used to determine employer contributions.

Net other financing sources nearly tripled, increasing $561 million, due
primarily to an increase in bonds issued by LGAC, a transfer from the Mass
Transportation Operating Assistance Fund and transfers from public benefit
corporations.

Special Revenue, Debt Service and Capital Projects Fund Types. An operating
deficit of $409 million was reported for Special Revenue Funds for the 1995-96
fiscal year which decreased the accumulated fund balance to $468

-57-
<PAGE>

million. Revenues increased $1.45 billion over the prior fiscal year (5.8
percent) as a result of increases in federal grants and lottery revenues.
Expenditures increased $1.21 billion (5.4 percent) as a result of increased
costs for social services programs and an increase in the distribution of
lottery proceeds to school districts. Other financing uses increased $693
million (25.1 percent) primarily because of an increase in federal
reimbursements transferred to other funds.

Debt Service Funds ended the 1995-96 fiscal year with an operating surplus of
over $185 million and, as a result the accumulated fund balance, increased to
$1.94 billion. Revenues increased $10 million (0.5 percent) because of increases
in both dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $201 million (9.5 percent). Net other financing sources
increased threefold to $299 million, due primarily to increases in patient
reimbursement revenues.

An operating surplus of $276 million was reported in the Capital Projects Funds
for the State's 1995-96 fiscal year and, as a result, the accumulated deficit
fund balance in this fund type decreased to $712 million. Revenues increased
$260 million (14.9 percent) primarily because a larger share of the petroleum
business tax was shifted from the General Fund to the Dedicated Highway and
Bridge Trust Fund, and by an increase in federal grant revenues for
transportation and local waste water treatment projects. Capital Projects Funds
expenditures increased $194 million (5.7 percent) in State fiscal year 1995-96
because of increased expenditures for education and health and environmental
projects. Net other financing sources increased by $577 million as a result of
an increased in proceeds from financing arrangements.

1994-95 FISCAL YEAR

The State completed its 1994-95 fiscal year with a combined Governmental Funds
operating deficit of $1.79 billion, which included operating deficits in the
General Fund of $1.43 billion, in the Capital Projects Funds of $366 million,
and in the Debt Service Funds of $38 million. There was an operating surplus in
the Special Revenue Funds of $39 million.

General Fund. The State reported a General Fund operating deficit of $1.43
billion for the 1994-95 fiscal year, as compared to an operating surplus of $914
million for the prior fiscal year. The 1994-95 fiscal year deficit was caused by
several factors, including the use of $1.03 billion of the 1993-94 cash-based
surplus to fund operating expenses in 1994-95, and the adoption of changes in
accounting methodologies by the State Comptroller. These factors were offset by
net proceeds of $315 million in bonds issued by LGAC.

Total revenues for 1994-95 were $31.46 billion. Revenues decreased by $173
million over the prior fiscal year, a decrease of less than one percent.
Personal income taxes grew by $103 million, an increase of 0.6 percent.
Similarly, consumption and use taxes increased by $376 million or 6.0 percent.
The increase in personal income and sales taxes was due to modest growth in the
State's economy. Business taxes declined by $751 million or 12.8 percent from
the previous year. The decline in business taxes was caused primarily by a
decline in taxable earnings in the insurance, bank and petroleum industries and
the beginning of the phase-out of the corporate tax surcharges.
Other revenues and miscellaneous receipts showed modest increases.

Total 1994-95 expenditures were $33.08 billion, an increase of $2.08 billion, or
6.7 percent over the prior fiscal year. In Grants to Local Governments, social
service and education expenditures grew by $927 million (10.3 percent) and $727
million (7.6 percent), respectively. Social services spending increased in
Medicaid and Income Maintenance, while education spending grew as a result of
increases enacted with the 1994-95 budget. General purpose local assistance
declined by $205 million (22.9 percent) as a result of prior year spending
reductions. Other local assistance spending showed modest increases. In State
Operations, personal service costs grew by $322 million (5.4 percent) while
non-personal service declined by $70 million (3.4 percent). Pension
contributions more than doubled, increasing by $95 million, while other fringe
benefit costs increased by $151 million (10.9 percent). State Operations growth
was primarily from labor contracts that resulted in salary increases and
retroactive payments.

-58-
<PAGE>

Net other financing sources and uses declined from $282 million (as restated) to
$198 million, an $84 million (29.8 percent) decline from the previous year,
primarily because of a reduction in bonds issued by LGAC.

Special Revenue, Debt Service and Capital Projects Fund Types. An operating
surplus of $39 million was reported for Special Revenue Funds for the 1994-95
fiscal year which increased the accumulated fund balance to $877 million.
Revenues increased $1.62 billion over the prior fiscal year (6.9 percent) as a
result of increases in federal grants and lottery revenues. Expenditures
increased $1.89 billion (9.3 percent) as a result of increased costs for social
services programs and an increase in the distribution of lottery proceeds to
school districts. Other financing uses declined $166 million (5.7 percent)
primarily because of a decline in federal reimbursements transferred to other
funds.

Debt Service Funds ended the 1994-95 fiscal year with an operating deficit of
over $38 million and, as a result, the accumulated fund balance declined to
$1.75 billion. Revenues increased $145 million (7.1 percent) because of
increases in both dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $106 million (5.3 percent). Net other financing uses
increased $101 million, due primarily to a decrease in net operating transfers
of $158 million offset in part by a $57 million increase in proceeds from other
financing arrangements.

An operating deficit of $366 million was reported in the Capital Projects Funds
for the State's 1994-95 fiscal year and, as a result, the accumulated deficit
fund balance in this fund type increased to $988 million. Revenues increased
$256 million (17.3 percent) primarily because a larger share of the petroleum
business tax was shifted from the General Fund to the Dedicated Highway and
Bridge Trust Fund, and by an increase in federal grant revenues for
transportation and local waste water treatment projects. Capital Projects Funds
expenditures increased $585 million (20.7 percent) in State fiscal year 1994-95
because of increased expenditures for transportation and correctional projects.
Net other financing sources (uses) declined by less than $2 million.

ECONOMICS AND DEMOGRAPHICS. This section presents economic information about the
State which may be relevant in evaluating the future prospects of the State.
However, the demographic information and statistical data, which have been
obtained from the sources indicated, do not present all factors which may have a
bearing on the State's fiscal and economic affairs. Further, such information
requires economic and demographic analysis in order to assess the import of the
data presented. The data and analysis may be interpreted differently, according
to the economist or other expert consulted.

CURRENT ECONOMIC OUTLOOK. The State Financial Plan is based upon a July 1997
projection by DOB of national and State economic activity. The information in
this section and in the tables below summarize the national and State economic
situation and outlook upon which projections of receipts and certain
disbursements were made for the 199798 Financial Plan.

The national economy has resumed a more robust rate of growth after a "soft
landing" in 1995, with approximately 14 million jobs added nationally since
early 1992. The State economy has continued to expand, but growth remains
somewhat slower than in the nation. Although the State has added approximately
300,000 jobs since late 1992, employment growth in the State has been hindered
during recent years by significant cutbacks in the computer and instrument
manufacturing, utility, defense, and banking industries. Government downsizing
has also moderated these job gains.

DOB forecasts that national economic growth will be quite strong in the first
half of calendar 1997, but will moderate considerably as the year progresses.
The overall growth rate of the national economy for calendar year 1997 is
expected to be practically identical to the consensus forecast of a widely
followed survey of national economic forecasters. Growth in real Gross Domestic
Product for 1997 is projected to be 3.6 percent, with an anticipated decline in
net exports and continued restraint in Federal spending more than offset by
increases in consumption and investment. Inflation, as measured by the Consumer
Price Index, is projected to remain subdued at about 2.6 percent due to improved
productivity and foreign competition. Personal income and wages are projected to
increase by 6.0 percent and 6.7 percent respectively.

-59-
<PAGE>

The forecast of the State's economy shows moderate expansion during the first
half of calendar 1997 with the trend continuing through the year. Although
industries that export goods and services are expected to continue to do well,
growth is expected to be moderated by tight fiscal constraints on the health
care and social services industries. On an average annual basis, employment
growth in the State is expected to be up substantially from the 1996 rate.
Personal income is expected to record moderate gains in 1997. Bonus payments in
the securities industry are expected to increase further from last year's record
level.

THE NEW YORK ECONOMY. New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.

Services: The services sector, which includes entertainment, personal services,
such as health care and auto repairs, and business-related services, such as
information processing, law and accounting, is the State's leading economic
sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.

Manufacturing: Manufacturing employment continues to decline in importance in
New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.

Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.

Finance, Insurance and Real Estate: New York City is the nation's leading center
of banking and finance and, as a result, this is a far more important sector in
the State than in the nation as a whole. Although this sector accounts for under
one-tenth of all nonagricultural jobs in the State, it contributes over
one-sixth of all non-farm labor and proprietors' income.

Agriculture: Farming is an important part of the economy of large regions of the
State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.

Government: Federal, State and local government together are the third largest
sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total state and local government employment.

Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service- related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.

DEBT AND OTHER FINANCING ACTIVITIES

-60-
<PAGE>

LEGAL CATEGORIES OF STATE DEBT AND OTHER FINANCINGS. State financing activities
include general obligation debt of the State and State-guaranteed debt, to which
the full faith and credit of the State has been pledged, as well as
lease-purchase and contractual-obligation financings, moral obligation
financings and other financings through public authorities and municipalities,
where the State's legal obligation to make payments to those public authorities
and municipalities for their debt service is subject to annual appropriation by
the Legislature. These categories are described in the Glossary of Financial
Terms in Exhibit A to this Annual Information Statement and in more detail
below.

GENERAL OBLIGATION AND STATE-GUARANTEED FINANCING. There are a number of methods
by which the State itself may incur debt. The State may issue general obligation
bonds. Under the State Constitution, the State may not, with limited exceptions
for emergencies, undertake long-term general obligation borrowing (i.e.,
borrowing for more than one year) unless the borrowing is authorized in a
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State. With the
exception of general obligation housing bonds (which must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 50 years after issuance, commencing no
more than three years after issuance), general obligation bonds must be paid in
equal annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.

The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes ("TRANs"), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued general obligation bonds,
by issuing bond anticipation notes ("BANs"). TRANs must mature within one year
from their dates of issuance and may not be refunded or refinanced beyond such
period. However, since 1990 the State's ability to issue TRANs has been limited
due to enactment of the fiscal reform program which created LGAC (see "Local
Government Assistance Corporation" below in this section). BANs may only be
issued for the purposes and within the amounts for which bonds may be issued
pursuant to voter authorizations. Such BANs must be paid from the proceeds of
the sale of bonds in anticipation of which they were issued or from other
sources within two years of the date of issuance or, in the case of BANs for
housing purposes, within five years of the date of issuance. In order to provide
flexibility within these maximum term limits, the State has utilized the BANs
authorization to conduct a commercial paper program to fund disbursements
eligible for general obligation bond financing.

Pursuant to specific constitutional authorization, the State may also directly
guarantee certain public authority obligations. The State Constitution provides
for the State guarantee of the repayment of certain borrowings for designated
projects of the New York State Thruway Authority, the Job Development Authority
and the Port Authority of New York and New Jersey. The State has never been
called upon to make any direct payments pursuant to such guarantees. State
guaranteed bonds of the Port Authority of New York and New Jersey were fully
retired on December 31, 1996. State guaranteed bonds issued by the Thruway
Authority were fully retired on July 1, 1995.

In February 1997, the Job Development Authority ("JDA") issued approximately $85
million of State guaranteed bonds to refinance certain of its outstanding bonds
and notes in order to restructure and improve JDA's capital structure. Due to
concerns regarding the economic viability of its programs, JDA's loan and loan
guarantee activities had been suspended since the Governor took office in 1995.
As a result of the structural imbalances in JDA's capital structure, and
defaults in its loan portfolio and loan guarantee program incurred between 1991
and 1996, JDA would have experienced a debt service cash flow shortfall had it
not completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. The State does not anticipate that it will be called upon to make
any payments pursuant to the State guarantee in the 1997-98 fiscal year. JDA
recently resumed its lending activities under a revised set of lending programs
and underwriting guidelines.

-61-
<PAGE>

Payments of debt service on State general obligation and State-guaranteed bonds
and notes are legally enforceable obligations of the State.

LEASE-PURCHASE AND CONTRACTUAL-OBLIGATION FINANCING. The State employs
additional long-term financing mechanisms, lease-purchase and
contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a financing
arrangement with LGAC to restructure the way the State makes certain local aid
payments (see "Local Government Assistance Corporation" below in this section).

The State also participates in the issuance of certificates of participation
("COPs") in a pool of leases entered into by the State's Office of General
Services on behalf of several State departments and agencies interested in
acquiring operational equipment, or in certain cases, real property. Legislation
enacted in 1986 established restrictions upon and centralized State control,
through the Comptroller and the Director of the Budget, over the issuance of
COPs representing the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to make installment
or lease-purchase payments for the State's acquisition of such equipment or real
property.

The State has never defaulted on any of its general obligation indebtedness or
its obligations under lease purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.

MORAL OBLIGATION AND OTHER FINANCING. Moral obligation financing generally
involves the issuance of debt by a public authority to finance a
revenue-producing project or other activity. The debt is secured by project
revenues and includes statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur in
the issuer's debt service reserve fund. There has never been a default on any
moral obligation debt of any public authority. The State does not intend to
increase statutory authorizations for moral obligation bond programs. From 1976
through 1987, the State was called upon to appropriate and make payments
totaling $162.8 million to make up deficiencies in the debt service reserve
funds of the Housing Finance Agency ("HFA") pursuant to moral obligation
provisions. In the same period, the State also expended additional funds to
assist the Project Finance Agency, the Urban Development Corporation ("UDC") and
other public authorities which had moral obligation debt outstanding. The State
has not been called upon to make any payments' Pursuant to any moral obligations
since the 1986-87 fiscal year and no such requirements are anticipated during
the 1997-98 fiscal year.

In addition to the moral obligation financing arrangements described above,
State law provides for the creation of State municipal assistance corporations,
which are public authorities established to aid financially troubled localities.
The Municipal Assistance Corporation for the City of New York ("NYC MAC") was
created in 1975 to provide financing assistance to New York City. To enable NYC
MAC to pay debt service on its obligations, NYC MAC receives, subject to annual
appropriation by the Legislature, receipts from the 4 percent New York State
sales tax for the benefit of New York City, the State-imposed stock transfer tax
and, subject to certain prior liens, certain local assistance payments otherwise
payable to New York City. The legislation creating NYC MAC also includes a moral
obligation provision. Under its enabling legislation, NYC MAC's authority to
issue moral obligation bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984. In 1995, the State created the Municipal
Assistance Corporation for the City of Troy ("Troy MAC"). The bonds issued by
Troy MAC, however, do not include the moral obligation provisions.

-62-
<PAGE>

The State also provides for contingent contractual-obligation financing for the
Secured Hospital Program pursuant to legislation enacted in 1985. Under this
financing method, the State entered into service contracts which obligate the
State to pay debt service, subject to annual appropriations, on bonds formerly
issued by the New York State Medical Care Facilities Finance Agency ("MCFFA")
and now included as debt of the DASNY in the event there are shortfalls of
revenues from other sources. The State has never been required to make any
payments pursuant to this financing arrangement, nor does it anticipate being
required to do so during the.1997-98 fiscal year.

LOCAL GOVERNMENT ASSISTANCE CORPORATION. In 1990, as part of a State fiscal
reform program, legislation was enacted creating LGAC, a public benefit
corporation empowered to issue long-term obligations to fund certain payments to
local governments that had been traditionally funded through the State's annual
seasonal borrowing. The legislation authorized LGAC to issue its bonds and notes
in an amount to yield net proceeds not in excess of $4.7 billion (exclusive of
certain refunding bonds). Over a period of years, the issuance of these
long-term obligations, which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal borrowing. The
legislation also dedicated revenues equal to one-quarter of the four cent State
sales and use tax to pay debt service on these bonds. The legislation also
imposed a cap on the annual seasonal borrowing of the State at $4.7 billion,
less net proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the legislative
leaders have certified the need for additional borrowing and provided a schedule
for reducing it to the cap. If borrowing above the cap is thus permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. This provision capping the seasonal
borrowing was included as a covenant with LGAC's bondholders in the resolution
authorizing such bonds.

As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, completing the program. The impact of LGAC's borrowing is that the
State has been able to meet its cash flow needs throughout the fiscal year
without relying on short-term seasonal borrowings.

1997-98 BORROWING PLAN. The State anticipates that its capital programs will be
financed, in part, through borrowings by the State and its public authorities in
the 1997-98 fiscal year. The State expects to issue $605 million in general
obligation bonds (including $140 million for purposes of redeeming outstanding
BANS) and $140 million in general obligation commercial paper. The Legislature
has also authorized the issuance of $311 million in COPs (including costs of
issuance, reserve funds and other costs) during the State's 1997-98 fiscal year
for equipment purchases. The projection of State borrowings for the 1997-98
fiscal year is subject to change as market conditions, interest rates and other
factors vary throughout the fiscal year.

In the 1997 legislative session, the Legislature approved a proposal to present
to the voters in November, 1997, a $2.4 billion State general obligation bond
referendum to finance major capital improvements in public school facilities. If
the School Facility Health and Safety Bond Act is approved by the voters, the
State does not anticipate any issuance for this program during the 1997-98
fiscal year.

Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $1.9 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments for 1997-98 capital projects. Included therein are borrowings by:
(i) DASNY for the State University of New York ("SUNY"), The City University of
New York ("CUNY"), health facilities, and mental health facilities; (ii) the
Thruway Authority for the Dedicated Highway and Bridge Trust Fund and
Consolidated Highway Improvement Program; (iii) UDC (doing business as the
Empire State Development Corporation) for prison and youth facilities; (iv) HFA
for housing programs; and (v) borrowings by the Environmental Facilities
Corporation ("EFC") and other authorities.

In the 1997 legislative session, the Legislature also approved two new
authorizations for lease-purchase and contractual obligation financings. An
aggregate $425 million was authorized for four public authorities (Thruway
Authority, DASNY, UDC and HFA) for the Community Enhancement Facility Program
for economic development purposes, including sports facilities, cultural
institutions, transportation, infrastructure and other community facility

-63-
<PAGE>

projects. DASNY was also authorized to issue up to $40 million to finance the
expansion and improvement of facilities at the Albany County airport.

OUTSTANDING DEBT OF THE STATE AND CERTAIN AUTHORITIES. For purposes of analyzing
the financial condition of the State, debt of the State and of certain public
authorities may be classified as State-supported debt, which includes general
obligation debt of the State and lease-purchase and contractual obligations of
public authorities (and municipalities) where debt service is paid from State
appropriations (including dedicated tax sources, and other revenues such as
patient charges and dormitory facilities rentals). In addition, a broader
classification, referred to as State-related debt, includes State-supported
debt, as well as certain types of contingent obligations, including
moral-obligation financing, certain contingent contractual-obligation financing
arrangements, and State-guaranteed debt described above, where debt service is
expected to be paid from other sources and State appropriations are contingent
in that they may be made and used only under certain circumstances.

STATE-SUPPORTED DEBT OUTSTANDING

General Obligation Bond Programs. The first type of State-supported debt,
general obligation debt, is currently authorized for three programmatic
categories: transportation, environmental and housing. The amount of general
obligation bonds and BANs issued in the 1994-95 through 1996-97 fiscal years
(excluding bonds issued to redeem BANS) were $250 million, $333 million and $439
million, respectively. Transportation-related bonds are issued for State highway
and bridge improvements, aviation, highway and mass transportation projects and
purposes, and rapid transit, rail, canal, port and waterway programs and
projects. Environmental bonds are issued to fund environmentally-sensitive land
acquisitions, air and water quality improvements, municipal nonhazardous waste
landfill closures and hazardous waste site cleanup projects. As of March 31,
1997, the total amount of outstanding general obligation debt was $5.03 billion,
including $294 million in BANS.

Lease-Purchase and Contractual-Obligation Financing Programs

The second type of State-supported debt, lease-purchase and
contractual-obligation financing arrangements with public authorities and
municipalities, has been used primarily by the State to finance the State's
highway and bridge program, SUNY and CUNY buildings, health and mental hygiene
facilities, prison construction and rehabilitation, and various other State
capital projects.

In addition, the State has utilized State-supported debt to refinance a
liability incurred to one of its pension funds as a result of an earlier
deferral (and subsequent amortization) of pension payments otherwise due to that
system. Specifically, under enabling legislation passed in 1986, the State
amortized a defer-red pension liability over a 17- year period at an established
interest rate of 8 percent. In order to achieve savings and refinance this
obligation, the State received legislative authorization in 1996 to issue
taxable pension bonds through DASNY to refinance the remaining pension
obligation for the period March 1, 1997 through March 1, 2003. DASNY issued
pension bonds that refinanced the balance of this obligation at interest rates
below 7 percent, without extending the remaining seven year amortization period,
liquidating the outstanding pension liability of $768.9 million. The refinancing
of this pre-existing pension liability, which was formerly included as a
long-term liability to the New York State and Local Employee Retirement System,
has now been reclassified as a component of State-supported debt. The State has
utilized and expects to continue to utilize lease-purchase and
contractual-obligation financing arrangements to finance its capital programs,
in addition to authorized general obligation bonds. Some of the major capital
programs financed by lease-purchase and contractual obligation agreements are
highlighted below.

Transportation. The State Department of Transportation is primarily responsible
for maintaining and rehabilitating the State's system of highways and bridges,
which includes 40,000 State highway lane miles and 7,500 State bridges. The
Department also oversees and funds programs for rail and aviation projects and
programs that help defray local capital expenses associated with road and bridge
projects.

Legislation enacted in 1991 established the Dedicated Highway and Bridge Trust
Fund to provide for the dedication of a portion of the petroleum business tax
and certain other transportation-related taxes and fees for transportation

-64-
<PAGE>

improvements. Legislation enacted in 1996 authorized a five-year, $12.7 billion
plan for State and local highways and bridges through 1999-2000, to be financed
by a combination of Federal 9 grants, pay-as-you-go capital and bond proceeds
supported by the Dedicated Highway and Bridge Trust Fund, and a small amount of
general obligation bonds remaining under previous authorizations.

The State has supported the capital plans of the MTA in part by entering into
service contracts relating to certain bonds issued by the MTA. Legislation
adopted in 1992 and 1993 also authorized payments, subject to appropriation, of
a portion of the petroleum business tax from the State's Dedicated Mass
Transportation Trust Fund to the MTA and authorized it to be used as a source of
payment for bonds to be sold by the MTA to support its capital program.

Education. The State finances the physical infrastructure of SUNY and CUNY and
their respective community colleges and the State Education Department through
direct State capital spending and through financing arrangements with the DASNY,
paying all capital costs of the senior colleges and sharing equally with local
governments for the community colleges, except that SUNY dormitories are
financed through dormitory fees.

The 34 SUNY campuses include more than 2,300 buildings including classrooms,
dormitories, libraries, athletic and student facilities and other buildings of
which 78 percent are over 20 years of age. Together with the 30 SUNY community
colleges, the SUNY system serves nearly 300,000 full-time students. The CUNY
system is comprised of 11 senior colleges and 6 community colleges that serve
approximately 150,000 full time students.

Health/Mental Hygiene. The State provides care for its citizens with mental
illness, mental retardation, and developmental disabilities, and for those with
chemical dependencies, through the Office of Mental Health ("OMH"), the Office
of Mental Retardation and Developmental Disabilities ("OMRDD") and the Office of
Alcoholism and Substance Abuse Services ("OASAS"). Historically, this care has
been provided at large State institutions, although recently the State adopted
policies that provide institutional care to the neediest and expanded care in
community residences. OMR has closed 11 of its 20 developmental centers, with
one additional facility planned for closure in 1997-98. OMH has reduced its
adult institutional population from 22,000 in 1982 to 6,450 at the end of
1996-97.

In 1997, OMH released a "Statewide Comprehensive Plan for Mental Health Services
1997-2001." The plan presents the programmatic and fiscal strategy of
implementing an integrated community-based system of care, de- emphasizing State
adult inpatient hospitalization. It estimates that the State-operated adult
inpatient census will decline to a range of 3,700 to 4,700 by the end of the
decade. As OMH approaches its long-term census targets and inpatient bed needs
diminish, plans are underway to develop alternative uses for surplus facilities.
Capital investments for these programs are primarily supported by patient
revenues through financing arrangements with DASNY.

Hospital capital programs of the Department of Health (including Roswell Park
Cancer Institute and the David Axelrod Institute for Public Health) have also
been financed by DASNY using contractual-obligation financing arrangements.

Corrections. During the 10-year period 1983-92, the State's prison system more
than doubled in size due to the unprecedented increase in demand for prison
space. Today, the system houses approximately 70,000 inmates in 70 facilities
with 3,000 buildings. Although the Department of Correctional Services ("DOCS")
capital program was focused primarily on rehabilitation of existing facilities
in the early 1990's, continued inmate population growth and projected future
growth indicate the need for both expansion of existing facilities and new
facilities. The 1997- 98 adopted budget authorizes the addition of approximately
3,100 beds over the next two years to accommodate this population growth.

Other Programs. The State also uses lease-purchase and contractual-obligation
financing arrangements for the institutional facilities of the Office of
Children and Family Services (formerly known as the Division for Youth),

-65-
<PAGE>

and Youth Opportunity Centers; the State's housing programs; and various
environmental, economic development, and State building programs.

-66-
<PAGE>

DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS

The Financial Reserves Fund, the Institutional Money Market Fund, the Ohio
Municipal Money Market Fund, the Prime Obligations Fund, the Tax-Free Money
Market Fund, and the U.S. Government Obligations Fund (the "Money Market Funds")
use the amortized cost method to determine their net asset value.

USE OF THE AMORTIZED COST METHOD. The Money Market Funds' use of the amortized
cost method of valuing their instruments depends on their compliance with
certain conditions contained in Rule 2a-7 of the 1940 Act. Under Rule 2a-7, the
Trustees must establish procedures reasonably designed to stabilize the net
asset value per share ("NAV"), as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market conditions
and the Money Market Funds' investment objectives.

The Money Market Funds have elected to use the amortized cost method of
valuation pursuant to Rule 2a-7. This involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
a Money Market Fund would receive if it sold the instrument. The value of
securities in a Money Market Fund can be expected to vary inversely with changes
in prevailing interest rates.

Pursuant to Rule 2a-7, the Money Market Funds will maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable
net asset value per share, provided that a Money Market Fund will not purchase
any security with a remaining maturity of more than 397 days (securities subject
to repurchase agreements may bear longer maturities) nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. Should the
disposition of a Money Market Fund's security result in a dollar weighted
average portfolio maturity of more than 90 days, the Money Market Fund will
invest its available cash to reduce the average maturity to 90 days or less as
soon as possible.

The Victory Portfolios' Trustees also have established procedures reasonably
designed, taking into account current market conditions and the Victory
Portfolios' investment objectives, to stabilize the net asset value per share of
the Money Market Funds for purposes of sales and redemptions at $1.00. These
procedures include review by the Trustees, at such intervals as they deem
appropriate, to determine the extent, if any, to which the net asset value per
share of the Money Market Funds calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds one-half of
one percent, Rule 2a-7 requires that the Board promptly consider what action, if
any, should be initiated. If the Trustees believe that the extent of any
deviation from a Money Market Fund's $1.00 amortized cost price per share may
result in material dilution or other unfair results to new or existing
investors, they will take such steps as they consider appropriate to eliminate
or reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity, withholding
or reducing dividends, reducing the number of a Money Market Fund's outstanding
shares without monetary consideration, or using a net asset value per share
determined by using available market quotations.

MONITORING PROCEDURES

The Trustee's procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based upon
available indications of market value. The Trustees will decide what, if any,
steps should be taken if there is a difference of more than 0.5% between the two
values. The Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening a Money Market Fund's average maturity) to
minimize any material dilution or other unfair results arising from differences
between the two methods of determining net asset value.

INVESTMENT RESTRICTIONS

Rule 2a-7 requires that the Money Market Funds limit their investments to
instruments that, in the opinion of the Trustees, present minimal credit risks
and are "Eligible Securities" as defined in Rule 2a-7. See "Investments in

- 65 -

<PAGE>

Which the Funds Can Invest." An Eligible Security generally must be rated by at
least one NRSRO. Such rating may be of the particular security or of a class of
debt obligations or a debt obligation in that class that is comparable in
priority and security issued by that issuer. If the instruments are not rated,
the Trustees must determine that they are of comparable quality. The Money
Market Funds will limit the percentage allocation of their investments so as to
comply with Rule 2a-7, which generally (except in the case of the Ohio Municipal
Money Market Fund) limits to 5% of total assets the amount which may be invested
in the securities of any one issuer. Rule 2a-7 provides an exception to this 5%
limit: certain money market funds may invest up to 25% of their total assets in
the First-Tier Securities (as that term is defined by Rule 2a-7 (generally, a
First-Tier Security is a security that has received a rating in the highest
short-term rating category)) of a single issuer for a period of up to three days
after the purchase of such a security. This exception is available to all Money
Market Funds other than the Ohio Municipal Money Market Fund. Additionally,
under Rule 2a-7 the Ohio Municipal Money Market Fund, as a single state money
market fund, must limit the amount which it invests in the securities of any one
issuer to 5% of its total assets only with respect to 75% of its total assets;
provided, however, that no more than 5% of its total assets may be invested in
the securities of any one issuer unless those securities are First-Tier
Securities.

The Money Market Funds will purchase only First-Tier Securities. However, a
Money Market Fund will not necessarily dispose of a security if it ceases to be
a First-Tier Security, although if a First-Tier Security is downgraded to a
Second-Tier Security (as that term is defined by Rule 2a-7) the Adviser will
reassess promptly whether such security continues to present minimal credit
risks and will cause the Money Market Fund to take such action as it determines
is in the best interests of the Money Market Fund and its shareholders.

Rule 2a-7 imposes special diversification requirements on puts. Generally, with
respect to 75% of its total assets, immediately after the acquisition of a put,
a money market fund may have no more than 10% of its total assets invested in
securities issued by, or subject to puts from, the same institution. With
respect to the remaining 75% of its total assets, a money market fund may invest
more than 10% of its assets in puts issued by a non-controlled person so long as
the puts are First-Tier Securities. Where a put is a Second-Tier Security, no
more than 5% of the money market fund's total assets may be invested in
securities issued by, or subject to puts from, the same institution.

The Money Market Funds may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This policy may,
from time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset value
is affected by any unrealized appreciation or depreciation of the portfolio.

In periods of declining interest rates, the indicated daily yield on shares of
the Money Market Funds computed by dividing the annualized daily income on a
Money Market Fund's portfolio by the net asset value computed as above may tend
to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.

In periods of rising interest rates, the indicated daily yield on shares of the
Money Market Funds computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.

VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS

The net asset value of the Money Market Funds is determined and the shares of
each Money Market Fund are priced as of the Valuation Time(s) on each Business
Day. A "Business Day" is a day on which the New York Stock Exchange (the "NYSE")
and the Federal Reserve Bank of Cleveland is open for trading and any other day
(other than a day on which no shares of a Money Market Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that a Money Market Fund's net
assets value per share might be materially affected. The New York Stock Exchange
will not open in observance of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving, and Christmas.

- 66 -

<PAGE>

VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE
TAX-FREE BOND FUNDS

Investment securities held by the Fund For Income, the Government Mortgage Fund,
the Intermediate Income Fund, the Investment Quality Bond Fund, and the Limited
Term Income Fund (the "Taxable Bond Funds") and the National Municipal Bond
Fund, the New York Tax-Free Fund, and the Ohio Municipal Bond Fund (the
"Tax-Free Bond Funds") are valued on the basis of security valuations provided
by an independent pricing service, approved by the Trustees, which determines
value by using information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities. Specific investment securities which
are not priced by the approved pricing service will be valued according to
quotations obtained from dealers who are market makers in those securities.
Investment securities with less than 60 days to maturity when purchased are
valued at amortized cost which approximates market value. Investment securities
not having readily available market quotations will be priced at fair value
using a methodology approved in good faith by the Trustees.

VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS.

Each equity security held by a Fund is valued at its last sales price on the
exchange where the security is principally traded or, lacking any sales on a
particular day, the security is valued at the mean between the closing bid and
asked prices on that day. Exchange listed convertible debt securities are valued
at the mean between the last bid and asked prices obtained from broker-dealers
or a comparable alternative, such as Bloomberg or Telerate. Each security traded
in the over-the-counter market (but not including securities reported on the
NASDAQ National Market System) is valued at the mean between the last bid and
asked prices based upon quotes furnished by market makers for such securities.
Each security reported on the NASDAQ National Market System is valued at the
sales price on the valuation date or absent a last sales price, at the mean
between the closing bid and asked prices on that day. Non-convertible debt
securities are valued on the basis of prices provided by an independent pricing
service. Prices provided by the pricing service may be determined without
exclusive reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, developments related
to special securities, yield, quality, coupon rate, maturity, type of issue,
individual trading characteristics and other market data. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Victory Portfolios'
officers in a manner specifically authorized by the Board of Trustees.
Short-term obligations having 60 days or less to maturity are valued on the
basis of amortized cost. For purposes of determining net asset value per share,
futures and options contracts generally will be valued 15 minutes after the
close of trading of the NYSE.

Generally, trading in foreign securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the close of the NYSE. The values of such securities used
in computing the net asset value of each Fund's shares are determined at such
times. Foreign currency exchange rates are also generally determined prior the
close of the NYSE. Occasionally, events affecting the values of such securities
and such exchange rates may occur between the times at which such values are
determined and the close of the NYSE which will not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by or under the
supervision of the Board of Trustees.

PERFORMANCE OF THE MONEY MARKET FUNDS

Performance for a class of shares of a Money Market Fund depends upon such
variables as:

o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in Fund (class) expenses; and
o the relative amount of Fund (class) cash flow.

- 67 -

<PAGE>

From time to time the Money Market Funds may advertise the performance of each
class compared to similar funds or portfolios using certain indices, reporting
services, and financial publications.

Yield. The Money Market Funds calculate the yield for a class daily, based upon
the seven days ending on the day of the calculation, called the "base period."
This yield is computed by:

o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional shares purchased with dividends earned
from the original one share and all dividends declared on the
original and any purchased shares;

o dividing the net change in the account's value by the value of
the account at the beginning of the base period to determine the
base period return; and

o multiplying the base period return by (365/7).

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with the Money Market Funds,
the yield for a class will be reduced for those shareholders paying those fees.
The seven-day yields of the Money Market Funds for the seven-day period ending
October 31, 1997 are listed in the following table.

==================================================================================================
Yield for the Seven-Day Period Ending

Fund October 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C>
Financial Reserves Fund 5.03%
- --------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.40%
- --------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.12%
- --------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 3.03%
- --------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.90%
- --------------------------------------------------------------------------------------------------
Tax-Free Money Market 3.12%
- --------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares 5.11%
- --------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.85%

==================================================================================================
</TABLE>

EFFECTIVE YIELD. The Money Market Funds' effective yields are computed by
compounding the unannualized base period return by:

o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.

The effective yields of Money Market Funds for the seven-day period ending
October 31, 1997 are listed below.

- 68 -

<PAGE>

==================================================================================================
Effective Yield for the Seven-Day Period

Fund Ending October 31, 1997

- --------------------------------------------------------------------------------------------------
<S> <C>

Financial Reserves Fund 5.16%
- --------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.55%
- --------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.25%
- --------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 3.08%
- --------------------------------------------------------------------------------------------------
Prime Obligations Fund 5.02%
- --------------------------------------------------------------------------------------------------
Tax-Free Money Market 3.17%
- --------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares 5.24%
- --------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.97%

==================================================================================================
</TABLE>

TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions (if any), and any change in the net asset value
per share of a Fund over the period. Average annual total returns are calculated
by determining the growth or decline in value of a hypothetical historical
investment in a Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. For example, a
cumulative total return of 100% over ten years would produce an average annual
total return of 7.18%, which is the steady annual rate of return that would
equal 100% growth on an annually compounded basis in ten years. While average
annual total returns (or "annualized total return") are a convenient means of
comparing investment alternatives, investors should realize that performance for
a Fund is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of a Fund. When using total return and yield to compare
a Fund with other mutual funds, investors should take into consideration
permitted portfolio composition methods used to value portfolio securities and
computing offering price. The total returns of the Money Market Funds for the
one year, five year, and ten year periods ending October 31, 1997 and the period
since inception of each Money Market Fund are as follows:

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

For the Period Ending October 31, 1997

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

One-Year Five- Ten- Period Since
Period Year Year Inception
Fund Period Period
- ----------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Financial Reserves Fund 5.04% 4.37% 5.50% 6.19%
- ----------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.46% 4.62% 5.82% 6.57%
- ----------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.17% N/A N/A 4.79%
- ----------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 3.01% 2.76% 3.65% 3.74%
- ----------------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.89% 4.31% 5.56% 5.61%
- ----------------------------------------------------------------------------------------------------------
Tax-Free Money Market 3.07% 2.75% N/A 3.64%
- ----------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares N/A N/A N/A 4.19%

- ----------------------------------------------------------------------------------------------------------
</TABLE>

- 69 -

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

<S> <C> <C> <C> <C>
U.S. Government Obligations: Select Shares 4.75% 4.20% 5.34% 5.38%

==========================================================================================================
</TABLE>

In addition to average annual total returns, the Money Market Funds, on behalf
of a class, may quote unaveraged or cumulative total returns reflecting the
total income over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. The cumulative total
returns of the Money Market Funds for the five year and ten year periods ending
October 31, 1997 and the period since inception are as follows:

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

Cumulative Total Returns for the Periods
Ending October 31, 1997

================================================================================================
Five-Year Ten-Year Period Since
Fund Period Period Inception
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

Financial Reserves Fund 23.84% 70.81% 140.04%
- ------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor 25.34% 76.07% 156.82%
Shares
- ------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select N/A N/A 11.95%
Shares
- ------------------------------------------------------------------------------------------------
Ohio Municipal Money Market Fund 14.58% 43.12% 57.36%
- ------------------------------------------------------------------------------------------------
Prime Obligations Fund 23.49% 71.79% 81.87%
- ------------------------------------------------------------------------------------------------
Tax-Free Money Market Fund 14.53% N/A 38.87%
- ------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund: N/A N/A 4.19%
Investor Shares
- ------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund: 22.84% 68.24% 77.56%
Select Shares

================================================================================================
</TABLE>

PERFORMANCE OF THE NON-MONEY MARKET FUNDS

From time to time, the "standardized yield," "distribution return," "dividend
yield," "average annual total return," "total return," and "total return at net
asset value" of an investment in each class of Non-Money Market Fund shares may
be advertised. An explanation of how yields and total returns are calculated for
each class and the components of those calculations are set forth below.

Yield and total return information may be useful to investors in reviewing the
Non-Money Market Fund's performance. A Non-Money Market Fund's advertisement of
its performance must, under applicable SEC rules, include the average annual
total returns for each class of shares of a Non-Money Market Fund for the 1, 5,
and 10- year period (or the life of the class, if less) as of the most recently
ended calendar quarter. This enables an investor to compare the Non-Money Market
Fund's performance to the performance of other funds for the same periods.
However, a number of factors should be considered before using such information
as a basis for comparison with other investments. Investments in a Non-Money
Market Fund are not insured; their yield and total return are not guaranteed and
normally will fluctuate on a daily basis. When redeemed, an investor's shares
may be worth more

- 70 -

<PAGE>

or less than their original cost. Yield and total return for any given past
period are not a prediction or representation by The Victory Portfolios of
future yields or rates of return on its shares. The yield and total returns of
the Class A and Class B shares of the Non-Money Market Funds are affected by
portfolio quality, portfolio maturity, the type of investments the Non-Money
Market Fund holds, and operating expenses.

PERFORMANCE - CLASS B SHARES

Class B shares of the Funds were initially offered on the dates listed below.
The performance figures for Class B shares for periods prior to such dates
represent the performance for Class A shares of the Funds, which have been
restated to reflect the applicable CDSC payable at redemption within 6 years
from purchase. Class B Shares are subject to an asset based sales charge of
0.75% of average daily net assets per year and other class-specific expenses.
Had these fees and expenses been reflected, performances quoted would have been
lower.

============================================================================
Date Class B Shares Were
Fund Initially Offered
- ----------------------------------------------------------------------------
Balanced Fund: Class B 3/1/96
- ----------------------------------------------------------------------------
Diversified Stock Fund: Class B 3/1/96
- ----------------------------------------------------------------------------
International Growth Fund: Class B 3/1/96
- ----------------------------------------------------------------------------
National Municipal Bond Fund: Class B 9/26/94
- ----------------------------------------------------------------------------
New York Tax-Free Fund: Class B 9/26/94
- ----------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B 3/1/96
- ----------------------------------------------------------------------------
Special Value Fund: Class B 3/1/96
============================================================================

STANDARDIZED YIELD. The "yield" (referred to as "standardized yield") of the
Non-Money Market Funds for a given 30-day period for a class of shares is
calculated using the following formula set forth in rules adopted by the SEC
that apply to all funds that quote yields:

Standardized Yield = 2 [(a-b + 1)^6 - 1]
---
cd

The symbols above represent the following factors:

a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day of
the period, adjusted for undistributed net investment income.

The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The SEC formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by a Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from a
Fund's portfolio investments calculated for that period. The standardized yield
may differ from the "dividend yield" of that class, described below.
Additionally, because each class of shares of a Fund is subject to different
expenses, it is likely that the standardized yields of the share classes of the
Funds will differ. The yields on the Funds for the 30-day period ended October
31, 1997 were as follows.

- 71 -

<PAGE>

==============================================================================
Yield for the 30-Day Period
Fund Ended October 31, 1997
- ------------------------------------------------------------------------------
Balanced Fund: Class A 2.148079%
- ------------------------------------------------------------------------------
Balanced Fund: Class B 1.346746%
- ------------------------------------------------------------------------------
Diversified Stock Fund: Class A 0.599536%
- ------------------------------------------------------------------------------
Diversified Stock Fund: Class B (0.738527)%
- ------------------------------------------------------------------------------
Fund for Income: Class A 7.606851%
- ------------------------------------------------------------------------------
Government Mortgage Fund: Class A 5.4696032%
- ------------------------------------------------------------------------------
Growth Fund: Class A 0.045826%
- ------------------------------------------------------------------------------
Intermediate Income Fund: Class A 5.129954%
- ------------------------------------------------------------------------------
International Growth Fund: Class A 0
- ------------------------------------------------------------------------------
International Growth Fund: Class B 0
- ------------------------------------------------------------------------------
Investment Quality Bond Fund: Class A 5.102010%
- ------------------------------------------------------------------------------
Lakefront Fund 1.382171%
- ------------------------------------------------------------------------------
Limited Term Income Fund: Class A 5.2348022%
- ------------------------------------------------------------------------------
National Municipal Bond Fund: Class 3.789578%
- ------------------------------------------------------------------------------
National Municipal Bond Fund: Class B 2.956791%
- ------------------------------------------------------------------------------
New York Tax-Free Fund: Class A 3.549320%
- ------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 3.011367%
- ------------------------------------------------------------------------------
Ohio Municipal Bond Fund: Class A 3.991590%
- ------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class A 0.629703%
- ------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B (0.745615)%
- ------------------------------------------------------------------------------
Real Estate Investment Fund 3.939614%*
- ------------------------------------------------------------------------------
Special Growth Fund: Class A (0.861114)%
- ------------------------------------------------------------------------------
Special Value Fund: Class A 0.363240%
- ------------------------------------------------------------------------------
Special Value Fund: Class B (0.540817)%
- ------------------------------------------------------------------------------
Stock Index Fund: Class A 1.589215%
- ------------------------------------------------------------------------------
Value Fund: Class A 0.646333%
==============================================================================

* Yield for the 30-day period ended September 30, 1997.

DIVIDEND YIELD AND DISTRIBUTION RETURNS. From time to time a Non-Money Market
Fund may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the Class A or Class B share dividends derived from
net investment income during a one-year period. Distribution return includes
dividends derived from net investment income and from net realized capital gains
declared during a one-year period. The "dividend yield" is calculated as
follows:

Dividend Yield = Dividends of the Class for a Period of One-Year
of the Class --------------------------------------------------
Max. Offering Price of the Class (last day of period)

- 72 -

<PAGE>

For Class A shares, the maximum offering price includes the maximum front-end
sales charge. For Class B shares, the maximum offering price is the net asset
value per share, without considering the effect of the CDSC.

- 73 -

<PAGE>

From time to time similar yield or distribution return calculations may also be
made using the Class A net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields on Class A shares
at maximum offering price and net asset value, and distribution returns on Class
A shares at maximum offering price and net asset value as of October 31, 1997
were as follows:

<TABLE>
<CAPTION>
==========================================================================================================

For the One-Year Period Ended October 31, 1997
==========================================================================================================

Distribution
Dividend Dividend Return at Distribution
Yield Yield Maximum Return
Fund at Maximum at Net Asset Offering at Net Asset
Offering Price Value Price Value
- ----------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Balanced Fund: Class A 2.37% 2.51% 4.91% 5.21%

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

Diversified Stock Fund: Class A 0.85% 0.91% 10.58% 11.23%

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

Fund for Income: Class A 6.71% 6.84% 6.71% 6.84%

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

Government Mortgage Fund 5.89% 6.25% 5.89% 6.25%

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

Growth Fund: Class A 0.21% 0.22% 3.44% 3.65%

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

Intermediate Income Fund: Class A 5.50% 5.83% 5.50% 5.83%

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

International Growth Fund: Class A 0.10% 0.10% 3.32% 3.52%

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

Investment Quality Bond Fund 5.40% 5.74% 5.40% 5.74%

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

Limited Term Income Fund 6.01% 6.13% 6.01% 6.13%

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

National Municipal Bond Fund: 4.07% 4.32% 4.07% 4.32%
Class A

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

New York Tax-Free Fund: Class A 5.32% 5.64% 5.65% 5.99%

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

Ohio Municipal Bond Fund 4.26% 4.52% 4.26% 4.52%

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

Ohio Regional Stock Fund: Class A 0.57% 0.61% 1.97% 2.09%

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

Special Growth Fund 0.00% 0.00% 3.78% 4.01%

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

Special Value Fund: Class A 0.65% 0.69% 6.03% 6.39%

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

Stock Index Fund 1.48% 1.57% 3.12% 3.31%

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

Value Fund 0.87% 0.92% 4.55% 4.82%

==========================================================================================================
</TABLE>

The dividend yield on Class B shares with and without the CDSC, and distribution
returns on Class B shares with and without the CDSC as of October 31, 1997 were
as follows.

- 74 -

<PAGE>

<TABLE>
<CAPTION>
==========================================================================================================

For the One-Year Period Ended October 31, 1997

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

Dividend
Dividend Yield Distribution Distribution
Yield with without Returns with Returns
Fund CDSC CDSC CDSC without CDSC
- ----------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Balanced Fund: Class B 1.20% 1.26% 3.76% 3.95%

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

Diversified Stock Fund: Class B 0.27% 0.28% 10.15% 10.69%

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

International Growth Fund: Class B 0.00% 0.00% 3.31% 3.48%

- ----------------------------------------------------------------------------------------------------------
National Municipal Bond Fund:

Class B 2.95% 3.08% 2.92% 3.08%

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

New York Tax-Free Fund: Class B 4.55% 4.79% 4.88% 5.14%

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

Ohio Regional Stock Fund: Class B 0.00% 0.00% 1.43% 1.50%

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

Special Value Fund: Class B 0.12% 0.13% 5.60% 5.90%

==========================================================================================================
</TABLE>

Total Returns. The "average annual total return" of a Fund, or of each class of
a Fund, is an average annual compounded rate of return for each year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical initial investment of $1,000 ("P" in the formula below) held
for a number of years ("n") to achieve an Ending Redeemable Value ("ERV"),
according to the following formula:

(ERV )1/n - 1 = Average Annual Total Return
---
( P )

The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:

ERV - P = Total Return
-------
P

In calculating total returns for the Funds, and for Class A shares of the Funds,
the current maximum sales charge (as a percentage of the offering price) is
deducted from the initial investment ("P") (unless the return is shown at net
asset value, as discussed below). For Class B shares, the payment of the
applicable CDSC (5.0% for the first year, 4.0% for second year, 3.0% for the
third and fourth years, 2.0% for the fifth year, 1.0% for the sixth year and
none thereafter) is applied to the investment result for the time period shown
(unless the total return is shown at net asset value, as described below). Total
returns also assume that all dividends and net capital gains distributions
during the period are reinvested to buy additional shares at net asset value per
share, and that the investment is redeemed at the end of the period. The average
annual total return and cumulative total return on Fund shares, and Class A
shares, for the period from the commencement of operations to October 31, 1996
(life of fund) at maximum offering price is shown on the table that follows. The
average annual total return for the one and five year periods (when applicable)
ended October 31, 1997 also are shown on the table that follows.

- 75 -

<PAGE>

<TABLE>
<CAPTION>
============================================================================================================
Average
Annual Average Annual
Total Cumulative Average Annual Total Return at
Return for Total Return Total Return at Maximum
the Life of for the Life Maximum Offering Price*
the Fund at of the Fund at Offering Price* for the Five-
Maximum Maximum for the One-Year Year Period

Maximum Offering Offering Period Ended Ended October
Fund Sales Charge Price* Price* October 31, 31, 1997
1997

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

<S> <C> <C> <C> <C> <C>
Balanced Fund: 5.75% 11.84% 54.64% 12.20% N/A
Class A

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

Balanced Fund: 5.00% 12.48% 58.14% 13.43% N/A
Class B

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

Diversified 5.75% 15.23% 212.51% 20.61% 18.32%
Stock Fund:

Class A
- ------------------------------------------------------------------------------------------------------------

Diversified 5.00% 15.85% 226.41% 22.48% 19.25%
Stock Fund:

Class B
- ------------------------------------------------------------------------------------------------------------

Fund for Income 2.00% 8.13% 127.12% 5.42% 5.64%

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

Government 5.75% 7.45% 71.02% 1.97% 5.27%
Mortgage Fund

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

Growth Fund 5.75% 17.85% 90.21% 21.65% N/A

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

Intermediate 5.75% 3.51% 14.40% 0.53% N/A
Income Fund

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

International 5.75% 5.37% 47.74% (0.03)% 8.97%
Growth Fund:

Class A
- ------------------------------------------------------------------------------------------------------------

International 5.00% 5.93% 53.64% 0.68% 9.67%
Growth Fund:

Class B
- ------------------------------------------------------------------------------------------------------------

Investment 5.75% 4.10% 16.96% 1.45% N/A
Quality Bond
Fund

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

Lakefront Fund 5.75% 7.32% 7.32% N/A N/A

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

Limited Term 2.00% 6.13% 61.32% 3.51% 4.54%
Income Fund

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

National 5.75% 4.34% 17.26% 1.88% N/A
Municipal Bond

Fund: Class A
- ------------------------------------------------------------------------------------------------------------

National 5.00% 4.46% 17.73% 2.74% N/A
Municipal Bond

Fund: Class B
</TABLE>

- 76 -

<PAGE>

Maximum Offering Offering Period Ended Ended October
Fund Sales Charge Price* Price* October 31, 31, 1997
1997

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

<S> <C> <C> <C> <C> <C>
New York Tax- 5.75% 5.96% 47.62% (0.34)% 5.14%
Free Fund:

Class A
- ------------------------------------------------------------------------------------------------------------

New York Tax- 5.00% 6.50% 52.70% 0.89% 5.69%
Free Fund:

Class B
- ------------------------------------------------------------------------------------------------------------

Ohio Municipal 5.75% 6.96% 65.17% 1.17% 6.29%
Bond Fund

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

Ohio Regional 5.75% 14.25% 191.89% 26.84% 17.47%
Stock Fund:

Class A
- ------------------------------------------------------------------------------------------------------------

Ohio Regional 5.00% 14.80% 203.13% 28.71% 18.26%
Stock Fund:

Class B
- ------------------------------------------------------------------------------------------------------------

Real Estate 5.75% 15.38% 15.38% N/A N/A
Investment Fund

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

Special Growth 5.75% 13.32% 61.01% 13.70% N/A
Fund

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

Special Value 5.75% 16.28% 80.51% 19.77% N/A
Fund: Class A

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

Special Value 5.00% 17.00% 84.80% 21.41% N/A
Fund: Class B

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

Stock Index 5.75% 19.18% 98.78% 23.59% N/A
Fund

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

Value Fund 5.75% 17.62% 88.78% 19.89% N/A

============================================================================================================
</TABLE>

*For Class B Shares, the calculations are made with the CDSC.

From time to time the Non-Money Market Funds also may quote an "average annual
total return at net asset value" or a cumulative "total return at net asset
value." It is based on the difference in net asset value per share at the
beginning and the end of the period for a hypothetical investment in that class
of shares (without considering front-end or contingent deferred sales charges)
and takes into consideration the reinvestment of dividends and capital gains
distributions. The average annual total return and cumulative total return on
Fund shares, and Class A shares of the Funds, at net asset value for the period
from the commencement of operations to October 31, 1997 (life of fund) are shown
in the table that follows. The average annual total return and cumulative total
return on Class B shares without the CDSC for the period from the commencement
of operations to October 31, 1997 are also shown below.

- 77 -

<PAGE>

=======================================================================================================
For period from commencement of operations to Average Annual Total
October 31, 1997 Return at Net Asset
Value* For Year Ended
October 31, 1997
Fund
-----------------------------------------------------
Average Annual Total Cumulative Total Return
Return at Net Asset at Net Asset Value*
Value*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund: Class
A 13.55% 64.07% 19.02%
- -------------------------------------------------------------------------------------------------------
Balanced Fund: Class
B 13.03% 61.14% 17.43%
- -------------------------------------------------------------------------------------------------------
Diversified Stock
Fund: Class A 16.08% 231.56% 27.96%
- -------------------------------------------------------------------------------------------------------
Diversified Stock
Fund: Class B 15.85% 226.41% 26.48%
- -------------------------------------------------------------------------------------------------------
Fund for Income 8.34% 131.66% 7.58%
- -------------------------------------------------------------------------------------------------------
Government Mortgage
Fund 8.31% 81.45% 8.22%
- -------------------------------------------------------------------------------------------------------
Growth Fund 19.64% 101.82% 29.08%
- -------------------------------------------------------------------------------------------------------
Intermediate Income
Fund 5.10% 21.38% 6.62%
- -------------------------------------------------------------------------------------------------------
International Growth
Fund: Class A 6.21% 56.75 6.04%
- -------------------------------------------------------------------------------------------------------
International Growth
Fund: Class B 5.93% 53.64% 4.68%
- -------------------------------------------------------------------------------------------------------
Investment Quality
Bond Fund 5.70% 24.10% 7.67%
- -------------------------------------------------------------------------------------------------------
Lakefront Fund 13.87% 13.87% N/A
- -------------------------------------------------------------------------------------------------------
Limited Term Income
Fund 6.39% 64.55 5.75
- -------------------------------------------------------------------------------------------------------
National Municipal
Bond Fund: Class A 6.01% 24.41% 8.10%
- -------------------------------------------------------------------------------------------------------
National Municipal
Bond Fund: Class B 5.16% 20.73% 6.74%
- -------------------------------------------------------------------------------------------------------
New York Tax-Free
Fund: Class A 6.90% 56.60% 5.77%
- -------------------------------------------------------------------------------------------------------
New York Tax-Free
Fund: Class B 6.50% 52.70% 4.88%
- -------------------------------------------------------------------------------------------------------
Ohio Municipal Bond
Fund 7.81% 75.25% 7.37%
- -------------------------------------------------------------------------------------------------------
Ohio Regional Stock
Fund: Class A 15.10% 209.69% 34.61%

- 78 -

- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

Ohio Regional Stock
Fund: Class B 14.80% 203.13% 32.71%
- -------------------------------------------------------------------------------------------------------
Real Estate
Investment Fund 22.42% 22.42% N/A
- -------------------------------------------------------------------------------------------------------
Special Growth Fund 15.10% 70.84% 20.62%
- -------------------------------------------------------------------------------------------------------
Special Value Fund:
Class A 18.06% 91.53 27.05%
- -------------------------------------------------------------------------------------------------------
Special Value Fund:
Class B 17.48% 87.80% 25.41%
- -------------------------------------------------------------------------------------------------------
Stock Index Fund 21.00% 110.91% 31.16%
- -------------------------------------------------------------------------------------------------------
Value Fund 19.41% 100.30% 27.24%
=======================================================================================================
</TABLE>

* For Class B shares, calculations are made without the CDSC.

OTHER PERFORMANCE COMPARISONS.

From time to time a Fund may publish the ranking of its performance or the
performance of its Class A or Class B shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Non-Money Market Funds, and ranks the performance of the Funds and their classes
against all other funds in similar categories, for both equity and fixed income
funds. The Lipper performance rankings are based on total return that includes
the reinvestment of capital gains distributions and income dividends but does
not take sales charges or taxes into consideration.

From time to time a Fund may publish the ranking of its performance or
performance of its Class A or Class B shares by Morningstar, Inc., an
independent mutual fund monitoring service that ranks mutual funds, including
the Non-Money Market Funds, in broad investment categories (domestic equity,
international equity taxable bond, municipal bond or other) monthly, based upon
each fund's three, five, and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted for
fees and sales loads. There are five ranking categories with a corresponding
number of stars: highest (5), above average (4), neutral (3), below average (2),
and lowest (1). Ten percent of the funds, series or classes in an investment
category receive five stars, 22.5% receive four stars, 35% receive three stars,
22.5% receive two stars, and the bottom 10% receive one star.

The total return on an investment made in a Fund or in Class A or Class B shares
of a Fund may be compared with the performance for the same period of one or
more of the following indices: the Consumer Price Index, the Salomon Brothers
World Government Bond Index, the Standard & Poor's 500 Index, the Shearson
Lehman Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the
J.P. Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index generally is considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgage-backed securities. The J.P. Morgan Government Bond Index
generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices.

- 79 -

<PAGE>

From time to time, the yields and the total returns of the Funds or Class A or
Class B shares of a Non-Money Market Fund may be quoted in and compared to other
mutual funds with similar investment objectives in advertisements, shareholder
reports or other communications to shareholders. A Fund also may include
calculations in such communications that describe hypothetical investment
results. (Such performance examples are based on an express set of assumptions
and are not indicative of the performance of any Fund.) Such calculations may
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Fund's investment are reinvested by being
paid in additional Fund shares, any future income or capital appreciation of a
Fund would increase the value, not only of the original Fund investment, but
also of the additional Fund shares received through reinvestment. As a result,
the value of a Fund investment would increase more quickly than if dividends or
other distributions had been paid in cash. A Fund may also include discussions
or illustrations of the potential investment goals of a prospective investor
(including but not limited to tax and/or retirement planning), investment
management techniques, policies or investment suitability of a Fund, economic
conditions, legislative developments (including pending legislation), the
effects of inflation and historical performance of various asset classes,
including but not limited to stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareholders may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund, as well as the views of the investment adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Fund.) A Fund may also include in
advertisements, charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to stock, bonds, and Treasury bills, as compared to an investment in
shares of a Fund, as well as charts or graphs which illustrate strategies such
as dollar cost averaging, and comparisons of hypothetical yields of investment
in tax-exempt versus taxable investments. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in a Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, a Fund may reprint articles (or excerpts) written regarding a
Fund and provide them to prospective shareholders. Performance information with
respect to the Funds is generally available by calling 1-800-KEY-FUND.

Investors may also judge, and a Fund may at times advertise, the performance of
a Fund or of Class A or Class B shares of a Fund by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies, which performance may be contained in
various unmanaged mutual fund or market indices or rankings such as those
prepared by Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman
Brothers, Merrill Lynch, and Salomon Brothers, and in publications issued by
Lipper Analytical Services, Inc. and in the following publications: IBC's Money
Fund Reports, Value Line Mutual Fund Survey, Morningstar, CDA/Wiesenberger,
Money Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, Ibbotson
Associates, and U.S.A. Today. In addition to yield information, general
information about a Fund that appears in a publication such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.

Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.

When comparing yield, total return, and investment risk of an investment in
shares of a Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an investment
in shares of a Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while a
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
Government. Money market mutual funds may seek to maintain a fixed price per
share.

- 80 -

<PAGE>

ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION

The New York Stock Exchange ("NYSE") holiday closing schedule indicated in the
SAI under "Valuation of Portfolio Securities for the Money Market Funds" is
subject to change.

When the NYSE or the Federal Reserve Board of Cleveland is closed, or when
trading is restricted for any reason other than its customary weekend or holiday
closings, or under emergency circumstances as determined by the SEC to warrant
such action, the Funds will determine their net asset value at Valuation Time. A
Fund's net asset value may be affected to the extent that its securities are
traded on days that are not Business Days.

The Victory Portfolios has elected, pursuant to Rule 18f-1 under the 1940 Act,
to redeem shares of the Balanced Fund, Diversified Stock Fund, Fund for Income,
Government Mortgage Fund, Growth Fund, Intermediate Income Fund, International
Growth Fund, Investment Quality Bond Fund, Limited Term Income Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Ohio
Regional Stock Fund, Special Growth Fund, Special Value Fund, Stock Index Fund,
and Value Fund solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund during any 90-day period for any one shareholder. The
remaining portion of the redemption may be made in securities or other property,
valued for this purpose as they are valued in computing the net asset value of
each class of the Fund. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and may incur additional
costs as well as the associated inconveniences of holding and/or disposing of
such securities or other property.

Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60-day notification requirement may, however, be waived
if (1) the only effect of a modification would be to reduce or eliminate an
administrative fee, redemption fee, or deferred sales charge ordinarily payable
at the time of exchange or (2) a Fund temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable to
invest amounts effectively in accordance with its investment objective and
policies.

The Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.

PURCHASING SHARES.

ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial depending on the amount of the purchase, the length of
time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B shares are the same
as those of the initial sales charge with respect to Class A shares. Any
salesperson or other person entitled to receive compensation for selling Fund
shares may receive different compensation with respect to one class of shares on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Fund instead.

The two classes of shares each represent an interest in the same portfolio
investments of a Fund. However, each class has different shareholder privileges
and features. The net income attributable to Class B shares and the dividends
payable on Class B shares will be reduced by incremental expenses borne solely
by that class, including the asset-based sales charge to which Class B shares
are subject.

CLASS B CONVERSION FEATURE. Ninety-six months after an investor's purchase order
for Class B shares is accepted, such "Matured Class B Shares" automatically will
convert to Class A shares, on the basis of the relative net asset value of the
two classes, without the imposition of any sales load or other charge. Each time
any Matured Class B shares convert to Class A shares, any Class B shares
acquired by the reinvestment of dividends or distributions on such Matured Class
B shares that are still held will also convert to Class A shares, on the same
basis. The conversion feature is intended to relieve holders of Matured Class B
shares of the asset-based sales charge under

- 81 -

<PAGE>

the Class B Distribution Plan after such shares have been outstanding long
enough that the Distributor may have been compensated for distribution expenses
related to such shares.

The conversion of Matured Class B shares to Class A shares is subject to the
continuing availability of a private letter ruling from the Internal Revenue
Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.

The methodology for calculating the net asset value, dividends and distributions
of the Fund's Class A and Class B shares recognizes two types of expenses.
General expenses that do not pertain specifically to either class are allocated
to the shares of each class, based upon the percentage that the net assets of
such class bears to a Fund's total net assets, and then pro rata to each
outstanding share within a given class. Such general expenses include (1)
management fees, (2) legal, bookkeeping and audit fees, (3) printing and mailing
costs of shareholder reports, prospectuses, statements of additional information
and other materials for current shareholders, (4) fees to the Trustees who are
not affiliated with the Adviser, (5) custodian expenses, (6) share issuance
costs, (7) organization and start-up costs, (8) interest, taxes and brokerage
commissions, and (9) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (1) Rule 12b-1
distribution fees and shareholder servicing fees, (2) incremental transfer and
shareholder servicing agent fees and expenses, (3) registration fees, and (4)
shareholder meeting expenses, to the extent that such expenses pertain to a
specific class rather than to a Fund as a whole.

REDUCED SALES CHARGE. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of a Fund alone or in combination with
purchases of other Class A shares of the Victory Portfolios. To obtain the
reduction of the sales charge, you or your Investment Professional must notify
the Transfer Agent at the time of purchase whenever a quantity discount is
applicable to your purchase.

In addition to investing at one time in any combination of Class A shares of the
Victory Portfolios in an amount entitling you to a reduced sales charge, you may
qualify for a reduction in the sales charge under the following programs:

COMBINED PURCHASES. When you invest in Class A shares of the Victory Portfolios
for several accounts at the same time, you may combine these investments into a
single transaction if purchased through one Investment Professional, and if the
total is $50,000 or more. The following may qualify for this privilege: an
individual, or "company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing for his, her, or
their own account; a trustee, administrator or other fiduciary purchasing for a
single trust estate or single fiduciary account or for a single or a
parent-subsidiary group of "employee benefit plans" (as defined in Section 3(3)
of ERISA); and tax-exempt organizations under Section 501(c)(3) of the Internal
Revenue Code.

RIGHTS OF ACCUMULATION. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Victory Portfolios Class A shares held by you,
your spouse, and your children under age 21, determined at the previous day's
net asset value at the close of business, to the amount of your new purchase
valued at the current offering price to determine your reduced sales charge.

LETTER OF INTENT. If you anticipate purchasing $50,000 or more of shares of a
Fund alone or in combination with Class A shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. You must start with a minimum initial investment
of 5% of the projected purchase amount. Each investment you make after signing

- 82 -

<PAGE>

the Letter will be entitled to the sales charge applicable to the total
investment indicated in the Letter. For example, a $2,500 purchase toward a
$60,000 Letter would receive the same reduced sales charge as if the $60,000 had
been invested at one time. To ensure that the reduced price will be received on
future purchases, you or your Investment Professional must inform the Transfer
Agent that the Letter is in effect each time shares are purchased. Neither
income dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter.

You are not obligated to complete the additional purchases contemplated by a
Letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.

If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.

EXCHANGING SHARES.

Shares of any Victory Money Market Fund may be exchanged for shares of any of
the Victory Portfolios, including Class A and Class B shares of the Victory
Portfolios. Exchanges for Class A shares of the Victory Portfolios may be
subject to payment of a sales charge.

Shares of a Fund may be exchanged for the same class of shares of any other fund
of the Victory Portfolios. For example, an investor can exchange Class B shares
of a Fund only for Class B shares of another Fund. At present, not all Funds of
the Victory Portfolios offer multiple classes of shares. If a Fund has only one
class of shares that does not have a class designation, that class is "Class A"
for exchange purposes. When Class B shares are redeemed to effect an exchange,
the priorities described in the Prospectuses for the imposition of the Class B
CDSC will be followed in determining the order in which the shares are
exchanged. Shareholders should take into account the effect of any exchange on
the applicability and rate of any CDSC that might be imposed in the subsequent
redemption of remaining shares. Shareholders owning shares of both classes must
specify whether they intend to exchange Class A or Class B shares. If you do not
make a selection, your exchange will be made in Class A shares.

REDEEMING SHARES.

REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (1) Class A shares, or (2)
Class B shares that were subject to the Class B CDSC when redeemed, in Class A
shares of a Fund or any of the other Victory Portfolios into which shares of the
Fund are exchangeable as described below, at the net asset value next computed
after receipt by the Transfer Agent of the reinvestment order. No service charge
is currently made for reinvestment in shares of the Funds. The shareholder must
ask the Distributor for such privilege at the time of reinvestment. Any capital
gain that was realized when the shares were redeemed is taxable, and
reinvestment will not alter any capital gains tax payable on that gain. If there
has been a capital loss on the redemption, some or all of the loss may not be
tax deductible, depending on the timing and amount of the reinvestment. Under
the Code, if the redemption proceeds of Fund shares on which a sales charge was
paid are reinvested in shares of a Fund or another of the Victory Portfolios
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or increase the gain recognized from
redemption. The Funds may amend, suspend, or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension, or cessation. The reinstatement must be into an account bearing the
same registration.

- 83 -

<PAGE>

DIVIDENDS AND DISTRIBUTIONS

The Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
federal tax treatment. The Funds ordinarily declare and pay dividends,
separately for Class A and Class B shares, from their net investment income as
follows.

Income Capital
Fund Dividends Gains
- -----------------------------------------------------------------------------------------------------

<S> <C> <C>
Balanced Fund Declared and paid Monthly Declared and paid Annually

Diversified Stock Fund Declared and paid Quarterly Declared and paid Annually

Fund for Income Declared and paid Monthly Declared and paid Annually

Government Mortgage Fund Declared and paid Monthly Declared and paid Annually

Growth Fund Declared and paid Quarterly Declared and paid Annually

Intermediate Income Fund Declared and paid Monthly Declared and paid Annually

International Growth Fund Declared and paid Quarterly Declared and paid Annually

Investment Quality Bond Fund Declared and paid Monthly Declared and paid Annually

Lakefront Fund Declared and paid Quarterly Declared and paid Annually

Limited Term Income Fund Declared and paid Monthly Declared and paid Annually

Money Market Funds Declared Daily and paid Monthly Declared and paid Annually

National Municipal Bond Fund Declared and paid Monthly Declared and paid Annually

New York Tax-Free Fund Declared and paid Monthly Declared and paid Annually

Ohio Municipal Bond Fund Declared and paid Monthly Declared and paid Annually

Ohio Regional Stock Fund Declared and paid Quarterly Declared and paid Annually

Real Estate Investment Fund Declared and paid Quarterly Declared and paid Annually

Special Growth Fund Declared and paid Quarterly Declared and paid Annually

Special Value Fund Declared and paid Quarterly Declared and paid Annually

Stock Index Fund Declared and paid Quarterly Declared and paid Annually

Value Fund Declared and paid Quarterly Declared and paid Annually
- -----------------------------------------------------------------------------------------------------
</TABLE>

The amount of a class's distributions may vary from time to time depending on
market conditions, the composition of a Fund's portfolio, and expenses borne by
a Fund or borne separately by a class, as described in "Alternative Sales
Arrangements - Class A and Class B," above. Dividends are calculated in the same
manner, at the same time and on the same day for shares of each class. However,
dividends on Class B shares are expected to be lower as a result of the
asset-based sales charge on Class B shares, and Class B dividends will also
differ in amount as a consequence of any difference in net asset value between
Class A and Class B shares.

For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities

- 84 -
<PAGE>

of the Fund chargeable against income. Interest income shall include discount
earned, including both original issue and market discount, on discount paper
accrued ratably to the date of maturity. Expenses, including the compensation
payable to the Adviser, are accrued each day. The expenses and liabilities of a
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.

TAXES

Information set forth in the Prospectuses for the Funds and this SAI that
relates to federal income taxation is only a summary of certain key tax
considerations generally affecting purchasers of shares of the Funds. The
following is only a summary of certain additional federal income tax
considerations generally affecting each Fund and its shareholders that are not
described in the Prospectuses. No attempt is made to present a complete
explanation of the tax treatment of the Funds or the implications to
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential purchasers of shares of the Funds are urged
to consult their tax advisers with specific reference to their own tax
circumstances.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY

Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it distributes an
amount equal to at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) plus at least 90% of its tax-exempt income (net of
expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Distributions by a Fund made during the taxable year or, under
specified circumstances, within twelve months after the close of the taxable
year, will be considered distributions of income and gains of the taxable year
and will therefore count towards the satisfaction of the Distribution
Requirement. If a Fund has a net capital loss (i.e., an excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward up
to eight years and treated as a short-term capital loss which can be used to
offset capital gains in such future years. As of October 31, 1997, the U.S.
Government Obligations Fund had capital loss carryforwards of approximately
$22,000, which expire in 2002; the Financial Reserves Fund had capital loss
carryforwards of approximately $13,000 which expire in 2001; the Limited Term
Income Fund had capital loss carryforwards of approximately $1,642,000,
$553,000, and $906,000 which expire in 2002, 2003 and 2005 respectively; the
Intermediate Income Fund had capital loss carryforwards of approximately
$2,498,000, $1,386,000, $869,000 and $521,000 which expire in 2001, 2002, 2003
and 2005, respectively; the Investment Quality Bond Fund had capital loss
carryforwards of approximately $8,729,000 which expire in 2002; the Government
Mortgage Fund had capital loss carryforwards of approximately $1,969,000 and
$109,000 which expire in 2002 and 2005, respectively; the National Municipal
Bond Fund had capital loss carryforwards of approximately $131,000 which expire
in 2004; and the Fund for Income had capital loss carryforwards of approximately
$704,000, $588,000 and $328,000 which expire in 2001, 2002 and 2003,
respectively. The Investment Quality Bond Fund had additional capital loss
carryforwards, subject to limitations on availability, to offset future capital
gains as the successor of a merger with the Government Bond Fund of
approximately $3,523,000, $2,760,000, $755,000 and $6,000 which expire in 2001,
2002, 2003 and 2004, respectively. Under Code Sections 382 and 383, if a Fund
has an "ownership change," then the Fund's use of its capital loss carryforwards
in any year following the ownership change will be limited to an amount equal to
the net asset value of the Fund immediately prior to the ownership change
multiplied by the long-term tax-exempt rate (which is published monthly by the
Internal Revenue Service (the "IRS")) in effect for the month in which the
ownership change occurs (the rate for March, 1997 is 5.10%). The Funds will use
their best efforts to avoid having an ownership change. However, because of
circumstances which may be beyond the control or knowledge of a Fund, there can
be no assurance that a Fund will not have, or has not already had, an ownership
change. If a Fund has or has had an ownership change, then any capital gain net
income for any year following the ownership change in excess of the annual
limitation on the capital loss carryforwards will have to be distributed by the
Fund to avoid tax at the Fund level and will be taxable to shareholders as
described under "Fund Distributions" below.

In addition to satisfying the Distribution Requirement, a regulated investment
company must: derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income

- 85 -
<PAGE>

(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement").

In general, gain or loss recognized by a Fund on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation (including municipal obligations) purchased by a Fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount
which accrued while the Fund held the debt obligation. In addition, under the
rules of Code section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless a Fund elects otherwise), generally
will be treated as ordinary income or loss.

The Code also treats as ordinary income a portion of the capital gain recognized
in a transaction where substantially all of the return realized is attributable
to the time value of a Fund's net investment in the transaction and: (1) the
transaction consists of the acquisition of property by the Fund and a
contemporaneous contract to sell substantially identical property in the future;
(2) the transaction is a straddle within the meaning of section 1092 of the
Code; (3) the transaction is one that was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but the
interest-like return would be taxed as capital gain; or (4) the transaction is
described as a conversion transaction in the Treasury Regulations. The amount of
such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code section 263(g). Built-in losses will be preserved where a Fund has a
built-in loss with respect to property that becomes a part of a conversion
transaction. No authority exists that indicates that the converted character of
the income treated as ordinary under this rule will not be passed through to the
Funds' shareholders.

In general, for purposes of determining whether capital gain or loss recognized
by a Fund on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected (as applicable, depending on the type of the
Fund involved) if (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the Fund
as part of a "straddle" (which term generally excludes a situation where the
asset is stock and Fund grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto), or (3) the
asset is stock and the Fund grants an in-the-money qualified covered call option
with respect thereto. In addition, a Fund may be required to defer the
recognition of a loss on the disposition of an asset held as part of a straddle
to the extent of any unrecognized gain on the offsetting position.

Any gain recognized by a Fund on the lapse of, or any gain or loss recognized by
a Fund from a closing transaction with respect to, an option written by the Fund
will be treated as a short-term capital gain or loss.

Certain transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such Section 1256 Contracts) generally is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A Fund,
however, may elect not to have this special tax treatment apply to Section 1256
Contracts that are part of a "mixed straddle" with other investments of the Fund
that are not Section 1256 Contracts.

- 86 -
<PAGE>

A Fund may enter into notional principal contracts, including interest rate
swaps, caps, floors, and collars. Treasury Regulations provide, in general, that
the net income or net deduction from a notional principal contract for a taxable
year is included in or deducted from gross income for that taxable year. The net
income or deduction from a notional principal contract for a taxable year equals
the total of all of the periodic payments (generally, payments that are payable
or receivable at fixed periodic intervals of one year or less during the entire
term of the contract) that are recognized from that contract for the taxable
year and all of the nonperiodic payments (including premiums for caps, floors,
and collars) that are recognized from that contract for the taxable year. No
portion of a payment by a party to a notional principal contract is recognized
prior to the first year to which any portion of a payment by the counterparty
relates. A periodic payment is recognized ratably over the period to which it
relates. In general, a nonperiodic payment must be recognized over the term of
the notional principal contract in a manner that reflects the economic substance
of the contract. A nonperiodic payment that relates to an interest rate swap,
cap, floor, or collar is recognized over the term of the contract by allocating
it in accordance with the values of a series of cash-settled forward or option
contracts that reflect the specified index and notional principal amount upon
which the notional principal contract is based (or, in the case of a swap, under
an alternative method contained in the proposed regulations and, in the case of
a cap or floor, under an alternative method which the IRS may provide in a
revenue procedure).

A Fund may purchase securities of certain foreign investment funds or trusts
which constitute passive foreign investment companies ("PFICs") for federal
income tax purposes. If a Fund invests in a PFIC, it has three separate options.
First, it may elect to treat the PFIC as a qualifying electing fund (a "QEF"),
in which case it will each year have ordinary income equal to its pro rata share
of the PFIC's ordinary earnings for the year and long-term capital gain equal to
its pro rata share of the PFIC's net capital gain for the year, regardless of
whether the Fund receives distributions of any such ordinary earnings or capital
gains from the PFIC. Second, for tax years beginning after December 31, 1997,
the Fund may make a mark-to-market election with respect to its PFIC stock.
Pursuant to such an election, the Fund will include as ordinary income any
excess of the fair market value of such stock at the close of any taxable year
over its adjusted tax basis in the stock. If the adjusted tax basis of the PFIC
stock exceeds the fair market value of such stock at the end of a given taxable
year, such excess will be deductible as ordinary loss in the amount equal to the
lesser of the amount of such excess or the net mark-to-market gains on the stock
that the Fund included in income in previous years. The Fund's holding period
with respect to its PFIC stock subject to the election will commence on the
first day of the following taxable year. If the Fund makes the mark-to-market
election in the first taxable year it holds PFIC stock, it will not incur the
tax described below under the third option.

Finally, if the Fund does not elect to treat the PFIC as a QEF and does not make
a mark-to-market election, then, in general, (1) any gain recognized by the Fund
upon a sale or other disposition of its interest in the PFIC or any "excess
distribution" (as defined) received by the Fund from the PFIC will be allocated
ratably over the Fund's holding period in the PFIC stock, (2) the portion of
such gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Fund's gross income for such year as ordinary income (and the distribution of
such portion by the Fund to shareholders will be taxable as an ordinary income
dividend, but such portion will not be subject to tax at the Fund level), (3)
the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate, as the
case may be) in effect for such prior year, plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received, at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Fund to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the Fund
thereon) will again be taxable to the shareholders as an ordinary income
dividend.

Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss (including, to the

- 87 -
<PAGE>

extent provided in Treasury Regulations, losses recognized pursuant to the PFIC
mark-to-market election) incurred after October 31 as if it had been incurred in
the succeeding year.

In addition to satisfying the requirements described above, a Fund must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a Fund's taxable year,
at least 50% of the value of the Fund's assets must consist of cash and cash
items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has not
invested more than 5% of the value of the Fund's total assets in securities of
each such issuer and the Fund does not hold more than 10% of the outstanding
voting securities of each such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security, not the issuer of the option. For purposes of asset diversification
testing, obligations issued or guaranteed by certain agencies or
instrumentalities of the U.S. Government, such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation, a
Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, the Government National Mortgage Corporation, and
the Student Loan Marketing Association, are treated as U.S. Government
securities.

If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of its ordinary
income for such calendar year and 98% of capital gain net income for the
one-year period ended on October 31 of such calendar year (or, at the election
of a regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year (a "taxable year election")). (Tax-exempt
interest on municipal obligations is not subject to the excise tax.) The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.

For purposes of calculating the excise tax, a regulated investment company
shall: (1) reduces its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
excludes foreign currency gains and losses and ordinary gains or losses arising
as a result of a PFIC mark-to-market election (or upon an actual disposition of
the PFIC stock subject to such election) incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(which gains and losses are included in determining the company's ordinary
taxable income for the succeeding calendar year).

Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.

FUND DISTRIBUTIONS

Each Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes. Distributions attributable to dividends received by the Funds from
domestic corporations will qualify

- 88 -
<PAGE>

for the 70% dividends-received deduction for corporate shareholders only to the
extent discussed below. Distributions attributable to interest received by the
Funds will not, and distributions attributable to dividends paid by a foreign
corporation generally should not, qualify for the dividend-received deduction.
In general, the Balanced Fund, Diversified Stock Fund, International Growth
Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio Regional Stock
Fund and Special Value Fund dividends paid on Class A and Class B shares are
calculated at the same time and in the same manner. In general, dividends on
Class B shares are expected to be lower than those on Class A shares due to the
higher distribution expenses charged by the Class B shares. Dividends may also
differ between classes as a result of differences in other class specific
expenses.

Ordinary income dividends paid by a Fund with respect to a taxable year will
qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
Generally, a dividend received by a Fund will not be treated as a qualifying
dividend (1) if it has been received with respect to any share of stock that the
Fund has held for less than 46 days (91 days in the case of certain preferred
stock), excluding for this purpose under the rules of Code Section 246(c)(3) and
(4) any period during which the Fund has an option to sell, is under a
contractual obligation to sell, has made and not closed a short sale of, is the
grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect
to, such (or substantially identical) stock; (2) to the extent that the Fund is
under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property;
or (3) to the extent that the stock on which the dividend is paid is treated as
debt-financed under the rules of Code Section 246A. The 46-day holding period
must be satisfied during the 90-day period beginning 45 days prior to each
applicable ex-dividend date; the 91-day holding period must be satisfied during
the 180-day period beginning 90 days before each applicable ex-dividend date.
Moreover, the dividends-received deduction for a corporate shareholder may be
disallowed or reduced (1) if the corporate shareholder fails to satisfy the
foregoing requirements with respect to its shares of the Fund or (2) by
application of Code Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain other
items). With respect to the International Growth Fund, only an insignificant
portion of the Fund will be invested in stock of domestic corporations;
therefore the ordinary dividends distributed by the Fund generally will not
qualify for the dividends-received deduction for corporate shareholders.

A Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such amounts.
Net capital gain that is distributed and designated as a capital gain dividend
will be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares or whether such gain was
recognized by the Fund prior to the date on which the shareholder acquired his
shares. The Code provides, however, that under certain conditions only 50% (58%
for the alternative minimum tax purposes) of the capital gain recognized upon a
Fund's disposition of domestic qualified "small business" stock will be subject
to tax.

Conversely, if a Fund elects to retain its net capital gain, the Fund will be
taxed thereon (except to the extent of any available capital loss carryovers) at
the 35% corporate tax rate. If a Fund elects to retain its net capital gain, it
is expected that the Fund also will elect to have shareholders of record on the
last day of its taxable year treated as if each received a distribution of his
pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.

The New York Tax-Free Fund, National Municipal Bond Fund, Ohio Municipal Bond
Fund, Ohio Municipal Money Market Fund, and Tax-Free Money Market Fund (the
"Tax-Exempt Funds") intend to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax-Exempt
Funds' taxable year at least 50% of each Fund's total assets consists of
tax-exempt municipal obligations. Distributions from a Tax- Exempt Fund will
constitute exempt-interest dividends to the extent of such Fund's tax-exempt
interest income (net of expenses and amortizable bond premium). Exempt-interest
dividends distributed to shareholders of a Tax-Exempt

- 89 -
<PAGE>

Fund are excluded from gross income for federal income tax purposes. However,
shareholders required to file a federal income tax return will be required to
report the receipt of exempt interest dividends on their returns. Moreover,
while exempt-interest dividends are excluded from gross income for federal
income tax purposes, they may be subject to alternative minimum tax ("AMT") in
certain circumstances and may have other collateral tax consequences as
discussed below. Distributions by a Tax-Exempt Fund of any investment company
taxable income or of any net capital gain will be taxable to shareholders as
discussed above.

AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for noncorporate taxpayers
and 20% for corporate taxpayers on the excess of the taxpayer's alternative
minimum taxable income ("AMTI") over an exemption amount. Exempt-interest
dividends derived from certain "private activity" municipal obligations issued
after August 7, 1986 will generally constitute an item of tax preference
includable in AMTI for both corporate and noncorporate taxpayers. In addition,
exempt-interest dividends derived from all municipal obligations, regardless of
the date of issue, must be included in adjusted current earnings, which are used
in computing an additional corporate preference item (i.e., 75% of the excess of
a corporate taxpayer's adjusted current earnings over its AMTI (determined
without regard to this item and the AMT net operating loss deduction))
includable in AMTI. For purposes of the corporate AMT, the corporate dividends-
received deduction is not itself an item of tax preference that must be added
back to taxable income or is otherwise disallowed in determining a corporation's
AMTI. However, corporate shareholders will generally be required to take the
full amount of any dividend received from the Fund into account (without a
dividends-received deduction) in determining their adjusted current earnings.

Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Further, a shareholder of a Tax-Exempt Fund is denied a deduction for interest
on indebtedness incurred or continued to purchase or carry shares of a
Tax-Exempt Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds held
by a Tax-Exempt Fund will likely be subject to tax on dividends paid by the
Tax-Exempt Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies, and foreign corporations engaged in a trade or
business in the United States. Prospective investors should consult their own
advisers as to such consequences.

Investment income that may be received by a Fund from sources within foreign
countries may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with many foreign countries which entitle a
Fund to a reduced rate of, or exemption from, taxes on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of a Fund's assets to be invested in various countries is not known: If
more than 50% of the value of a Fund's total assets at the close of its taxable
year consist of the stock or securities of foreign corporations, the Fund may
elect to "pass through" to the Fund's shareholders the amount of foreign taxes
paid by the Fund. If the Fund so elects, each shareholder would be required to
include in gross income, even though not actually received, his pro rata share
of the foreign taxes paid by the Fund, but would be treated as having paid his
pro rata share of such foreign taxes and would therefore be allowed to either
deduct such amount in computing taxable income or use such amount (subject to
various Code limitations) as a foreign tax credit against federal income tax
(but not both). For purposes of the foreign tax credit limitation rules of the
Code, each shareholder would treat as foreign source income his pro rata share
of such foreign taxes plus the portion of dividends received from the Fund
representing income derived from foreign sources. No deduction for foreign taxes
could be claimed by an individual shareholder who does not itemize deductions.
Each shareholder should consult his own tax adviser regarding the potential
application of foreign tax credit rules.

Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends, or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.

Distributions by a Fund will be treated in the manner described above regardless
of whether such distributions are paid in cash or reinvested in additional
shares of the Fund (or of another fund). Shareholders receiving a

- 90 -
<PAGE>

distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income, recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.

Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.

Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has failed to
provide a correct taxpayer identification number (2) who is subject to backup
withholding for failure to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the Fund that it is not subject to
backup withholding or is an "exempt recipient" (such as a corporation).

SALE OR REDEMPTION OF SHARES

The Money Market Funds seek to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that the Money Market Funds will do
this. In such a case, and for all the Funds other than the Money Market Funds, a
shareholder will recognize gain or loss on the sale or redemption of shares of a
Fund in an amount equal to the difference between the proceeds of the sale or
redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of a Fund within 30 days before or after the sale or redemption. In
general, any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. Long-term capital gain recognized by an individual shareholder will be
taxed at the lowest rates applicable to capital gains if the holder has held
such shares for more than 18 months at the time of the sale. However, any
capital loss arising from the sale or redemption of shares held for six months
or less will be disallowed to the extent of the amount of exempt-interest
dividends received on such shares and (to the extent not disallowed) will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules of Code section 246(c)(3) and (4) (discussed above in connection with the
dividends-received deduction for corporations) generally will apply in
determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate at least 11.6%
lower than the maximum rate applicable to ordinary income. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

If a shareholder (1) incurs a sales load in acquiring shares of a Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on such shares but shall be treated as incurred on the acquisition
of the subsequently acquired shares.

FOREIGN SHAREHOLDERS

Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("foreign shareholder"), depends on whether the income from a Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.

- 91 -
<PAGE>

If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Furthermore,
such foreign shareholder may be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) on the gross income resulting from a
Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but may not be allowed a deduction against such gross income or a
credit against the U.S. withholding tax for the foreign shareholder's pro rata
share of such foreign taxes which it is treated as having paid. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of a Fund, capital gain dividends and
exempt-interest dividends, and amounts retained by the Fund that are designated
as undistributed capital gains.

If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income dividends, capital
gain dividends, and any gains realized upon the sale of shares of the Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
or domestic corporations.

In the case of a foreign shareholder other than a corporation, a Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholder furnishes the Fund with proper notification of his
foreign status.

The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund, including the
applicability of foreign taxes.

EFFECT OF FUTURE LEGISLATION; STATE AND LOCAL TAX CONSIDERATIONS

The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect.

Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends, and capital gain dividends from regulated investment companies often
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences of
these and other state and local tax rules affecting investment in a Fund.

- 92 -
<PAGE>

TRUSTEES AND OFFICERS

BOARD OF TRUSTEES.

Overall responsibility for management of the Victory Portfolios rests with the
Trustees, who are elected by the shareholders of the Victory Portfolios. The
Victory Portfolios are managed by the Trustees in accordance with the laws of
the State of Delaware. There are currently nine Trustees, seven of whom are not
"interested persons" of the Victory Portfolios within the meaning of that term
under the 1940 Act ("Independent Trustees"). The Trustees, in turn, elect the
officers of the Victory Portfolios to supervise actively its day-to-day
operations.

The Trustees of the Victory Portfolios, their addresses, ages, and their
principal occupations during the past five years are as follows:

Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------- -------------------

<S> <C> <C>
Roger Noall,* 62 Chairman and Trustee From 1996 to present,
c/o Brighton Apt. 1603 Executive of KeyCorp;
8231 Bay Colony Drive from 1995 to 1996,
Naples, Florida 34108 General Counsel and
Secretary of KeyCorp;
from 1994 to 1996, Senior
Executive Vice President
and Chief Administrative
Officer of KeyCorp; from
1985 to 1994, Vice
Chairman of the Board and
Chief Administrative
Officer of Society
Corporation (now known as
KeyCorp).

Leigh A. Wilson,** 53
New Century Care, Inc. President and Trustee From 1989 to present,
53 Sylvan Road North Chairman and Chief
Westport, CT 06880 Executive Officer,
New Century Care, Inc.
(Merchant bank); from
1995 to present,
Principal of New
Century Living, Inc.;
from 1989 to present,
Director of Chimney Rock
Vineyard and Chimney
Rock Winery; President
and Director, Key Mutual
Funds.

</TABLE>

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

* Mr. Noall is an "interested person" and an "affiliated person" of the
Company.

** Mr. Wilson is deemed to be an "interested person" of the Victory Portfolios
under the 1940 Act solely by reason of his position as President.

- 93 -
<PAGE>

Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------- -------------------

<S> <C> <C>
Robert G. Brown, 74 Trustee Executive Vice President
8650 S. Ocean Drive Easton Corporiation -
Singer Island Retired. From October
Jensen Beach, FL 34957 1983 to November 1990,
Founder and President,
Cleveland Advanced
Manufacturing Program,
Inc. Serves on Board of
Directors of CAMP, Inc.
(non-profit corporation
engaged in regional
economic development).

Edward P. Campbell, 48 Trustee From October 1997 to
Nordson Corporation present, President and
28601 Clemens Road Chief Executive Officer
Westlake, OH 44145 of Nordson Corporation
(manufacturer of
application equipment);
July 1996 to October
1997, President and Chief
Operating Officer of
Nordson Corporation; from
March 1994 to July 1996,
Execitive Vice President
and Chief Operating
Officer of Nordson
Corporation; from May
1988 to March 1994, Vice
President of Nordson
Corporation; from 1987 to
December 1994, member of
the Supervisory Committee
of Society's Collective
Investment Retirement
Fund; from May 1991 to
August 1994, Trustee,
Financial Reserves Fund
and from May 1993 to
August 1994, Trustee,
Ohio Municipal Money
Market Fund. Currently,
Director of Key Mutual
Funds and Director of
Nordson Corporation.

Dr. Harry Gazelle, 70 Trustee Retired radiologist, Drs.
17822 Lake Road Hill and Thomas
Lakewood, OH 44107 Corporation.

Eugene J. McDonald, 65 Trustee From 1990 to present,
Duke Management Company Executive Vice President
2200 West Main Street, and Chief Investment
Suite 1000 Officer for Asset
Durham, N.C. 27705 Management of Duke
University and President
and CEO of Duke
Management Company;
Director of CCB Financial
Corporation, Flag Group
of Mutual Funds, DP Mann
Holdings, Key Mutual
Funds, Greater Triangle
Community Foundation, and
NC Bar Association
Investment Committee.

Dr. Thomas F. Morrissey, 64 Trustee 1995 Visiting Scholar,
Weatherhead School of Bond University,
Management Queensland, Australia;
Case Western Reserve Professor, Weatherhead
University School of Management,
10900 Euclid Avenue Case Western Reserve
Cleveland, OH 44106-7235 University; from 1989 to
1995, Associate Dean of
Weatherhead School of
Management; from 1987 to
December 1994, Member of
the Supervisory Committee
of Society's Collective
Investment Retirement
Fund; from May 1991 to
August 1994, Trustee,
Financial Reserves Fund
and from May 1993 to
August 1994, Trustee,
Ohio Municipal Money
Market Fund.
</TABLE>

- 94 -
<PAGE>

Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------- -------------------
<S> <C> <C>

Dr. H. Patrick Swygert, 54 Trustee President, Howard
Howard University University; formerly
2400 6th Street, N.W. President, State
Suite 402 University of New York at
Washington, D.C. 20059 Albany; formerly,
Executive Vice President,
Temple University;
Trustee, The Victory
Funds.

Frank A. Weil, 66 Trustee Chairman and Chief
Abacus & Associates Executive Officer of
147 E. 47th Street Abacus & Associates, Inc.
New York, N.Y. 10017 (private investment
firm); Director and
President of the Norman
and Hickrill Foundations;
Director of Key Mutual
Funds. Director, Trojan
Industries. Formerly
United States Assistant
Secretary of Commerce for
Industry and Trade.
</TABLE>

The Board presently has an Investment Policy Committee, a Business, Legal, and
Audit Committee, and a Nominating Committee. The members of the Investment
Policy Committee are Messrs. Wilson and Morrissey, who will serve until August
1998. The function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the
Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell, and Gazelle who will serve until August
1998. The function of the Business, Legal, and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; and to review
compliance and contract matters. Mr. Campbell is the Chairman of the Nominating
Committee which nominates persons to serve as Independent Trustees and Trustees
to serve on committees of the Board.

The Investment Policy Committee met four times during the 12 months ended
October 31, 1997. The Business, Legal and Audit Committee met four times during
the 12 months ended October 31, 1997.

REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.

Each Trustee (other than Leigh A. Wilson) receives an annual fee of $27,000 for
serving as Trustee of all the Funds of the Victory Portfolios, and an additional
per meeting fee ($2,400 in person and $1,200 per telephonic meeting). Leigh A.
Wilson receives an annual fee of $33,000 for serving as President and Trustee
for all of the funds of the Victory Portfolios, and an additional per meeting
fee ($3,000 in person and $1,500 per telephonic meeting). The Advisor pays the
fees of Roger Noall.

- 95 -

<PAGE>

The following table indicates the compensation received by each Trustee from the
Victory "Fund Complex"(1) for the 12 month period ended October 31, 1997.

Aggregate
Pension or Retirement Estimated Annual Compensation Total Compensation
Benefits Accrued as Benefits from Victory from Victory
Portfolio Expenses Upon Retirement Portfolios "Fund Complex" (1)
------------------ --------------- ---------- ------------------
<S> <C> <C> <C> <C>

Leigh A. Wilson, Trustee.... -0- -0- $45,000 $56,250
Robert G. Brown, Trustee... -0- -0- 39,000 39,000
Edward P. Campbell, Trustee. -0- -0- 39,000 39,000
Harry Gazelle, Trustee...... -0- -0- 40,200 40,200
Thomas F. Morrissey, -0- -0- 39,000 39,000
Trustee.....................
H. Patrick Swygert, Trustee. -0- -0- 36,600 36,600
</TABLE>

(1) There are presently 33 mutual funds from which the above-named Trustees are
compensated in the Victory "Fund Complex," but not all of the above-named
Trustees serve on the board of each fund in the "Fund Complex."

OFFICERS.

The officers of the Victory Portfolios, their ages, addresses, and principal
occupations during the past five years, are as follows:

Position(s) with the Principal Occupation
Name, Age, and Address Victory Portfolios During Past 5 Years
- ------------------------ ------------------- -------------------
<S> <C> <C>
Roger Noall,* 62 Chairman and Trustee From 1996 to present,
c/o Brighton Apt. 1603 Executive of KeyCorp;
8231 Bay Colony Drive from 1995 to 1996,
Naples, Florida 34108 General Counsel and
Secretary of KeyCorp;
from 1994 to 1996, Senior
Executive Vice President
and Chief Administrative
Officer of KeyCorp; from
1985 to 1994, Vice
Chairman of the Board and
Chief Administrative
Officer of Society
Corporation (now known as
KeyCorp).

William B. Blundin, 59 Vice President Senior Vice President of
125 West 55th Street BISYS Fund Services
New York, N.Y. 10019 ("BISYS"); officer of
other investment
companies administered
by BISYS Fund Services;
President and Chief
Executive Officer of
Vista Broker- Dealer
Services, Inc., Emerald
Asset Management, Inc.
and BNY Hamilton
Distributors, Inc.,
registered
broker/dealers. - 94

</TABLE>

- 96 -
<PAGE>

<TABLE>
<CAPTION>
Position(s) with the Principal Occupation
Name, Age, and Address Victory Portfolios During Past 5 Years
- ------------------------ ------------------- -------------------
<S> <C> <C>

J. David Huber, 59 Vice President Executive Vice President
3435 Stelzer Road of BISYS.
Columbus, OH 43219-3035

Thomas E. Line, 30 Treasurer From December 1996
3435 Stelzer Road to present, employee
Columbus, OH 43219-3035 of BISYS Funds
Services; from
September 1989 to
November 1996, Audit
Senior Manager at
KPMG Peat Marwick
LLP.

Michael J. Sullivan Secretary From December 1996
to present, Vice
President of BISYS
Fund Services; from
February 1995 to
november 1996,
President,
Performance
Financial Group (a
mutual fund
consulting firm);
from January 1993 to
january 1995, CEO,
Manufacturing
Company.

Alaina V. Metz, Age 30 Assistant Secretary From June 1995 to
3435 Stelzer Road present, Chief
Columbus, OH 43219 Administrative and
Regulatory
Serevices, BISYS
Fund Services
Limited Partnership;
from May 1989 to
June 1995,
Supervisor, Mutual
Fund Legal
Department, Alliance
Capital Management.

Jay G. Baris, 43 Assistant Secretary From 1994 to
Kramer, Levin, Present, Partner,
Naftalis & Frankel; Kramer, Levin,
919 Third Avenue, Naftalis & Frankel;
41st Floor previously, Partner,
Reid & Priest. New
York, NY 10022

</TABLE>

Trustees and officers as a group owned beneficially less than 1% of all classes
of outstanding shares of the Funds.

The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219- 3035.

The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS receives fees from the Victory Portfolios as Administrator.

As of January 30, 1998, the Trustees and officers as a group owned beneficially
less than 1% of all classes of outstanding shares of the Funds.

ADVISORY AND OTHER CONTRACTS

INVESTMENT ADVISER AND SUB-ADVISER.

One of the Fund's most important contracts is with its investment adviser, Key
Asset Management Inc. ("KAM" or the "Adviser"), a New York corporation
registered as an investment adviser with the Securities and Exchange SEC. KAM is
a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. On February 28, 1997, KAM became the
surviving corporation of the reorganization of four indirect investment adviser
subsidiaries of KeyCorp--KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers"),
Society Asset Management, Inc. ("SAM"), Spears, Benzak, Salomon & Farrell, Inc.
("SBSF") and Applied Technologies, Inc. ("ATI"), each registered with the SEC as
an investment adviser. Key Advisers, SAM, and ATI were merged with and into
SBSF, a New York corporation organized on February 22, 1972. Pursuant to the
terms of the reorganization, SBSF changed its name to Key Asset Management Inc.
SAM, SBSF, and ATI will continue to operate under their existing names as
separate divisions of KAM. Affiliates of the Adviser manage approximately $60
billion for numerous clients including large corporate and public retirement
plans, Taft-Hartley plans, foundations and endowments, high net worth
individuals, and mutual funds.

- 97 -

<PAGE>

KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of September 30, 1997, KeyCorp had an asset
base of $72 billion, with banking offices in 26 states from Maine to Alaska, and
trust and investment offices in 16 states. KeyCorp is the resulting entity of a
merger in 1994 of Society Corporation, the bank holding company of which
KeyBank, formerly Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and leasing companies. KeyBank is the lead affiliate bank of
KeyCorp.

The following schedule lists the advisory fees for each mutual fund that is
advised by the Adviser.

.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund

.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund
Victory U.S. Government Obligations Fund
Victory Tax-Free Money Market Fund

.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund
Victory Limited Term Income Fund
Victory Government Mortgage Fund
Victory Financial Reserves Fund
Victory Fund for Income

.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund
Victory New York Tax-Free Fund

.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund
Victory Stock Index Fund

.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund

.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund
Victory Investment Quality Bond Fund
Victory Ohio Regional Stock Fund

1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund
Victory Lakefront Fund
Victory Value Fund
Victory Growth Fund
Victory Real Estate Investment Fund
Victory Special Value Fund
Victory Special Growth Fund

- 98 -

<PAGE>

1.10% OF AVERAGE DAILY NET ASSETS
Victory International Growth Fund

Lakefront Capital Investors, Inc. ("Lakefront" or the "Sub-Adviser") serves as
sub-adviser to the Lakefront Fund. For its services under the Investment
Sub-Advisory Agreement, the Adviser pays Lakefront a monthly fee of 0.50% of the
Lakefront Fund's average daily net assets from its advisory fee.

THE INVESTMENT ADVISORY AND INVESTMENT SUB-ADVISORY AGREEMENTS.

Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Victory Portfolios, on behalf of the Funds (the "Investment Advisory
Agreement"), provides that it will continue in effect as to the Funds for an
initial two-year term and for consecutive one-year terms thereafter, provided
that such continuance is approved at least annually by the Trustees or by vote
of a majority of the outstanding shares of each Fund (as defined under
"Additional Information - Miscellaneous"), and, in either case, by a majority of
the Trustees who are not parties to the Investment Advisory Agreement or
interested persons (as defined in the 1940 Act) of any party to the Investment
Advisory Agreement, by votes cast in person at a meeting called for such
purpose.

The Investment Advisory Agreement is terminable as to any particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, by vote of the Board of Trustees
of the Victory Portfolios, or by the Adviser. The Investment Advisory Agreement
also terminates automatically in the event of any assignment, as defined in the
1940 Act.

The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.

From January 1, 1996 until February 28, 1997, Key Advisers served as investment
adviser to the Funds.

From January, 1993 until December 31, 1995, Society Asset Management, Inc.
served as investment adviser to the Funds. For the fiscal years ended October
31, 1997, 1996 and 1995 , the Key Asset Management Inc. (and its predecessors)
earned the following advisory fees with respect to each Fund, the amount of fees
paid to the Adviser is net of the amount of fee reduction:

- 99 -

<PAGE>

<TABLE>

<CAPTION>
1997 1996 1995

Amount of Amount of Amount of Amount of Amount of Amount
Fees Paid Fees Fees Paid Fees Fees Paid of Fee
to Advisor Reduction to Advisor Reduction to Advisor Reduction
---------- --------- ---------- --------- ---------- ---------

<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $ 2,810,294 $353,372 $2,006,013 $376,178 $1,024,165 $624,474

Diversified Stock Fund 4,560,843 0 3,147,950 55,678 2,006,479 126,000

Financial Reserves Fund 3,786,668 301,812 3,402,511 582,762 3,125,072 420,213

Fund for Income 5,722 92,630 22,779 87,637 87,483 36,865

Government Mortgage Fund 565,656 0 646,159 3,389 702,724 15,995

Growth Fund 1,709,722 0 1,181,723 70,660 526,613 216,181

Institutional Money Market
Fund (a) 1,638,661 855,791 1,003,395 932,844 314,773 337,327

Intermediate Income Fund 1,622,286 340,846 1,218,106 357,865 692,143 325,544

International Growth Fund 1,317,383 0 1,224,364 30,428 901,337 116,464

Investment Quality Bond
Fund 993,289 208,773 836,655 185,307 546,647 238,865

Lakefront Fund 2,144 5,022

Limited Term Income Fund 418,588 15,636 671,988 46,818 710,323 20,789

National Municipal Bond 812/ 25,316/
Fund (b) 0 239,815 0 206,174 11,825 0

New York Tax-Free Bond 23,901 73,540 7,542 83,068 48,644 45,003

Ohio Municipal Bond Fund 376,962 79,594 298,093 103,079 183,193 163,525

Ohio Municipal Money
Market Fund 2,281,185 833,236 1,129,662 1,706,115 187,594 244,500

Ohio Regional Stock Fund 375,231 0 318,859 4,181 253,943 13,584

Prime Obligations Fund 1,870,850 0 1,628,427 -- 1,907,736 0

Real Estate Investment Trust 0 15,464

Special Growth Fund 920,562 0 711,543 33,521 143,381 296,856

Special Value Fund 3,525,053 0 2,304,543 71,047 1,140,267 405,752

Stock Index Fund 1,715,703 574,290 936,282 382,702 489,171 194,774

Tax-Free Money Market
Fund 1,283,064 37,520 1,092,669 31,987 829,802 34,209

U.S. Government Obligations
Fund 5,387,642 0 4,208,590 0 2,245,705 0

Value Fund 4,396,880 0 3,378,303 62,495 1,771,834 810,820
</TABLE>

(a) Fiscal year ended October 31, 1996 and 1997; fiscal period ended October
31, 1995; fiscal year ended April 30, 1995 and April 30, 1994;
respectively.

- 100 -
<PAGE>

(b) Fiscal year ended October 31, 1996 and 1997; fiscal period ended October
31, 1995 and fiscal year ended April 30, 1995; and fiscal period February
3, 1994 (commencement of operations) to April 30, 1994 respectively.

Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Funds and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the Adviser.

GLASS-STEAGALL ACT.

In 1971 the United States Supreme Court held in INVESTMENT COMPANY INSTITUTE V.
CAMP that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V.
INVESTMENT COMPANY INSTITUTE that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. IN THE BOARD
OF GOVERNORS case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.

From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Funds may include
descriptions of Key Trust Company of Ohio, N.A. and the Adviser including, but
not limited to, (1) descriptions of the operations of Key Trust Company of Ohio,
N.A. and the Adviser; (2) descriptions of certain personnel and their functions;
and (3) statistics and rankings related to the operations of Key Trust Company
of Ohio, N.A. and the Adviser.

PORTFOLIO TRANSACTIONS.

THE MONEY MARKET FUNDS. Pursuant to the Investment Advisory Agreement of the
Victory Portfolios on behalf of the Money Market Funds, the Adviser determines,
subject to the general supervision of the Trustees of the Victory Portfolios,
and in accordance with each Money Market Fund's investment objective, policies
and restrictions, which securities are to be purchased and sold by the Money
Market Funds, and which brokers are to be eligible to execute its portfolio
transactions. Since purchases and sales of portfolio securities by the Money
Market Funds are usually principal transactions, the Money Market Funds incur
little or no brokerage commissions. For the three previous fiscal years ended
October 31, 1997, 1996 and 1995 , the Money Market Funds paid no brokerage
commissions. Securities of the Money Market Funds are normally purchased
directly from the issuer or from a market maker for the securities. The purchase
price paid to dealers serving as market makers may include a spread between the
bid and asked prices. The Money Market Funds may also purchase securities from

- 101 -

<PAGE>

underwriters at prices which include the spread retained by the underwriter from
the proceeds of the offering to the issuer.

The Money Market Funds do not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity, but the
Adviser may seek to enhance the yield of the Funds by taking advantage of yield
disparities or other factors that occur in the money markets. For example,
market conditions frequently result in similar securities trading at different
prices. The Adviser may dispose of any portfolio security prior to its maturity
if such disposition and reinvestment of proceeds are expected to enhance yield
consistent with the Adviser's judgment as to desirable portfolio maturity
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. The investment policies of the Money Market Funds
require that investments mature in 90 days or less. Thus, there is likely to be
relatively high portfolio turnover, but since brokerage commissions are not
normally paid on money market instruments, the high rate of portfolio turnover
is not expected to have a material effect on the net income or expenses of the
Money Market Funds.

The Adviser's primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order.
Allocation of transactions, including their frequency, among various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders.

INCOME AND EQUITY FUNDS. Pursuant to the Investment Advisory Agreement (and for
the Lakefront Fund, the Investment Sub-Advisory Agreement), the Adviser (and the
Sub-Adviser) determine, subject to the general supervision of the Trustees of
the Victory Portfolios, and in accordance with each Fund's investment objective
and restrictions, which securities are to be purchased and sold by the Funds,
and which brokers are to be eligible to execute its portfolio transactions.
Purchases from underwriters and/or broker-dealers of portfolio securities
include a commission or concession paid by the issuer to the underwriter and/or
broker-dealer and purchases from dealers serving as market makers may include
the spread between the bid and asked price. While the Adviser (and the
Sub-Adviser) generally seeks competitive spreads or commissions, each Fund may
not necessarily pay the lowest spread or commission available on each
transaction, for reasons discussed below.

Allocation of transactions to dealers is determined by the Adviser (or the
Sub-Adviser) in their best judgment and in a manner deemed fair and reasonable
to shareholders. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price. Subject to this consideration,
dealers who provide supplemental investment research to the Adviser (or the
Sub-Adviser) may receive orders for transactions by the Victory Portfolios.
Information so received is in addition to and not in lieu of services required
to be performed by the Adviser (or the Sub-Adviser) and does not reduce the
investment advisory fees payable to the Adviser by the Funds. Such information
may be useful to the Adviser (or the Sub-Adviser) in serving both the Victory
Portfolios and other clients and, conversely, such supplemental research
information obtained by the placement of orders on behalf of other clients may
be useful to the Adviser (or the Sub-Adviser) in carrying out its obligations to
the Victory Portfolios. The Trustees have authorized the allocation of brokerage
to affiliated broker-dealers on an agency basis to effect portfolio
transactions. The Trustees have adopted procedures incorporating the standards
of Rule 17e-1 of the 1940 Act, which require that the commission paid to
affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." At times, the Funds may also purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Funds.

ALL FUNDS. The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with the Adviser, the
Sub-Adviser, Key Trust Company of Ohio, N.A. ("Key Trust") or their affiliates,
or BISYS or its affiliates, and will not give preference to Key Trust's
correspondent banks or affiliates, or BISYS with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.

- 102 -

<PAGE>

Investment decisions for each Fund are made independently from those made for
the other Funds of the Victory Portfolios or any other investment company or
account managed by the Adviser (or the Sub-Adviser). Such other investment
companies or accounts may also invest in the securities in which the Funds
invest, and the Funds may invest in similar securities. When a purchase or sale
of the same security is made at substantially the same time on behalf of a Fund
and any other Fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser (or the Sub-Adviser) believes to be equitable to such
Funds, investment company or account. In some instances, this investment
procedure may affect the price paid or received by a Fund or the size of the
position obtained by the Fund in an adverse manner relative to the result that
would have been obtained if only that particular Fund had participated in or
been allocated such trades. To the extent permitted by law, the Adviser (or the
Sub-Adviser) may aggregate the securities to be sold or purchased for a Fund
with those to be sold or purchased for the other funds of the Victory Portfolios
or for other investment companies or accounts in order to obtain best execution.
In making investment recommendations for the Victory Portfolios, the Adviser
(and the Sub-Adviser) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
the Adviser (or the Sub-Adviser), their parents or subsidiaries or affiliates
and, in dealing with their commercial customers, the Advisers (or the
Sub-Adviser), their parents, subsidiaries, and affiliates will not inquire or
take into consideration whether securities of such customers are held by the
Victory Portfolios.

Brokerage commissions paid by each of the Funds listed below were as follows for
the fiscal years ended October 31, 1997, 1996 and 1995.

1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $212,666.31 $190,526.34 $125,079
- ------------------------------------------------------------------------------------------------
Diversified Stock Fund 906,124.85 881,427.50 615,260
- ------------------------------------------------------------------------------------------------
Financial Reserves Fund -- -- --
- ------------------------------------------------------------------------------------------------
Fund For Income -- 1,250.00 0
- ------------------------------------------------------------------------------------------------
Government Mortgage Fund -- 542.84 0
- ------------------------------------------------------------------------------------------------
Growth Fund 68,970.96 97,820.00 147,798
- ------------------------------------------------------------------------------------------------
Institutional Money Market Fund -- -- --
- ------------------------------------------------------------------------------------------------
Intermediate Income Fund 3,242.20 61,811.73 1,500
- ------------------------------------------------------------------------------------------------
International Growth Fund 1,103,488.08 -- 333,609
- ------------------------------------------------------------------------------------------------
Investment Quality Bond Fund 1,734.39 12,889.90 1,800
- ------------------------------------------------------------------------------------------------
Lakefront Fund 2,513.90 -- --
- ------------------------------------------------------------------------------------------------
Limited Term Income Fund 468.75 8,580.94 0
- ------------------------------------------------------------------------------------------------
National Municipal Bond Fund -- -- --
- ------------------------------------------------------------------------------------------------
New York Tax-Free Fund -- 0 0
- ------------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund -- 0 0
- ------------------------------------------------------------------------------------------------
Ohio Municipal Money Market Fund -- -- --
- ------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund 21,805.75 6,597.60 15,420
- ------------------------------------------------------------------------------------------------
Prime Obligations Fund -- -- --
- ------------------------------------------------------------------------------------------------
Real Estate Investment Fund -- -- --
- ------------------------------------------------------------------------------------------------
Special Growth Fund 238,533.30 176,980.29 99,980
- ------------------------------------------------------------------------------------------------
Special Value Fund 428,514.23 431,541.97 224,350
- ------------------------------------------------------------------------------------------------
Stock Index Fund 43,190.22 27,553.63 24,243
- ------------------------------------------------------------------------------------------------
Tax-Free Money Market Fund -- -- --
- ------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund -- -- --
- ------------------------------------------------------------------------------------------------
Value Fund 218,946.60 225,799.21 218,770

</TABLE>

- 103 -

<PAGE>

PORTFOLIO TURNOVER.

The turnover rate stated in the Prospectus for a Fund's investment portfolio is
calculated by dividing the lesser of a Fund's purchases or sales of portfolio
securities for the year by the monthly average value of the portfolio
securities. The calculation excludes all securities whose maturities, at the
time of acquisition, were one year or less. The portfolio turnover rates for
each of the Funds listed below were as follows for the fiscal years ended
October 31, 1997 and 1996.

Fund 1997 1996
- ---- ---- ----

<S> <C> <C>
Balanced Fund (a) 109% 80%(b)
Diversified Stock Fund (a) 63% 94%(b)
Fund for Income 26% 25%
Government Mortgage Fund 115% 127%
Growth Fund 21% 27%
Intermediate Income Fund 195% 164%
International Growth Fund (a) 116% 178%(b)
Investment Quality Bond Fund 249% 182%
Lakefront Fund 36% N/A
Limited Term Income Fund 139% 221%
National Municipal Bond Fund (a) 154% 143%

New York Tax-Free Fund (a) 11% 0%
Ohio Municipal Bond Fund 74% 81%
Ohio Regional Stock Fund (a) 8% 6%(b)
Real Estate Invesment Fund 21% N/A
Special Growth Fund (a) 195% 152%

Special Value Fund (a) 39% 55%(b)
Stock Index Fund 11% 4%
Value Fund 26% 28%

</TABLE>

(a) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(b) For year ended October 31, 1996 for Class A shares and for the period March
1, 1996 through October 31, 1996 for Class B shares.

ADMINISTRATOR.

BISYS Fund Services Limited Partnership (d/b/a BISYS Fund Services) ("BISYS" or
the "Administrator") serves as administrator to the Funds pursuant to an
administration agreement dated October 1, 1997 (the "Administration Agreement").
The Administrator assists in supervising all operations of the Funds (other than
those performed by the Adviser or the Sub-Adviser under the Investment Advisory
Agreement and Investment Sub-Advisory Agreement), subject to the supervision of
the Board of Trustees.

For the services rendered to the Funds and related expenses borne by BISYS as
Administrator, each Fund pays BISYS an annual fee, computed daily and paid
monthly, at the following annual rates based on each Fund's average daily net
assets:

- 104 -

<PAGE>

.15% for portfolio assets of $300 million and less,
.12% for the next $300 million through $600 million of portfolio assets; and
.10% for portfolio assets greater than $600 million.

BISYS may periodically waive all or a portion of its fee with respect to any
Fund in order to increase the net income of one or more of the Funds available
for distribution to shareholders.

Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund for a period of two years, and for consecutive one-year terms
thereafter, provided that such continuance is ratified at least annually by the
Trustees or by vote of a majority of the outstanding shares of each Fund, and in
either case by a majority of the Trustees who are not parties to the
Administration Agreement or interested persons (as defined in the 1940 Act) of
any party to the Administration Agreement, by votes cast in person at a meeting
called for such purpose.

The Administration Agreement provides that BISYS shall not be liable for any
error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.

Under the Administration Agreement, BISYS assists in each Fund's administration
and operation, including providing statistical and research data, clerical
services, internal compliance and various other administrative services,
including among other responsibilities, forwarding certain purchase and
redemption requests to the Transfer Agent, participation in the updating of the
prospectus, coordinating the preparation, filing, printing and dissemination of
reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, BISYS may delegate all or any part of its
responsibilities thereunder.

The following chart reflects the aggregate administration fees earned after fee
reductions by the Administrator in connection with the sale of shares of each
Fund for the fiscal years ended October 31, 1997, 1996 and 1995.

1997 1996 1995
Administration Fee Administration Fee Administration Fee
Fees Reductions Fees Reductions Fees Reductions
---- ---------- ---- ---------- ---- ----------

<S> <C> <C> <C> <C> <C> <C>
Balanced Fund...................... $472,961 $0 $357,125 $0 $246,993 $303
Diversified Stock Fund............. 1,034,997 0 678,848 60,602 490,419 1,612
Financial Reserves Fund............ 1,209,552 0 1,196,089 0 1,063,114 472
Fund for Income.................... 11,799 17,707 13,292 19,833 27,624 9,681
Government Mortgage Fund........... 169,697 0 195,013 0 215,665 0
Growth Fund........................ 256,459 0 187,857 0 63,251 48,168
Institutional Money Market
Fund (a)......................... 340,471 1,156,193 464,863 696,881 134,232 257,028
Intermediate Income Fund........... 392,489 0 314,921 0 203,344 194
International Growth Fund.......... 179,643 0 171,154 0 138,965 0
Investment Quality Bond Fund....... 240,312 0 205,210 0 157,427 0
Lakefront Fund..................... 1,045 0 N/A N/A N/A N/A
Limited Term Income Fund........... 130,222 0 216,263 0 220,396 0
National Municipal Bond
Fund(b)............................ 65,363(b) 0 20,352 35,877 1,046 6,080
New York Tax-Free Bond............. 10,626 15,949 9,888 14,823 18,436 7,104
Ohio Municipal Bond Fund........... 114,083 0 100,340 0 86,670 10
Ohio Municipal Money Market
Fund............................. 548,673(c) 375,708 851,457 0 (c) (c)
Ohio Regional Stock Fund........... 75,046 0 64,609 0 53,484 21

- 105 -

<PAGE>

Prime Obligations Fund............. 790,839 0 697,897 0 817,341 0
Real Estate Investment Fund........ 0 2,320 N/A N/A N/A N/A
Special Growth Fund................ 138,080 0 112,578 0 33,202 32,831
Special Value Fund................. 525,357 0 356,371 0 231,340 1,000
Stock Index Fund................... 0 567,979 0 329,746 0 171,000
Tax-Free Money Market Fund......... 562,890 0 446,706 35,290 370,209 0
U.S. Government Obligations
Fund............................. 2,258,117 0 1,803,685 0 780,808 88,000
Value Fund......................... 654,663 0 516,120 0 387,398 0
</TABLE>

(a) Fiscal year ended October 31, 1996 and 1997; fiscal period ended October
31, 1995; fiscal year ended April 30, 1995; respectively.

(b) Fiscal year ended October 31, 1996 and 1997; fiscal period ended October
31, 1994 and fiscal year ended April 30, 1995; and fiscal period February
3, 1994 (commencement of operations) to April 30, 1994, respectively. For
the fiscal year ended April 30, 1995, the Fund paid administration fees of
$926 of which Fidelity Distributors Corporation received $717 and Concord
Holding Corporation received $209. During the same period, fees and
expenses of $83,748 were reimbursed to the Predecessor Fund. (c) For the
two month period ended October 31, 1995, Concord Holding Corporation earned
an administration fee of $129,644 after $0 in voluntary fee waivers. For
the period June 5, 1995 to August 31, 1995, Concord Holding Corporation
earned administration fees of $165,282 from the Fund after voluntary fees
waived of $4,709. Prior to that, from August 31, 1994 to June 4, 1995,
Primary Fund Service Corporation earned $433,288 from the Fund after
voluntary fees waived of $500.

Distributor.

BISYS Fund Services serves as distributor (the "Distributor") for the continuous
offering of the shares of the Funds pursuant to a Distribution Agreement between
the Distributor and the Victory Portfolios. Unless otherwise terminated, the
Distribution Agreement will remain in effect with respect to each Fund for two
years, and thereafter for consecutive one-year terms, provided that it is
approved at least annually (1) by the Trustees or by the vote of a majority of
the outstanding shares of each Fund, and (2) by the vote of a majority of the
Trustees of the Victory Portfolios who are not parties to the Distribution
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreement
will terminate in the event of its assignment, as defined under the 1940 Act.

The following chart reflects the total underwriting commissions earned and the
amount of those commissions retained by the Distributor in connection with the
sale of shares of each Fund for the fiscal years ended October 31, 1997, 1996
and 1995.

- 106 -

<PAGE>

<TABLE>
<CAPTION>
1997 1996 1995
Underwriting Amount Underwriting Amount Underwriting Amount
Commissions Retained Commissions Retained Commission Retained

<S> <C> <C> <C> <C> <C> <C>
Balanced Fund....................... $96,700 $4,600 $63,000 $60,000 (a) (a)
Diversified Stock Fund.............. 1,412,000 448,000 452,000 430,000 (a) (a)
Financial Reserves Fund............. 0 0 - - (a) (a)
Fund for Income..................... 13,800 3,600 18,000 17,000 (a) (a)
Government Mortgage Fund............ 17,200 2,000 2,000 2,000 (a) (a)
Growth Fund......................... 15,300 2,200 1,000 1,000 (a) (a)
Institutional Money Market Fund..... 0 0 - - (a) (a)
Intermediate Income Fund............ 2,600 300 2,000 2,000 (a) (a)
International Growth Fund........... 11,600 1,300 17,000 17,000 (a) (a)
Investment Quality Bond Fund........ 15,700 2,200 6,000 6,000 (a) (a)
Lakefront Fund . . . . . . . . . .. 3,000 500 - - - -
Limited Term Income Fund............ 400 100 3,000 3,000 (a) (a)
National Municipal Bond Fund........ 30,200 1,300 31,000 31,000 (a) (a)
New York Tax-Free Bond.............. 51,300 3,900 43,000 39,000 (a) (a)
Ohio Municipal Bond Fund............ 26,000 3,500 20,000 20,000 (a) (a)
Ohio Municipal Money Market
Fund.............................. 0 0 - - (a) (a)
Ohio Regional Stock Fund............ 19,800 1,500 21,000 21,000 (a) (a)
Prime Obligations Fund.............. 0 0 - - (a) (a)
Real Estate Investment Fund . .. 16,600 2,300 - - - -
Special Growth Fund................. 18,200 2,800 2,000 2,000 (a) (a)
Special Value Fund.................. 76,000 4,600 22,000 11,000 (a) (a)
Stock Index Fund.................... 91,700 12,800 9,000 9,000 (a) (a)
Tax-Free Money Market Fund.......... 0 0 - - (a) (a)
U.S. Government Obligations
Fund............................. 0 0 - - (a) (a)
Value Fund.......................... 12,800 2,000 1,000 1,000 (a) (a)
</TABLE>

(a) In 1995, the amount of underwriting commissions and the amount retained
for the entire Fund Complex was $721,000 and $107,000, respectively.

TRANSFER AGENT.

State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. ("BFDS") serves as the
dividend disbursing agent and shareholder servicing agent for the Funds,
pursuant to a Transfer Agency and Service Agreement. Under its agreement with
the Victory Portfolios, State Street has agreed (1) to issue and redeem shares
of the Victory Portfolios; (2) to address and mail all communications by the
Victory Portfolios to its shareholders, including reports to shareholders,
dividend and distribution notices, and proxy material for its meetings of
shareholders; (3) to respond to correspondence or inquiries by shareholders and
others relating to its duties; (4) to maintain shareholder accounts and certain
sub-accounts; and (5) to make periodic reports to the Trustees concerning the
Victory Portfolios' operations.

SHAREHOLDER SERVICING PLAN.

Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser and Sub-Adviser) are for
administrative support services to customers who may from time to time
beneficially own shares, which services may include: (1) aggregating and
processing purchase and redemption requests for shares from customers and
transmitting promptly net purchase and redemption orders to our distributor

- 107 -

<PAGE>

or transfer agent; (2) providing customers with a service that invests the
assets of their accounts in shares pursuant to specific or pre-authorized
instructions; (3) processing dividend and distribution payments on behalf of
customers; (4) providing information periodically to customers showing their
positions in shares; (5) arranging for bank wires; (6) responding to customer
inquiries; (7) providing subaccounting with respect to shares beneficially owned
by customers or providing the information to the Funds as necessary for
subaccounting; (8) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (9)
forwarding to customers proxy statements and proxies containing any proposals
which require a shareholder vote; and (10) providing such other similar services
as we may reasonably request to the extent you are permitted to do so under
applicable statutes, rules or regulations.

OTHER SERVICING PLANS.

In connection with certain servicing plans, the Funds had made certain
commitments that provide: (i) for one or more brokers to accept on the Funds'
behalf, purchase and redemption orders; (ii) authorize such brokers to designate
other intermediaries to accept purchase and redemption orders on the Funds'
behalf; (iii) that the Funds will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order; and (iv) that customer orders will be
priced at the Funds' Net Asset Value next computed after they are accepted by an
authorized broker or the broker's authorized designee.

DISTRIBUTION AND SERVICE PLAN.

The Victory Portfolios, on behalf of the Financial Reserves Fund, Fund for
Income, Institutional Money Market Fund (Investor Class and Select Class),
Lakefront Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Money Market Fund, Real Estate Investment Fund, and U.S. Obligations
Fund (Investor Shares) has adopted a Distribution and Service Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b- 1"). Rule 12b-1
provides in substance that a mutual fund may not engage directly or indirectly
in financing any activity that is primarily intended to result in the sale of
shares of such mutual fund except pursuant to a plan adopted by the fund under
Rule 12b-1. The Board of Trustees has adopted the Plan to allow the Adviser, the
Sub-Adviser and the Distributor to incur certain expenses that might be
considered to constitute indirect payment by the Funds of distribution expenses.
Under the Plan, if a payment to the Advisers or the Sub-Adviser of management
fees or to the Distributor of administrative fees should be deemed to be
indirect financing by the Victory Portfolios of the distribution of their
shares, such payment is authorized by the Plan.

The Plan specifically recognizes that the Adviser, the Sub-Adviser or the
Distributor, directly or through an affiliate, may use its fee revenue, past
profits, or other resources, without limitation, to pay promotional and
administrative expenses in connection with the offer and sale of shares of the
Funds. In addition, the Plan provides that the Adviser, the Sub-Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' shares,
or to third parties, including banks, that render shareholder support services.

The Plan has been approved by the Board of Trustees. As required by the Rule,
the Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders. In particular, the Trustees noted that the Plan does not authorize
payments by the Funds other than the advisory and administrative fees authorized
under the investment advisory and administration agreements. To the extent that
the Plan gives the Adviser, the Sub-Adviser or the Distributor greater
flexibility in connection with the distribution of shares of the Funds,
additional sales of the Funds' shares may result. Additionally, certain
shareholder support services may be provided more effectively under the Plan by
local entities with whom shareholders have other relationships.

CLASS B SHARES DISTRIBUTION PLAN.

The Victory Portfolios has adopted a Distribution Plan for Class B shares of the
Balanced Fund, Diversified Stock Fund, International Growth Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Regional Stock Fund and
Special Value Fund under the Rule. The Distribution Plan adopted by the Trustees
with respect to the Class B shares of the Funds provides that each Fund will pay
the Distributor a distribution fee under the Distribution Plan at the annual
rate of 0.75% of the average daily net assets of the Fund attributable to the
Class B shares. The distribution fees may be used by the Distributor for: (a)
costs of printing and distributing each Fund's prospectus, statement of
additional information and reports to prospective investors in the Funds; (b)
costs involved in preparing, printing and distributing sales literature
pertaining to the Funds; (c) an allocation of overhead and other branch office

- 108 -

<PAGE>

distribution-related expenses of the Distributor; (d) payments to persons who
provide support services in connection with the distribution of each Fund's
Class B shares, including but not limited to, office space and equipment,
telephone facilities, answering routine inquiries regarding the Funds,
processing shareholder transactions and providing any other shareholder services
not otherwise provided by the Victory Portfolios' transfer agent; (e) accruals
for interest on the amount of the foregoing expenses that exceed the
distribution fee and the CDSCs received by the Distributor; and (f) any other
expense primarily intended to result in the sale of the Funds' Class B shares,
including, without limitation, payments to salesmen and selling dealers at the
time of the sale of Class B shares, if applicable, and continuing fees to each
such salesmen and selling dealers, which fee shall begin to accrue immediately
after the sale of such shares.

The amount of the distribution fees payable by any Fund under the Distribution
Plan is not related directly to expenses incurred by the Distributor and the
Distribution Plan does not obligate the Funds to reimburse the Distributor for
such expenses. The distribution fees set forth in the Distribution Plan will be
paid by each Fund to the Distributor unless and until the Distribution Plan is
terminated or not renewed with respect to such Fund; any distribution or service
expenses incurred by the Distributor on behalf of the Funds in excess of
payments of the distribution fees specified above which the Distributor has
accrued through the termination date are the sole responsibility and liability
of the Distributor and not an obligation of the Funds.

The Distribution Plan for the Class B shares specifically recognizes that either
the Adviser or the Distributor, directly or through an affiliate, may use its
fee revenue, past profits, or other resources, without limitation, to pay
promotional and administrative expenses in connection with the offer and sale of
shares of the Funds. In addition, the Plan provides that the Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' Class B
shares, or to third parties, including banks, that render shareholder support
services.

The Distribution Plan was approved by the Trustees, including the independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the
Trustees carefully considered all pertinent factors relating to the
implementation of the Distribution Plan prior to its approval, and have
determined that there is a reasonable likelihood that the Distribution Plan will
benefit the Funds and their Class B shareholders. To the extent that the
Distribution Plan gives the Advisers or the Distributor greater flexibility in
connection with the distribution of Class B shares of the Funds, additional
sales of the Funds' Class B shares may result. Additionally, certain Class B
shareholder support services may be provided more effectively under the
Distribution Plan by local entities with whom shareholders have other
relationships.

FUND ACCOUNTANT.

BISYS Fund Services Ohio, Inc. ("BISYS, Inc.") serves as fund accountant for the
all of the Funds pursuant to a fund accounting agreement with the Victory
Portfolios dated May 31, 1995 (the "Fund Accounting Agreement"). As fund
accountant for the Victory Portfolios, BISYS, Inc. calculates each Fund's net
asset value, the dividend and capital gain distribution, if any, and the yield.
BISYS, Inc. also provides a current security position report, a summary report
of transactions and pending maturities, a current cash position report, and
maintains the general ledger accounting records for the Funds. Under the Fund
Accounting Agreement, BISYS, Inc. is entitled to receive annual fees of .03% of
the first $100 million of the Fund's daily average net assets, .02% of the next
$100 million of the Fund's daily average net assets, and .01% of the Fund's
remaining daily average net assets. These annual fees are subject to a minimum
monthly assets charge of $2,500 per taxable fund, $2,917 per tax-free fund and
$3,333 per international fund and does not include out-of-pocket expenses or
multiple class charges of $833 per month assessed for each class of shares after
the first class.

For the fiscal years ended October 31, 1997, 1996, and 1995 the Fund accountant
earned the following fund accounting fees of:

- 109 -

<PAGE>

FUND 1997 1996 1995
- ---- ---- ---- ----

<S> <C> <C> <C>
Balanced Fund $89,610 $93,776 $87,894
Diversified Stock Fund 119,767 159,249 141,598
Financial Reserves Fund 88,998 78,188 100,934
Fund for Income 48,449 57,144 32,288
Government Mortgage Fund 38,396 50,487 83,080
Growth Fund 51,705 35,364 49,945
Institutional Money Market Fund(a) 102,437 86,455 50,238

Intermediate Income Fund 67,260 61,867 71,451
International Growth Fund 70,707 90,570 121,305
Investment Quality Bond Fund 57,053 52,699 70,983
Lakefront Fund 24,280 N/A N/A
Limited Term Income Fund 33,524 39,040 89,012
National Municipal Bond Fund(b) 57,061 65,000 24,041

New York Tax-Free Fund 49,575 51,388 48,533
Ohio Municipal Bond Fund 46,445 51,845 43,204
Ohio Municipal Money Market Fund 99,579 65,058 13,370/
30,071(c)
Ohio Regional Stock Fund 45,783 51,094 30,563
Prime Obligations Fund 92,710 85,261 260,571
Real Estate Investment Fund 15,520 N/A N/A
Special Growth Fund 39,041 57,804 20,897
Special Value Fund 87,704 79,170 75,514
Stock Index Fund 120,844 87,027 22,715
Tax-Free Money Market Fund 79,661 107,911 112,625
U.S. Government Obligation Fund 97,657 85,062 243,249
Value Fund 83,739 71,046 124,400
</TABLE>

(a) Fiscal period ended October 31, 1996; fiscal period ended October 31, 1995;
fiscal year ended April 30, 1995 and April 30, 1994; respectively.
(b) Fiscal year ended October 31, 1996; fiscal period ended October 31, 1995
and fiscal year ended April 30, 1995; and fiscal period February 3, 1994
(commencement of operations) to April 30, 1994, respectively.
(c) For the period ended October 31, 1995 and the period from June 5, 1995
through August 31, 1995.

Key Asset Management Inc. served as fund accountant for the Real Estate
Investment Fund until October 13, 1997.

- 110 -

<PAGE>

CUSTODIAN.

Cash and securities owned by each of the Victory Portfolios are held by Key
Trust as custodian pursuant to a Custodian Agreement dated August 1, 1996. Cash
and securities owned by the Funds are also held by Morgan Stanley Trust Company
("Morgan Stanley") as sub-custodian, and certain foreign sub-custodians,
pursuant to a Sub-Custody Agreement. Under these Agreements, Key Trust and
Morgan Stanley each (1) maintains a separate account or accounts in the name of
each respective fund; (2) makes receipts and disbursements of money on behalf of
each Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning The Victory Portfolios' operations. Key Trust
may, with the approval of a fund and at the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of a fund, provided that
Key Trust shall remain liable for the performance of all of its duties under the
Custodian Agreement.

INDEPENDENT ACCOUNTANTS.

The audited financial statements of the Victory Portfolios for the fiscal year
ended October 31, 1997 are incorporated by reference herein. The financial
statements for the fiscal year ended October 31, 1997 have been audited by
Coopers & Lybrand L.L.P. as set forth in their report incorporated by reference
herein, and are included in reliance upon such report and on the authority of
such firm as experts in auditing and accounting. Coopers & Lybrand L.L.P. serves
as The Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s address is 100
East Broad Street, Columbus, Ohio 43215.

LEGAL COUNSEL.

Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to the Victory Portfolios.

EXPENSES.

The Funds bear the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, SEC fees, state
securities qualification fees, costs of preparing and printing prospectuses for
regulatory purposes and for distribution to current shareholders, outside
auditing and legal expenses, advisory and administration fees, fees and
out-of-pocket expenses of the custodian and transfer agent, certain insurance
premiums, costs of maintenance of the fund's existence, costs of shareholders'
reports and meetings, and any extraordinary expenses incurred in the Funds'
operation.

ADDITIONAL INFORMATION

DESCRIPTION OF SHARES.

The Victory Portfolios (sometimes referred to as the "Trust") is a Delaware
business trust. The Delaware Trust Instrument authorizes the Trustees to issue
an unlimited number of shares, which are units of beneficial interest, without
par value. The Victory Portfolios presently has 30 series of shares, which
represent interests in the following funds and their respective classes, if any:

Balanced Fund
Class A Shares
Class B Shares
Diversified Stock Fund

Class A Shares

- 111 -

<PAGE>

Class B Shares

Financial Reserves Fund
Fund For Income
Government Mortgage Fund
Growth Fund
Institutional Money Market Fund
Select Shares
Investor Shares
Intermediate Income Fund
International Growth Fund
Class A Shares
Class B Shares
Investment Quality Bond Fund
Lakefront Fund

Limited Term Income Fund
National Municipal Bond Fund

Class A Shares
Class B Shares
New York Tax-Free Fund
Class A Shares
Class B Shares
Ohio Municipal Bond Fund
Ohio Municipal Money Market Fund
Ohio Regional Stock Fund
Class A Shares
Class B Shares
Prime Obligations Fund
Real Estate Investment Fund
Special Growth Fund
Special Value Fund
Class A Shares
Class B Shares
Stock Index Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
Select Shares
Investor Shares
Value Fund

The Victory Portfolios' Trust Instrument authorizes the Trustees to divide or
redivide any unissued shares of the Victory Portfolios into one or more
additional series by setting or changing in any one or more aspects their
respective preferences, conversion or other rights, voting power, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.

- 112 -

<PAGE>

Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectus and this Statement of Additional
Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of a fund are entitled to receive the assets available for
distribution belonging to the fund, and a proportionate distribution, based upon
the relative asset values of the respective funds, of any general assets not
belonging to any particular fund which are available for distribution.

To the best knowledge of the Victory Portfolios, the names and addresses of the
holders of 5% or more of the outstanding shares of each class of the Funds'
equity securities as of January 30, 1998, and the percentage of the outstanding
shares held by such holders are set forth below:

=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCED FUND- SNBOC and Company 96.9% -
CLASS A SHARES 4900 Tiedeman Road
Cleveland, Ohio 44144
- -----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED STOCK FUND - SNBOC and Company 83.7% -
CLASS A SHARES 4900 Tiedeman Road
Cleveland, Ohio 44144
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL RESERVES FUND SNBOC and Company 93.8% -
4900 Tiedeman Road
Cleveland, Ohio 44144
- -----------------------------------------------------------------------------------------------------------------------------
FUND FOR INCOME Key Trust of Cleveland 16.1% -
4900 Tiedeman Road
Cleveland, Ohio 44144
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT MORTGAGE SNBOC and Company 95.5% -
FUND 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH FUND SNBOC and Company 95.4% -
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL MONEY BISYS Fund Services Ohio Inc. 98.5% -
MARKET FUND-SELECT Attn: Iris Young
CLASS 3435 Steltzer Rd.
Columbus, Ohio 43219-3035
- -----------------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS Liefke & Co. 67.6% -
c/o KeyCorp Trust Services
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Investment Products 8.14% -
127 Public Square
Cleveland, Ohio 44114
- -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 17.7% -
4900 Tiedeman Road
Cleveland, Ohio 44144
- -----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE INCOME SNBOC and Company 98.5% -
FUND 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH SNBOC and Company 95.6% -
FUND-CLASS A 4900 Tiedeman Road
Cleveland, Ohio 44144
=============================================================================================================================
</TABLE>

- 113 -
<PAGE>

<TABLE>
<CAPTION>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS B IRA of Jerry L. Ufford 16.7% 16.7%
22315 Berry Drive
Rocky River, OH 44116
- -----------------------------------------------------------------------------------------------------------------------------
Bruce R. McBroom 5.6% 5.6%
Phyllis E. McBroom
7628 Collins St.
Lowville, NY 13367
- -----------------------------------------------------------------------------------------------------------------------------
A. Buell Arnold 7.7% 7.7%
Doris B. Arnold Trustees
Arnold Family Trust
12 Bartlett Lane
Delmar, NY 12054
- -----------------------------------------------------------------------------------------------------------------------------
Josephine E. Marx 5.5% 5.5%
1 Scott Place
Schenectady, NY 12309
- -----------------------------------------------------------------------------------------------------------------------------
Brandon Bradley 8.1% 8.1%
Box 398
Route 37
Hogansburg, NY 13655
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT QUALITY BOND SNBOC and Company 77.6% -
FUND 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
LAKEFRONT FUND SNBOC and Company 48.9% -
4900 Tiedman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. - 8.9%
IRA Rollover of C. Maxwell
20563 Rock Hall Avenue
Rock Hall, MD 21661
- -----------------------------------------------------------------------------------------------------------------------------
BISYS Fund Services - 27.1%
3435 Stelzer Road
Columbus, OH 43219
- -----------------------------------------------------------------------------------------------------------------------------
LIMITED TERM INCOME SNBOC and Company 97.4% -
FUND 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
NATIONAL MUNICIPAL BOND Key Trust of Cleveland 18.7% -
FUND-CLASS A SHARES 4900 Tiedeman Road
Cleveland, Ohio 44144
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES El Matador Inc. 9.5% 9.5%
2564 Ogden Avenue
Ogden, UT 84401
=============================================================================================================================
</TABLE>

- 114 -
<PAGE>

<TABLE>
<CAPTION>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Key Bank of Maine, Escrow Agent 13.3% 13.3%
for Robert, Geraldine and Janet Sylvester
and GFS ND Manufacturing Co.
1 Canal Plaza
Portland, ME 04101
- -----------------------------------------------------------------------------------------------------------------------------
Marden Spencer 6.2% 6.2%
958 E. Olympus Park Dr., #A102
Salt Lake City, UT 84117
- -----------------------------------------------------------------------------------------------------------------------------
Ethel F. Robinson 9.6% 9.6%
2716 100th SE
Everett, WA 98208-4338
- -----------------------------------------------------------------------------------------------------------------------------
NEW YORK TAX-FREE Key Trust of Cleveland 11.5% -
FUND-CLASS A SHARES 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
Philip Morris Companies Inc. - 10.2%
100 Park Avenue - 10th Fl.
New York, NY 10017
- -----------------------------------------------------------------------------------------------------------------------------
SBSF Funds Inc. - 6.2%
45 Rockefeller Plaza
New York, NY 10111
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES Leon A. Philp 5.7% 5.7%
15 Budd Avenue
Clarence, NY 14031
- -----------------------------------------------------------------------------------------------------------------------------
Richard A. Dudley 17.1% 17.1%
Margaret H. Dudley JTWROS
68 Center Street
Geneseo, NY 14454
- -----------------------------------------------------------------------------------------------------------------------------
Catherine C. Lieb 5.4% 5.4%
19 Park Avenue
Dansville, NY 14437
- -----------------------------------------------------------------------------------------------------------------------------
Anna Maria Desocio 8.5% 8.5%
Colomba Desocio JTWROS
1624 Caleb Avenue
Syracuse, NY 13206
- -----------------------------------------------------------------------------------------------------------------------------
OHIO MUNICIPAL BOND SNBOC and Company 88.8% -
FUND 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
OHIO MUNICIPAL MONEY SNBOC and Company 18.3% -
MARKET FUND 4900 Tiedeman Road
Cleveland, OH 44144
=============================================================================================================================
</TABLE>

- 115 -
<PAGE>

<TABLE>
<CAPTION>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SNBOC and Company 58.6% -
2025 Ontario Street
Cleveland, OH 44115
- -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Investment Products 5.4% -
127 Public Square
Cleveland, OH 44114
- -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 8.9% -
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
OHIO REGIONAL STOCK SNBOC and Company 86.3% -
FUND - CLASS A SHARES 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES IRA of Jerry Ufford 6.8% 6.8%
22315 Berry Drive
Rocky River, OH 44116
- -----------------------------------------------------------------------------------------------------------------------------
IRA of Gerald Mencl 6.4% 6.4%
5899 Canal Road
Valley View, OH 44125
- -----------------------------------------------------------------------------------------------------------------------------
IRA of Stephen A. Worth 5.7% 5.7%
10064 Hunting Dr.
Brecksville, OH 44141
- -----------------------------------------------------------------------------------------------------------------------------
PRIME OBLIGATIONS FUND SNBOC and Company 5.0% -
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Investment Products 29.3% -
127 Public Square
Cleveland, OH 44114
- -----------------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 33.1% -
2025 Ontario Street
Cleveland, OH 44115
- -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 21.9% -
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT SNBOC and Company 71.4% -
FUND 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
SPECIAL GROWTH FUND SNBOC and Company 98.1% -
4900 Tiedeman Road
Cleveland, OH 44144
=============================================================================================================================
</TABLE>

- 116 -
<PAGE>

<TABLE>
<CAPTION>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SPECIAL VALUE FUND-CLASS SNBOC and Company 88.4% -
A SHARES 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
STOCK INDEX FUND SNBOC and Company 97.7% -
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
TAX-FREE MONEY MARKET SNBOC and Company 46.2% -
FUND 4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 40.5% -
2025 Ontario Street
Cleveland, OH 44115
- -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 7.5% -
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SNBOC and Company 18.2% -
OBLIGATIONS FUND - 4900 Tiedeman Road
SELECT SHARES Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 11.1% -
4900 Tiedeman Road
Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 31.3% -
2025 Ontario Street
Cleveland, OH 44115
- -----------------------------------------------------------------------------------------------------------------------------
Chase Manhattan Bank - 6.0%
FBO Global Trust
450 W. 33rd Street
New York, NY 10001-2603
- -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Investment Products 29.5% -
127 Public Square
Cleveland, OH 44114
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT Key Clearing Corp. 98.9% -
OBLIGATIONS FUND - 4900 Tiedeman Road
INVESTOR SHARES Cleveland, OH 44144
- -----------------------------------------------------------------------------------------------------------------------------
VALUE FUND SNBOC and Company 99.4% -
4900 Tiedeman Road
Cleveland, OH 44144
=============================================================================================================================
</TABLE>

- 117 -
<PAGE>

Shares of the Victory Portfolios are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as shareholders are
entitled to vote. Shareholders vote as a single class on all matters except (1)
when required by the 1940 Act, shares shall be voted by individual series, and
(2) when the Trustees have determined that the matter affects only the interests
of one or more series, then only shareholders of such series shall be entitled
to vote thereon. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees have been elected by the shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. A meeting shall be held for such purpose upon the written request of
the holders of not less than 10% of the outstanding shares. Upon written request
by ten or more shareholders meeting the qualifications of Section 16(c) of the
1940 Act, (i.e., persons who have been shareholders for at least six months, and
who hold shares having a net asset value of at least $25,000 or constituting 1%
of the outstanding shares) stating that such shareholders wish to communicate
with the other shareholders for the purpose of obtaining the signatures
necessary to demand a meeting to consider removal of a Trustee, The Victory
Portfolios will provide a list of shareholders or disseminate appropriate
materials (at the expense of the requesting shareholders). Except as set forth
above, the Trustees shall continue to hold office and may appoint their
successors.

Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Victory Portfolios shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each fund of the Victory Portfolios affected by the matter. For
purposes of determining whether the approval of a majority of the outstanding
shares of a fund will be required in connection with a matter, a fund will be
deemed to be affected by a matter unless it is clear that the interests of each
fund in the matter are identical, or that the matter does not affect any
interest of the fund. Under Rule 18f-2, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a fund only if approved by a majority of the outstanding shares
of such fund. However, Rule 18f-2 also provides that the ratification of
independent accountants, the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by shareholders of the
Victory Portfolios voting without regard to series.

SHAREHOLDER AND TRUSTEE LIABILITY.

The Victory Portfolios is organized as a Delaware business trust. The Delaware
Business Trust Act provides that a shareholder of a Delaware business trust
shall be entitled to the same limitation of personal liability extended to
shareholders of Delaware corporations, and the Delaware Trust Instrument
provides that shareholders of the Victory Portfolios shall not be liable for the
obligations of the Victory Portfolios. The Delaware Trust Instrument also
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his or her being or having been a
shareholder. The Delaware Trust Instrument also provides that the Victory

- 118 -
<PAGE>

Portfolios shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Victory Portfolios, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.

The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Victory Portfolios shall be personally liable in connection with the
administration or preservation of the assets of the funds or the conduct of the
Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.

MISCELLANEOUS.

As used in the Prospectus and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Victory
Portfolios upon the issuance or sale of shares of a Fund, together with all
income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange, or liquidation of such
investments, and any funds or payments derived from any reinvestment of such
proceeds and any general assets of the Victory Portfolios, which general
liabilities and expenses are not readily identified as belonging to a particular
Fund that are allocated to that Fund by the Trustees. The Trustees may allocate
such general assets in any manner they deem fair and equitable. It is
anticipated that the factor that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of each respective fund at the time of
allocation. Assets belonging to a particular Fund are charged with the direct
liabilities and expenses in respect of that Fund, and with a share of the
general liabilities and expenses of each of the Funds not readily identified as
belonging to a particular Fund, which are allocated to each Fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees and will be in accordance with generally
accepted accounting principles. Determinations by the Trustees as to the timing
of the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.

As used in the Prospectus and in this SAI, a "vote of a majority of the
outstanding shares" of the Fund means the affirmative vote of the lesser of (a)
67% or more of the shares of the Fund present at a meeting at which the holders
of more than 50% of the outstanding shares of the Fund are represented in person
or by proxy, or (b) more than 50% of the outstanding shares of the Fund.

The Victory Portfolios is registered with the SEC as an open-end management
investment company. Such registration does not involve supervision by the SEC of
the management or policies of the Victory Portfolios.

The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee.

The 1997 Annual Report to shareholders of The Victory Portfolios is incorporated
herein in its entirety. This report includes the financial statements for the
fiscal year ended October 31, 1997. The opinion in the Annual Report of Coopers
& Lybrand L.L.P., independent accountants, is incorporated herein in its
entirety to such Annual Report, and such financial statements are incorporated
in their entirety.

THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT AN OFFERING
OF THE SECURITIES DESCRIBED IN THESE DOCUMENTS IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE. NO SALESMAN, DEALER, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE
CONTAINED IN THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION.

- 119 -
<PAGE>

APPENDIX
DESCRIPTION OF SECURITY RATINGS.

The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser or the Sub-Adviser with regard to
portfolio investments for the Funds include Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited and its
affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by the Adviser or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.

LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).

Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):

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

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

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

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

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

Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):

AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

- 120 -
<PAGE>

BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.

Description of the three highest long-term debt ratings by Duff:

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

AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.

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

Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):

AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated "[-]+."

A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

IBCA's description of its three highest long-term debt ratings:

AAA. Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions are unlikely to increase
investment risk significantly.

AA. Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly.

A. Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.

SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).

Moody's description of its three highest short-term debt ratings:

Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:

- - Leading market positions in well-established industries.

- 121 -
<PAGE>

- - High rates of return on funds employed.

- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.

- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

- - Well-established access to a range of financial markets and assured sources
of alternate liquidity.

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

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

S&P's description of its three highest short-term debt ratings:

A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).

A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."

A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):

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

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

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

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

Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.

Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.

Fitch's description of its four highest short-term debt ratings:

F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

- 122 -

<PAGE>

F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.

F-2. Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings.

F-3. Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.

IBCA's description of its three highest short-term debt ratings:

A+. Obligations supported by the highest capacity for timely repayment.

A1. Obligations supported by a very strong capacity for timely repayment.

A2. Obligations supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.

SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS

Moody's description of its two highest short-term loan/municipal note ratings:

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

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

S&P's description of its two highest municipal note ratings:

SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.

SP-2. Satisfactory capacity to pay principal and interest.

SHORT-TERM DEBT RATINGS

Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.

BankWatch Ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.

The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.

The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.

The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.

TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.

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

- 123 -
<PAGE>

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

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

DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS

Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.

Certificates of Deposit. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.

Bankers' Acceptances. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.

U.S. Treasury Obligations. U.S. Treasury Obligations are obligations issued or
guaranteed as to payment of principal and interest by the full faith and credit
of the U.S. Government. These obligations may include Treasury bills, notes and
bonds, and issues of agencies and instrumentalities of the U.S. Government,
provided such obligations are guaranteed as to payment of principal and interest
by the full faith and credit of the U.S. Government.

U.S. Government Agency and Instrumentality Obligations. Obligations issued by
agencies and instrumentalities of the U.S. Government include such agencies and
instrumentalities as the Government National Mortgage Association, the
Export-Import Bank of the United States, the Tennessee Valley Authority, the
Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated to
do so by law. A Fund will invest in the obligations of such instrumentalities
only when the investment adviser believes that the credit risk with respect to
the instrumentality is minimal.

- 124 -