TOWER MUTUAL FUNDS, 497, 1996-12-04

TOWER MUTUAL FUNDS
497, 1996-12-04

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TOWER CAPITAL APPRECIATION FUND
(A PORTFOLIO OF TOWER MUTUAL FUNDS)
CLASS B SHARES
PROSPECTUS

The shares of Tower Capital Appreciation Fund (the "Fund") represent interests
in a diversified investment portfolio of Tower Mutual Funds (the "Trust"), an
open-end management investment company (a mutual fund). The Fund invests
primarily in a diversified portfolio of common stocks.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
HIBERNIA NATIONAL BANK OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY
HIBERNIA NATIONAL BANK OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY.

INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.

This prospectus contains the information you should read and know before you
invest in Class B Shares ("Shares") of the Fund. Keep this prospectus for future
reference.

Additional information about the Fund is contained in the Trust's Statement of
Additional Information dated November 30, 1996, which has also been filed with
the Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing to the Fund or calling toll-free 1-800-999-0124. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).

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

Prospectus dated November 30, 1996

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--
CLASS A SHARES 3
- ------------------------------------------------------

GENERAL INFORMATION 4
- ------------------------------------------------------

INVESTMENT INFORMATION 4
- ------------------------------------------------------

Investment Objective 4

PORTFOLIO INVESTMENTS, STRATEGIES,
AND LIMITATIONS 5
- ------------------------------------------------------

Borrowing Money 5
Foreign Securities 5
Investing in Securities of Other
Investment Companies 6
Lending of Portfolio Securities 6
Put and Call Options 6
Financial Futures and Options
on Futures 7
Repurchase Agreements 8
Restricted and Illiquid Securities 8
Temporary Investments 9
U.S. Government Securities 9
When-Issued and Delayed Delivery
Transactions 9
Portfolio Turnover 10

TOWER MUTUAL FUNDS INFORMATION 10
- ------------------------------------------------------

Management of Tower Mutual Funds 10
Distribution of Fund Shares 11
Shareholder Servicing Arrangements 12
Fund Administration 13

BROKERAGE TRANSACTIONS 13
- ------------------------------------------------------

EXPENSES OF THE FUND AND CLASS B SHARES 13
- ------------------------------------------------------

NET ASSET VALUE 14
- ------------------------------------------------------

INVESTING IN THE FUND 14
- ------------------------------------------------------

Share Purchases 14
Minimum Investment Required 15
What Shares Cost 15
Conversion Feature 16
Systematic Investment Program 16
Exchanging Securities for Fund Shares 17
Certificates and Confirmations 17
Dividends 17
Capital Gains 17

REDEEMING SHARES 18
- ------------------------------------------------------

Systematic Withdrawal Program 19
Accounts with Low Balances 19

SHAREHOLDER INFORMATION 19
- ------------------------------------------------------

Voting Rights 19

EFFECT OF BANKING LAWS 20
- ------------------------------------------------------

TAX INFORMATION 20
- ------------------------------------------------------

Federal Income Tax 20
Other State and Local Taxes 21

OTHER CLASSES OF SHARES 21
- ------------------------------------------------------

PERFORMANCE INFORMATION 21
- ------------------------------------------------------

ADDRESSES 22
- ------------------------------------------------------

SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------

CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)............................. None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)..................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable) (1)......................................................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None
Exchange Fee.............................................................................................. None
</TABLE>

ANNUAL CLASS B SHARES OPERATING EXPENSES*
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C>
Management Fee............................................................................................ 0.75%
12b-1 Fee................................................................................................. 0.75%
Other Expenses............................................................................................ 0.51%
Shareholder Services Fee.................................................................. 0.25%
Total Class B Shares Operating Expenses......................................................... 2.01%
</TABLE>

(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter.

* The Total Class B Shares Operating Expenses in the table above are based on
expenses expected to be incurred during the fiscal year ending August 31,
1997.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE CLASS B SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "TOWER MUTUAL FUNDS INFORMATION," AND "INVESTING IN THE
FUND." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

Long-term shareholders invested in the Class B Shares may pay more than the
economic equivalent of the maximum front-end sales charges permitted under the
rules of the National Association of Securities Dealers, Inc.
<TABLE>
<S> <C> <C>
EXAMPLE 1 YEAR 3 YEARS
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period................................................... $77 $107
You would pay the following on the same investment, assuming no redemptions..................... $20 $ 63
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING AUGUST 31,
1997.

SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------

CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) (1)......................... 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)..................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)............................................................ None
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None
Exchange Fee.............................................................................................. None
</TABLE>

ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C>
Management Fee............................................................................................ 0.75%
12b-1 Fee................................................................................................. 0.25%
Other Expenses............................................................................................ 0.24%
Total Class A Shares Operating Expenses......................................................... 1.24%
</TABLE>

(1) Programs are available for reducing the front-end sales charge on purchases
of Class A Shares.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE CLASS A SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "TOWER MUTUAL FUNDS INFORMATION" AND "INVESTING IN THE
FUND." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3)
payment of the maximum sales charge of 4.50%................................ $57 $83 $110 $188
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

TOWER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated October 10, 1996 on the Fund's
financial statements is incorporated by reference to the Annual Report dated
August 31, 1996.

This table should be read in conjunction with the Fund's financial statements
and notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.09 $ 13.81 $ 14.60 $ 14.02 $ 14.35 $ 11.93 $ 12.94
- ------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------
Net investment income 0.19 0.22 0.23 0.30 0.29 0.33 0.38
- ------------------------------------------------
Net realized and unrealized gain (loss) on
investments 2.62 2.54 0.36 2.00 0.11 2.45 (0.76)
- ------------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
Total from investment operations 2.81 2.76 0.59 2.30 0.40 2.78 (0.38)
- ------------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------
Distributions from net investment income (0.19) (0.21) (0.25) (0.30) (0.27) (0.36) (0.39)
- ------------------------------------------------
Distributions in excess of net investment
income -- -- -- -- -- -- (0.02)(e)
- ------------------------------------------------
Distributions from net realized gain on
investments (0.84) (0.27) (1.13) (1.42) (0.46) -- (0.22)
- ------------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
Total distributions (1.03) (0.48) (1.38) (1.72) (0.73) (0.36) (0.63)
- ------------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 17.87 $ 16.09 $ 13.81 $ 14.60 $ 14.02 $ 14.35 $ 11.93
- ------------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (B) 18.03% 20.71% 4.27% 17.89% 2.93% 23.77% (3.11%)
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------
Expenses 1.24% 1.25% 1.09% 0.85% 0.83% 0.74% 0.42%
- ------------------------------------------------
Net investment income 1.08% 1.46% 1.67% 2.10% 1.99% 2.58% 3.06%
- ------------------------------------------------
Expense waiver (c) -- -- -- 0.18% 0.25% 0.29% 0.75%
- ------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------
Net assets, end of period (000 omitted) $169,648 $144,476 $139,081 $140,808 $73,653 $87,927 $60,448
- ------------------------------------------------
Average commission rate paid $0.0632 -- -- -- -- -- --
- ------------------------------------------------
Portfolio turnover 69% 69% 118% 127% 163% 124% 123%
- ------------------------------------------------

<CAPTION>
<S> <C>
1989(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.17
- ------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------
Net investment income 0.33
- ------------------------------------------------
Net realized and unrealized gain (loss) on
investments 2.68
- ------------------------------------------------ -----------
Total from investment operations 3.01
- ------------------------------------------------ -----------
LESS DISTRIBUTIONS
- ------------------------------------------------
Distributions from net investment income (0.24)
- ------------------------------------------------
Distributions in excess of net investment
income --
- ------------------------------------------------
Distributions from net realized gain on
investments --
- ------------------------------------------------ -----------
Total distributions (0.24)
- ------------------------------------------------ -----------
NET ASSET VALUE, END OF PERIOD $ 12.94
- ------------------------------------------------ -----------
TOTAL RETURN (B) 32.29%
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------
Expenses 0.56%(d)
- ------------------------------------------------
Net investment income 4.00%(d)
- ------------------------------------------------
Expense waiver (c) 0.83%(d)
- ------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------
Net assets, end of period (000 omitted) $48,093
- ------------------------------------------------
Average commission rate paid --
- ------------------------------------------------
Portfolio turnover 70 %
- ------------------------------------------------
</TABLE>

(a) Reflects operations for the period from October 14, 1988 (date of initial
public investment) to August 31, 1989.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Computed on an annualized basis.
(e) These distributions in excess of net investment income were a result of
certain book and tax timing differences. These distributions do not
represent a return of capital for federal tax purposes.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated April 8, 1988. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of this
prospectus, the Board of Trustees (the "Trustees") has established two classes
of shares, known as Class A Shares and Class B Shares. This prospectus relates
only to Class B Shares of the Fund. The Fund is designed for institutions and
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio primarily consisting of common
stocks.

For information on how to purchase Shares of the Fund, please refer to
"Investing in the Fund." The minimum initial investment for Class B Shares of
the Fund is $1,000. See "Minimum Investment Required."
Class B Shares are sold at net asset value. However, a contingent deferred sales
charge is imposed on certain Shares which are redeemed within six full years of
purchase. See "How to Redeem Shares."

INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide growth of capital and income.
The Fund's investment approach is based on the conviction that over the long
term the economy will continue to expand and develop and that this economic
growth will be reflected in the growth of the revenues and earnings of publicly
held corporations.

The investment objective of the Fund cannot be changed without the approval of
holders of a majority of the Fund's shares. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the investment policies described in this prospectus.

Unless indicated otherwise, the investment policies of the Fund may be changed
by the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS. The Fund attempts to achieve its investment objective by
investing primarily in a professionally managed, diversified portfolio of common
stocks. The securities in which the Fund invests include, but are not limited
to:

common stocks of companies selected by the Fund's investment adviser on
the basis of traditional research techniques, including assessment of
earnings and dividend growth prospects of the companies. Ordinarily,
these companies will be in the top 30% of their industries with regard to
revenues. However, other factors such as product position, market share,
potential earnings growth, or asset values will be considered by the
investment adviser and

may outweigh revenues. At least 65% of the Fund's portfolio will be
invested in common stocks, unless it is in a defensive position;

preferred stocks, corporate bonds, notes, warrants, rights, and
convertible securities of these companies; and

U.S. government securities.

In addition, the Fund may engage in when-issued and delayed delivery
transactions and invest in foreign securities, temporary investments, and
repurchase agreements. The Fund may also purchase put options on its portfolio
securities and on futures contracts and write call options on its portfolio
securities.

The Fund reserves the right to attempt to hedge the portfolio by entering into
financial futures contracts and to write calls on financial futures contracts.
The Fund will notify shareholders before it begins engaging in these
transactions. See "Portfolio Investments, Strategies, and Limitations."

PORTFOLIO INVESTMENTS, STRATEGIES, AND LIMITATIONS
- --------------------------------------------------------------------------------

BORROWING MONEY

The Fund will not borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a percentage of
its cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets. The Fund may pledge up to 15% of the
value of its assets to secure such borrowings. This policy cannot be changed
without the approval of holders of a majority of the Fund's shares.

FOREIGN SECURITIES

The Fund may invest in foreign securities which are traded publicly in the
United States. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investments in domestic issuers. These considerations include
the possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries, the difficulty of
obtaining or enforcing court judgments abroad, restrictions on foreign
investments in other jurisdictions, difficulties in repatriation of capital
invested abroad, and difficulties in transaction settlements and the effect of
delay on shareholder equity. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher.

The Fund's investment adviser will consider these and other factors before
investing in foreign securities and will not make such investments unless, in
its opinion, such investments will meet the Fund's standards and objective. The
Fund will only purchase securities issued in U.S. dollar denominations and will
not invest more than 15% of its total assets in foreign securities.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest in the securities of other open-end investment companies, as
well as closed-end investment companies. The Fund, however, will not own more
than 3% of the total outstanding voting stock of any investment company, invest
more than 5% of its total assets in any one investment company, or invest more
than 10% of its total assets in investment companies in general.

The Fund will purchase securities of investment companies only in open-market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, or acquisition of assets.

It should be noted that investment companies incur certain expenses, such as
management fees, and, therefore, any investment by the Fund in shares of another
investment company would be subject to such duplicate expenses. The Fund will
invest in other investment companies primarily for the purposes of investing its
short-term cash on a temporary basis. The Fund's investment adviser will waive
its investment advisory fee on assets invested in securities of other investment
companies.

LENDING OF PORTFOLIO SECURITIES

In order to generate income, the Fund may lend portfolio securities on a
short-term or long-term basis, or both, up to one-third of the value of its
total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the investment adviser has determined are
creditworthy under guidelines established by the Trustees and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned at all times. This policy cannot be
changed without the approval of holders of a majority of the Fund's shares.

There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.

PUT AND CALL OPTIONS

The Fund may engage in or reserve the right to engage in put and call options.
The Fund may purchase put and call options on its portfolio securities. These
options will be used as a hedge to attempt to protect securities which the Fund
holds or will be purchasing against decreases or increases in value. The Fund
may also write (sell) put and call options on all or any portion of its
portfolio to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which they have segregated cash
or U.S. government securities in the amount of any additional consideration. In
the case of put options, the Fund will segregate cash or U.S. Treasury
obligations with a value equal to or greater than the exercise price of the
underlying securities. The Fund will limit its purchase of options so that not
more than 20% of its net assets will be invested in option premiums. The Fund
will limit its option writing activities so that the assets underlying such
options

will not exceed 25% of its total net assets. (These limits apply to both options
on securities and options on futures contracts.)

The Fund will generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
when options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Fund's investment adviser.

Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options generally have a continuous
liquid market while over-the-counter options may not.

FINANCIAL FUTURES AND OPTIONS ON FUTURES

The Fund may engage in or reserve the right to engage in financial futures and
options on futures. The Fund may purchase and sell financial futures contracts
to hedge all or a portion of its portfolio of securities against changes in
interest rates or as a hedge to attempt to protect securities which the Fund
holds against decreases in value. For the immediate future, the Fund will enter
into futures contracts directly only when it desires to exercise a financial
futures put option in its portfolio rather than either closing out the option or
allowing it to expire. Financial futures contracts call for the delivery of
particular debt instruments issued or guaranteed by the U.S. Treasury or by
specified agencies or instrumentalities of the U.S. government at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract, and the buyer agrees to take delivery of
the instrument at the specified future time.

The Fund may write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value resulting from anticipated increases in market interest
rates. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling the futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.

The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures position and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts an amount of cash and cash equivalents equal to the underlying
commodity value of the futures contracts (less any related margin deposits) will
be deposited in a segregated account with the Fund's custodian (or the broker,
if legally permitted) to collateralize the position and thereby insure that the
use of such futures contracts is unleveraged.

RISKS. When the Fund uses financial futures and options on futures as
hedging devices, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contracts
and any related options to react differently than the portfolio securities
to market

changes. In addition, the Fund's investment adviser could be incorrect in
its expectations about the direction or extent of market factors, such as
interest rate movements. In these events, the Fund may lose money on the
futures contracts or options. When the Fund writes a call option, it
retains the risk of a market decline in the price of the underlying
security, but gives up the right to capital appreciation of that security
above the "strike price" of the option.

It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Fund's investment adviser will
consider liquidity before entering into options transactions, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.

REPURCHASE AGREEMENTS

The Fund may invest in repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers and other recognized financial
institutions sell U.S. government securities or certificates of deposit or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. The Fund or its custodian will take possession of the securities
subject to repurchase agreements and these securities will be marked to market
daily.

To the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.

RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest up to 10% of its total assets in restricted securities.
Certain restricted securities which the Trustees deem to be liquid will be
excluded from this limitation. The restriction is not applicable to commercial
paper issued under Section 4(2) of the Securities Act of 1933. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies but which are subject to restriction on
resale under federal securities law.

The Fund will limit investments in illiquid securities (including, as
applicable, certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, repurchase agreements providing for
settlement in more than seven days after notice, and over-the-counter options)
to 15% of its net assets.

TEMPORARY INVESTMENTS

During times of unusual market conditions, for defensive purposes and to
maintain liquidity, the Fund may invest in cash and money market instruments,
such as the following:

prime commercial paper (rated A-2 or above by Standard & Poor's Ratings
Group, Prime-2 or above by Moody's Investors Service, Inc., or F-2 or
above by Fitch Investors Service, Inc.) and Europaper (rated A-2 or above
or Prime-2 or above). In the case where commercial paper or Europaper has
received different ratings from different nationally recognized
statistical rating organizations, such commercial paper or Europaper is
an acceptable temporary investment so long as at least one rating is one
of the preceding high-quality ratings and provided the investment adviser
has determined that such investment presents minimal credit risks;

instruments of domestic and foreign banks and savings associations having
capital, surplus, and undivided profits of over $100 million or if the
principal amount of the instrument is insured by the Federal Deposit
Insurance Corporation ("FDIC") or the Savings Association Insurance Fund
("SAIF"). These instruments include certificates of deposit, demand and
time deposits, savings shares, Eurodollar Certificates of Deposit,
Eurodollar Time Deposits, Canadian Time Deposits, and bankers'
acceptances;

securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities;

repurchase agreements; and

other short-term money market instruments which are not rated but are
determined by the investment adviser to be of comparable quality to the
other temporary obligations in which the Fund may invest.

U.S. GOVERNMENT SECURITIES

The types of U.S. government securities in which the Fund may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed in a variety of ways
by the U.S. government or its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities are backed by the full faith and credit of the U.S. Treasury.
Obligations of Federal Home Loan Banks are backed by the discretionary authority
of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Federal Farm Credit
System, including the National Bank for Cooperatives and Banks for Cooperatives,
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, National Credit Union
Administration, and Student Loan Marketing Association are backed by the credit
of the agency or instrumentality issuing the obligations.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for
a future time. The Fund engages in when-issued and delayed delivery transactions
only for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies, not for investment leverage. The
seller's failure to complete these transactions may cause the Fund to miss a
price or yield considered to be advantageous. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. Accordingly, the Fund
may pay more/less than the market value of the securities on the settlement
date.

The Fund may dispose of a commitment prior to settlement if the investment
adviser deems it appropriate to do so. In addition, the Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.

As a matter of operating policy, which may be changed without shareholder
approval, the Fund will limit its purchase of securities on a when-issued or
delayed delivery basis to no more than 20% of the value of its total assets.

Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment a later increase or decrease in percentage resulting
from any change in value of the Fund's net assets will not result in a violation
of any of the above restrictions.

PORTFOLIO TURNOVER

The Fund conducts portfolio transactions to accomplish its investment objective,
to invest new money obtained from selling its shares, and to meet redemption
requests. The Fund may dispose of portfolio securities at any time if it appears
that selling the securities will help the Fund achieve its investment objective.
The Fund's rate of portfolio turnover may exceed that of certain other mutual
funds with the same investment objective. A higher rate of portfolio turnover
involves correspondingly greater brokerage commissions and other expenses which
must be borne directly by the Fund and, thus, indirectly by its shareholders. In
addition, a high rate of portfolio turnover may result in the realization of
larger amounts of capital gains which, when distributed to the Fund's
shareholders, are taxable to them. Nevertheless, transactions for the Fund's
portfolio will be based only upon investment considerations and will not be
limited by any other considerations when the Fund's investment adviser deems it
appropriate to make changes in the Fund's portfolio.

TOWER MUTUAL FUNDS INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF TOWER MUTUAL FUNDS

BOARD OF TRUSTEES. Tower Mutual Funds is managed by a Board of Trustees. The
Trustees are responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
The Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.

INVESTMENT ADVISER. Pursuant to an investment advisory contract with Tower
Mutual Funds, investment decisions for the Fund are made by Hibernia National
Bank, the Fund's investment

adviser (the "Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of the Fund.

ADVISORY FEES. The Adviser receives an annual investment advisory fee at
an annual rate equal to 0.75 of 1% of the Fund's average net assets. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse
the Fund for certain operating expenses. The Adviser may modify or
terminate this voluntary waiver of its advisory fee or reimbursement of
expenses at any time at its sole discretion. The Adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.

ADVISER'S BACKGROUND. Hibernia National Bank, a national bank organized in
1890, is a wholly owned subsidiary of Hibernia Corporation ("Hibernia").
Hibernia National Bank has acted as investment adviser to the Trust since
its inception in 1988. Through its subsidiaries and affiliates, Hibernia
offers a full range of financial services to the public, including
commercial lending, depository services, cash management, retail banking,
credit card services, mortgage banking, discount brokerage, investment
counseling, international banking, and trust services.

Hibernia National Bank has been ranked by the American Banker newspaper as
the 81st largest U.S. Bank according to December 31, 1995, total deposits.
The 1995 Money Market Directory of Pension Funds ranked Hibernia National
Bank among the top 25% of the largest of nearly 200 bank and trust company
managers of tax-exempt funds in the United States. As of March 31, 1996,
the Trust Group had $4.97 billion under administration of which it had
investment discretion over $1.7 billion. The Trust Group has managed pools
of commingled funds since 1966; as of March 31, 1996, the Trust Group
managed seven such investment pools, as well as the six Tower Mutual Funds.

As part of their regular banking operations, Hibernia National Bank may
make loans to public companies. Thus, it may be possible, from time to
time, for a Fund to hold or acquire the securities of issuers which are
also lending clients of Hibernia National Bank. The lending relationship
will not be a factor in the selection of securities.

John A. Cain became the Fund's portfolio manager in March 1995. Mr. Cain is
a Vice President and Trust Investment Officer specializing in equity and
balanced account management. Mr. Cain is the investment manager of Hibernia
Trust's Growth Stock Fund. He has 36 years of investment management
experience both in the brokerage and trust industries. He earned his B.B.A.
from the University of Mississippi.

DISTRIBUTION OF FUND SHARES

Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.

DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan of Tower
Mutual Funds, the distributor may select brokers and dealers to provide
distribution and administrative services. The distributor may also select
administrators (including depository institutions such as commercial

banks and savings associations) to provide administrative services. Fees paid by
the distributor for these services with respect to Class B Shares will be
reimbursed by the Fund up to 0.75 of 1% of average daily net assets of Class B
Shares.

These services may include, but are not limited to: providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer, as necessary or beneficial to establish and maintain
shareholder accounts and records, processing purchase and redemption
transactions, and performing other services. Brokers, dealers, and
administrators will receive fees based upon Class B Shares owned by their
clients or customers. The formula for calculating the fees will be determined
from time to time by the Trustees. The fees are calculated as a percentage of
the average aggregate net asset value of Class B Shares added to shareholder
accounts and held in the accounts during the period for which the brokers,
dealers, and administrators provide services. Although fees paid by the Fund
relate directly to the net asset value of the Shares, it is possible that fees
paid by the Fund may be used to provide similar services for other of the
Trust's funds. In addition, the Fund may reimburse the distributor for writing,
printing and distributing prospectuses, statements of additional information,
and sales literature. Payments made to the distributor under the distribution
plan will be limited to reimbursement of actual expenses.

The distributor may sell, assign or pledge its right to receive Rule 12b-1 fees
and contingent deferred sales charges to finance payments made to brokers in
connection with the sale of Class B Shares. Actual distribution expenses for
Class B Shares at any given time may exceed the Rule 12b-1 fees and payments
received pursuant to contingent deferred sales charges. These unrecovered
amounts, plus interest thereon, will be carried forward and paid from future
Rule 12b-1 fees and payments received through contingent deferred sales charges.
If a distribution plan were terminated or not continued, the Fund would not be
contractually obligated to pay for any expenses not previously reimbursed by the
Fund or recovered through contingent deferred sales charges.

The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act, and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.

SHAREHOLDER SERVICING ARRANGEMENTS

Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is shareholder servicing agent (the "Shareholder Servicing Agent")
for Shares of the Fund. The Fund may pay the Shareholder Servicing Agent a fee
based on the average daily net asset value of Shares for which it provides
shareholder services. These shareholder services include, but are not limited
to, distributing prospectuses and other information, providing shareholder
assistance and communicating or facilitating purchases and redemptions of
Shares. This fee will be computed at an annual

rate equal to 0.25 of 1% of Class B Shares' average daily net assets; however,
the Shareholder Servicing Agent may choose voluntarily to waive all or a portion
of its fee at any time or pay all or some of its fees to financial institutions
or other financial service providers.

FUND ADMINISTRATION

Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, provides the Fund with certain administrative personnel and services
necessary to operate the Fund, such as legal and accounting services. Federated
Services Company provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Services Company may voluntarily choose to waive a portion
of its fee.

BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------

EXPENSES OF THE FUND AND CLASS B SHARES
- --------------------------------------------------------------------------------

Holders of Class B Shares pay their allocable portion of Trust and Fund
expenses.

The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to the cost of: organizing the Trust and continuing
its existence; registering the Trust; Trustees' fees; auditors' fees; meetings
of Trustees; legal fees of the Trust; association membership dues and such
non-recurring and extraordinary items as may arise.

Fund expenses for which holders of Class B Shares pay their allocable portion
based on average daily net assets include, but are not limited to: registering a
Fund and shares of the Fund; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such
non-recurring and extraordinary items as may arise.

At present, the only expenses allocated to Class B Shares are expenses under the
Distribution Plan and the Shareholder Services Plan. The Trustees reserve the
right to allocate certain expenses to holders of Shares as they deem appropriate
("Class Expenses"). In any case, Class Expenses would be limited to: transfer
agent fees as identified by the transfer agent as attributable to holders of
Class B Shares; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxies to
current shareholders; registration fees paid to the Securities and Exchange
Commission and to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Class B
Shares; legal fees relating solely to Class B Shares; and Trustees fees incurred
as a result of issues relating solely to Class B Shares.

NET ASSET VALUE
- --------------------------------------------------------------------------------

On Monday through Friday, the Fund determines net asset value at the close of
the New York Stock Exchange, normally 3:00 p.m. (Central Standard Time), except
on: (i) days on which there are not sufficient changes in the value of the
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; and (iii) the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

Net asset value per share fluctuates. The net asset value per share of each
class is determined by dividing the sum of the interest of a class of shares in
the market value of all securities and other assets of the Fund, less
liabilities atttributable to that class of shares, by the number of shares
outstanding within that class. The net asset value of Class A Shares and Class B
Shares of the Fund may differ slightly due to the variability in daily net
income resulting from different distribution charges.

INVESTING IN THE FUND
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares of the Fund are sold on days on which the New York Stock Exchange is open
for business. Class B Shares may be purchased through Hibernia Investment
Securities, Inc. ("HISI") or through brokers or dealers that have a sales
agreement with the distributor. In connection with the sale of Shares, the
distributor may from time to time offer certain items of nominal value to any
shareholder or investor. The Fund reserves the right to reject any purchase
request.

THROUGH HISI AND AUTHORIZED BROKER/DEALERS. An investor may place an order
through HISI and authorized broker/dealers to purchase Shares. Shares will be
purchased at the public offering price next determined after the Fund receives
the purchase request from HISI, which, in most cases, forwards the request to
the transfer agent. Purchase requests through registered broker/dealers must be
received by HISI and transmitted to the Fund before 3:00 p.m. (Central Standard
Time) in order for Shares to be purchased at that day's public offering price.
It is the responsibility of HISI or broker/dealers to transmit orders to the
Fund in a timely manner.

Federal funds should be wired as follows: Hibernia Investment Securities, Inc.,
New Orleans, Louisiana; for Credit to: include Fund name and class designation,
Title or name of account; and Wire Order Number. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in the Fund by an investor is $1,000. Subsequent
investments must be in amounts of at least $100. The Fund may choose to waive
the minimum investment requirements for Hibernia National Bank or its affiliates
and for directors and employees of Hibernia National Bank.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received.

Shares are sold without an initial sales charge, but are subject to a contingent
deferred sales charge of up to 5.50% if redeemed within six full years following
the purchase date. Shares also bear a Rule 12b-1 fee. Class B Shares will
automatically convert into Class A Shares, based on relative net asset value, on
or around the fifteenth of the month, eight full years after the purchase date.
Shares provide an investor the benefit of putting all of the investor's dollars
to work from the time the investment is made, but, until conversion, will have a
higher expense ratio and pay lower dividends than Class A Shares due to a higher
Rule 12b-1 fee and shareholder services fee.

Shares redeemed within six years of their purchase will be subject to a
contingent deferred sales charge according to the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.5%
Second 4.5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
</TABLE>

No contingent deferred sales charge will be imposed on: (1) the portion of
redemption proceeds attributable to increases in the value of the account due to
increases in the net asset value per Share, (2) Shares acquired through
reinvestment of dividends and capital gains, (3) Shares held for more than six
years after the end of the calendar month of acquisition, (4) accounts following
the death or disability of a shareholder, or (5) minimum required distributions
to a shareholder over the age of 70-1/2 from an IRA or other retirement plan.

CONVERSION FEATURE

Class B Shares include all Shares purchased pursuant to the contingent deferred
sales charge alternative which have been outstanding for less than the period
ending eight years after the end of the month in which the shareholder's order
to purchase Class B Shares was accepted. At the end of this eight year period,
Class B Shares may automatically convert to Class A Shares, in which case the
Shares will be subject to a lower Rule 12b-1 distribution fee which is assessed
on Class A Shares. Such conversion will be on the basis of the relative net
asset values of the two classes, without the imposition of any sales charge, fee
or other charge. The purpose of the conversion feature is to relieve the holders
of the Class B Shares that have been outstanding for a period of time sufficient
for the distributor to have been compensated for distribution expenses related
to the Class B Shares from most of the burden of such distribution-related
expenses.

For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid on Class B Shares in a
shareholder's Fund account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's Fund account
(other than those in the sub-account) convert to Class A Shares, an equal pro
rata portion of the Class B Shares in the sub-account will also convert to Class
A Shares.

SALES CHARGE REALLOWANCE. For sales of Class B Shares, HISI and any authorized
dealer will normally receive up to 100% of the contingent deferred sales charge.
Any portion of the contingent deferred sales charge which is not paid to HISI or
a dealer will be retained by the distributor. However, the distributor, in its
sole discretion, may uniformly offer to pay to HISI or a dealer selling Shares,
all or a portion of the contingent deferred sales charge it normally retains. If
accepted by HISI or a dealer, such additional payments will be predicated upon
the amount of Shares sold. Such payments may take the form of cash or
promotional incentives, such as payment of certain expenses of qualified
employees and their spouses to attend informational meetings about the Fund or
other special events at recreational facilities, or items of material value. In
some instances, these incentives will be made available only to dealers whose
employees have sold or may sell significant amounts of Shares.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor, HISI, Hibernia
National Bank, or their affiliates may also offer to pay a fee from their own
assets to financial institutions as financial assistance for providing
substantial marketing and sales support. The support may include initiating
customer accounts, providing sales literature, or participating in sales,
educational and training seminars (including those held at recreational
facilities). Such assistance will be predicated upon the amount of Shares the
financial institution sells or may sell and/or upon the type and nature of sales
or marketing support furnished by the financial institution. Any payments made
by the distributor may be reimbursed by Hibernia National Bank or its
affiliates.

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received. A shareholder may apply for participation in this program through
HISI.

EXCHANGING SECURITIES FOR FUND SHARES

The Fund may accept securities in exchange for Shares. The Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.

Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, must be liquid, and must
not be subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least $25,000.

Shares purchased by exchange of securities cannot be redeemed by telephone for
five business days to allow time for the transfer to settle.

Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the Fund
will be issued for each equivalent amount of securities accepted.

Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company, through its
subsidiary Federated Shareholder Services Company, maintains a share account for
each shareholder of record. Share certificates are not issued unless requested
by contacting HISI in writing.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.

DIVIDENDS

Dividends are declared and paid quarterly to all shareholders in the Fund on the
record date. Dividends are automatically reinvested in additional shares of the
Fund on payment dates at the ex-dividend date net asset value , unless cash
payments are requested by writing to the Fund or HISI.

CAPITAL GAINS

Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.

REDEEMING SHARES
- --------------------------------------------------------------------------------

The Fund redeems Class B Shares at their net asset value, less any applicable
contingent deferred sales charge, next determined after the Fund receives the
redemption request. Redemptions may be made on days on which the Fund computes
its net asset value. Telephone or written requests for redemption must be
received in proper form and can be made through HISI, an authorized
broker/dealer or directly to the Fund.

BY TELEPHONE. A shareholder may redeem Shares by calling HISI at 1-800-999-0124
to request the redemption. Shares will be redeemed at the net asset value next
determined after the Fund receives the redemption request from HISI. Redemption
instructions given by telephone may be electronically recorded.

Redemption requests through HISI or a broker/dealer must be received by the Fund
before 3:00 p.m. (Central Standard Time) in order for Shares to be redeemed at
that day's net asset value. HISI or the broker/dealer is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions to the Fund. Registered broker/dealers may charge customary fees
and commissions for this service. Proceeds be wired within five days after a
proper request for redemption has been received.

Proceeds from redemption requests received on holidays when wire transfers are
restricted will be wired the following business day. Questions about telephone
redemptions on days when wire transfers are restricted should be directed to
your shareholder services representative at the telephone number listed on your
account statement.

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from HISI or the distributor. If reasonable procedures are not
followed by the Funds, they may be liable for losses due to unauthorized or
fraudulent telephone instructions.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.

BY MAIL. Shareholders may redeem Shares by sending a written request to HISI.
The written request should include the shareholder's name, the Fund name and
Class designation, the account number, and the share or dollar amount requested.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request to HISI.
Shareholders should call HISI for assistance in redeeming by mail.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have signatures on written redemption requests
guaranteed by:

a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the FDIC;

a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;

a savings bank or savings association whose deposits are insured by the
SAIF, which is administered by the FDIC; or

any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Fund does not accept signatures guaranteed by a notary public.

The Trust and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Trust may elect in the future to
limit eligible signature guarantors to

institutions that are members of a signature guarantee program. The Trust and
its transfer agent reserve the right to amend these standards at any time
without notice.

Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Shares are
redeemed to provide for periodic withdrawal payments in an amount directed by
the shareholder. Depending upon the amount of the withdrawal payments, the
amount of dividends paid and capital gains distributions with respect to Shares,
and the fluctuation of the net asset value of Shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should not
be considered as yield or income on the shareholder's investment in the Fund. To
be eligible to participate in this program, a shareholder must have an account
value of at least $10,000. A shareholder may apply for participation in this
program through HISI. A contingent deferred sales charge may be imposed on Class
B Shares.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum of $1,000 due to shareholder
redemptions. This requirement does not apply, however, if the balance falls
below $1,000 because of changes in the net asset value of the Fund. Before
Shares are redeemed to close an account, the shareholder is notified in writing
and allowed 30 days to purchase additional Shares to meet the minimum
requirement.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each class of
the Fund have equal voting rights, except that in matters affecting only a
particular class, only shareholders of that class are entitled to vote. As a
Massachusetts business trust, Tower Mutual Funds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in Tower Mutual Funds' or a Fund's operation and for the election of
Trustees under certain circumstances.

Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of Tower Mutual Funds'
outstanding shares.

EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------

The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.

Some entities providing services to the Trust are subject to such banking laws
and regulations. They believe, based on the advice of their counsel, that they
may perform those services for the Trust contemplated by any agreement entered
into with the Trust without violating those laws or regulations. Changes in
either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations, could prevent these entities from continuing to
perform all or a part of the above services. If this happens, the Trustees would
consider alternative means of continuing available services. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL INCOME TAX

The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.

The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Fund will not be combined for tax purposes with those realized by any of the
other Funds.

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares.

OTHER STATE AND LOCAL TAXES

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------

The Tower Capital Appreciation Fund also offers Class A Shares. Class A Shares
are sold at net asset value plus a sales charge primarily to institutions and
individuals and are subject to a minimum initial investment of $1,000. Programs
are available for reducing the front-end sales charge on purchases of Class A
Shares.

Both classes are subject to certain of the same expenses.

Class A Shares are distributed under a 12b-1 Plan adopted by the Trust.

Expenses differences between classes may affect the performance of each class.

To obtain more information and a prospectus for Class A Shares, investors may
call 1-800-999-0124.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time the Fund may advertise its total return and yield for each
class of shares.

Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield for the Fund is calculated by dividing the net investment income per
Share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding.

Total return and yield will be calculated separately for Class A Shares and
Class B Shares. Expense differences between Class A Shares and Class B Shares
may affect the performance of each class.

The performance information reflects the effect of non-recurring charges, such
as the contingent deferred sales charge which, if excluded, would increase the
total return and yield. Occasionally, performance information which does not
reflect the effect of the contingent deferred sales charge may be quoted in
advertising. From time to time, advertisements for the Fund may refer to
ratings, rankings, and other information in certain financial publications
and/or compare the Fund's performance to certain indices.

ADDRESSES
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<TABLE>
<S> <C> <C>
Tower Capital Appreciation Fund Federated Investors Tower
Class B Shares Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Hibernia National Bank Attention: Tower Mutual Funds
P.O. Box 61540
New Orleans, Louisiana 70161
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Custodian
Hibernia National Bank Attention: Tower Mutual Funds
P.O. Box 61540
New Orleans, Louisiana 70161
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Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Federated Investors Tower
Services Company Pittsburgh, Pennsylvania 15222-3779
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Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
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</TABLE>

Cusip 891836702
G00858-01-B (11/96)
Federated Securities Corp.
Distributor

Tower Mutual Funds
Statement of Additional Information
This Statement of Additional Information relates to the following six portfolios
(individually or collectively referred to as the `Fund
or `Funds'') of Tower Mutual Funds (the ``Trust''):

Tower Capital Appreciation Fund;

Class A Shares

Class B Shares

Tower Louisiana Municipal Income Fund;

Tower Total Return Bond Fund;

Tower U.S. Government Income Fund;

Tower Cash Reserve Fund; and

Tower U.S. Treasury Money Market Fund.
This Statement should be read with the prospectuses of the Funds dated
October 31, 1996 and November 30, 1996. This Statement is not a prospectus.
You may request a copy of a prospectus, free of charge by calling
1-800-999-0124.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 30, 1996
The shares of the Tower Mutual Funds are not deposits or obligations of
Hibernia National Bank or its affiliates, are not endorsed or guaranteed
by Hibernia National Bank or its affiliates, and are not insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or
any other government agency. Investment in the shares of the Tower
Mutual Funds involves investment risks, including the possible loss of
principal amount invested. Tower Cash Reserve Fund and Tower U.S.
Treasury Money Market Fund attempt to maintain a stable net asset value
of $1.00 per share; there be no assurance that these Funds will be able
to do so.

Federated Securities Corp. is the distributor of the Funds
and is a subsidiary of Federated Investors.
Cusip 891836108
Cusip891836702
Cusip 891836306
Cusip 891836504
Cusip 891836405
Cusip 891836207
Cusip 891836603
G00858-02 (11/96)

GENERAL INFORMATION ABOUT THE FUNDS 1

INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS 1

When-Issued and Delayed Delivery Transactions 1
Lending of Portfolio Securities 1
Reverse Repurchase Agreements 1
Futures and Options Transactions 1
Ratings 6
Credit Enhancement 6
Portfolio Turnover 6
INVESTMENT LIMITATIONS 6

Regulatory Compliance 12
TOWER MUTUAL FUNDS MANAGEMENT 12

Officers and Trustees 12
Fund Ownership 13
Trustees Compensation 13
Trustee Liability 14
INVESTMENT ADVISORY SERVICE 14

Adviser to the Trust 14
Advisory Fees 14
BROKERAGE TRANSACTIONS 15

OTHER SERVICES 15

Trust Administration 15
Transfer Agent, Dividend Disbursing Agent, and
Portfolio Accounting Services 16
Custodian 16

Independent Auditors 16
PURCHASING SHARES 16

Distribution Plan 16
Shareholder Services (Captial Appreciation Fund-
Class B Shares) 16
Conversion To Federal Funds 17

DETERMINING NET ASSET VALUE 17

Determining Market Value of Securities 17
Use of the Amortized Cost Method 17
Monitoring Procedures 18
Investment Restrictions 18
EXCHANGE PRIVILEGE 18

Requirements for Exchange 18
Making an Exchange 18
REDEEMING SHARES 18

Redemption in Kind 19
MASSACHUSETTS PARTNERSHIP LAW 19

TAX STATUS 19

The Funds' Tax Status 19
Shareholders' Tax Status 19
Capital Gains 19
TOTAL RETURN 20

YIELD 20

TAX-EQUIVALENT YIELD 21

PERFORMANCE INFORMATION 21

Economic and Market Information 23
FINANCIAL STATEMENTS 23

APPENDIX 24

GENERAL INFORMATION ABOUT THE FUNDS

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated April 8, 1988. As of the date of this
Statement, the Trust consists of six separate portfolios of securities (the
`Funds'') which are as follows: Tower Capital Appreciation Fund
(`Capital Appreciation Fund''), Tower Louisiana Municipal Income Fund
(`Louisiana Municipal Income Fund''), Tower Total Return Bond Fund
(`Total Return Bond Fund''), Tower U.S. Government Income Fund (``U.S.
Government Income Fund'), Tower Cash Reserve Fund (``Cash Reserve Fund''),
and Tower U.S. Treasury Money Market Fund (`U.S. Treasury Money Market
Fund''and together with Cash Reserve Fund, the ``Money Market Funds'').
Capital Appreciation Fund currently offers two classes of shares,which are
designated as Class A Shares and Class B Shares .
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS

The Prospectus discusses the objective of each Fund and the policies it
employs to achieve those objectives. The following discussion supplements
the description of the Funds' investment policies in the Prospectus.
The Funds' respective investment objectives cannot be changed without
approval of shareholders. The investment policies described below may be
changed by the Board of Trustees (the `Trustees'') without shareholder
approval. Shareholders will be notified before any material change in
these policies becomes effective.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for a Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of a
Fund sufficient to make payment for the securities to be purchased are

segregated on the Fund's records at the trade date. These assets are
marked to market daily and are maintained until the transaction has been
settled.
LENDING OF PORTFOLIO SECURITIES
The Funds (except the Money Market Funds) may lend portfolio securities.
The collateral received when a Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower
or placing broker. The Fund does not have the right to vote securities on
loan, but would terminate the loan and regain the right to vote if that
were considered important with respect to the investment.
REVERSE REPURCHASE AGREEMENTS
The Funds (except U.S. Treasury Money Market Fund) may invest in reverse
repurchase agreements. These transactions are similar to borrowing cash.
In a reverse repurchase agreement, a Fund transfers possession of a
portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market
value in cash, and agrees that on a stipulated date in the future such Fund
will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable a Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but
the ability to enter into reverse repurchase agreements does not ensure

that a Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and maintained until the transaction is settled.
FUTURES AND OPTIONS TRANSACTIONS
The Funds (except the Money Market Funds) may engage in or reserve the
right to engage in put and call options, financial futures, and
options on futures as discussed for those Funds in the prospectus.
For purposes of Capital Appreciation Fund, financial futures may
include stock index futures.
The Funds will maintain positions in securities, option rights, and
segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position may be closed
out only on an exchange which provides a secondary market for an
option of the same series.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller
who agrees to make delivery of the specific type of security called
for in the contract (`going short'') and the buyer who agrees to take
delivery of the security (`going long'') at a certain time in the
future. Financial futures contracts call for the delivery of
particular debt securities issued or guaranteed by the U.S. Treasury
or by specified agencies or instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to
interest rates. A rise in rates means a drop in price. Conversely, a
drop in rates means a rise in price. In order to hedge their holdings

of securities, the Funds could enter into contracts to deliver
securities at a predetermined price (i.e., `go short'') to protect
themselves against the possibility that the prices of their securities
may decline during the Funds' anticipated holding period. The Funds
would `go long'' (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market interest
rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles
(but does not obligate) its purchaser to decide on or before a future
date whether to assume a short position at the specified price.
A Fund could purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates or as a means of reducing
fluctuations in the net asset value of shares of the Fund. Generally,
if the hedged portfolio securities decrease in value during the term
of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, a Fund
will normally close out its option by selling an identical option. If
the hedge is successful, the proceeds received by a Fund upon the sale
of the second option will be large enough to offset both the premium
paid by such Fund for the original option plus the realized decrease
in value of the hedged securities.
Alternately, a Fund may exercise its put to close out the position.
To do so, it would simultaneously enter into a futures contract of the
type underlying the option (for a price less than the strike price of

the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If a Fund
neither closes out nor exercises an option, the option will expire on
the date provided in the option contract, and only the premium paid
for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, a Fund may write
listed call options on futures contracts for U.S. government
securities to hedge its portfolio against an increase in market
interest rates. When a Fund writes a call option on a futures
contract, it is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike price at any
time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down,
a Fund's obligation under a call option on a future (to sell a futures
contact) costs less to fulfill, causing the value of such Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that Fund keeps the premium received for the option. This
premium can offset the drop in value of such Fund's fixed income
securities which is occurring as interest rates rise.
Prior to the expiration of a call written by a Fund, or exercise of it
by the buyer, such Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the second
option will be less than the premium received by the Fund for the
initial option. The new premium income of the Fund will then offset
the decrease in value of the hedged securities.

WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Funds may write listed put options on financial futures contracts
for U.S. government securities to hedge its portfolio against a
decrease in market interest rates. When a Fund writes a put option on
a futures contract, it receives a premium for undertaking the
obligation to assume a long futures position (buying a futures
contract) at a fixed price at any time during the life of the option.
As market interest rates decrease, the market price of the underlying
futures contract increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because
the buyer can sell the same futures contract at a higher price in the
market. The premium received by the Fund can then be used to offset
the higher prices of portfolio securities to be purchased in the
future due to the decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the
buyer, a Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of buying the second option will
be less than the premium received by such Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
When a Fund purchases a call option on a futures contract, it is
purchasing the right (not the obligation) to assume a long futures
position (buy a futures contract) at a fixed price at any time during
the life of the option. As market interest rates fall, the value of
the underlying futures contract will normally increase, resulting in
an increase in value of such Fund's option position. When the market
price of the underlying futures contract increases above the strike

price plus premium paid, a Fund could exercise its option and buy the
futures contract below market price.
LIMITATION ON OPEN FUTURES POSITION
A Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures contracts.
If this limitation is exceeded at any time, a Fund will take prompt
action to close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
MARGIN IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, a Fund does not pay or
receive money upon the purchase or sale of a futures contract.
Rather, the Fund is required to deposit an amount of `initial
margin''in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve
the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good-faith
deposit on the contract which is returned to the Fund upon termination
of the futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called `variation margin,'' equal to the

daily change in value of the futures contract. This process is know
as `marking to market.'' Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the
Fund and the broker of the amount one would owe the other if the
futures contract expires. In computing its daily net asset value, a
Fund will mark-to-market its open futures positions.
The Funds are also required to deposit and maintain margin when they
write call options on futures contracts.
PURCHASING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Funds may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put
option gives a Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option. A call option gives a Fund, in return for a
premium, the right to buy the underlying security from the seller.
Capital Appreciation Fund may only buy put options which are listed on
a recognized options exchange.
WRITING COVERED PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
As writer of a call option, a Fund has the obligation, upon exercise
of the option during the option period, to deliver the underlying
security upon payment of the exercise price. As a writer of a put
option, a Fund has the obligation to purchase a security from the
purchaser of the option upon the exercise of the option.
A Fund may only write call options either on securities held in it
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount
of any additional consideration). In the case of put options, a Fund

will segregate cash or U.S. Treasury obligations with a value equal to
or greater than the exercise price of the underlying securities.
RESTRICTED SECURITIES
The Funds may invest in restricted securities. Restricted securities
are any securities in which a Fund may otherwise invest pursuant to
its investment objective and policies but which are subject to
restriction on resale under federal securities law. The Funds will
not invest more than 10% of the value of its total assets in
restricted securities.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under an SEC Staff position set
forth in the adopting release for Rule 144A under the Securities Act
of 1933 (the `Rule''). The Rule is a non-exclusive, safe-harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise
restricted securities to qualified institutional buyers. The Rule was
expected to further enhance the liquidity of the secondary market for
securities eligible for resale under Rule 144A. The Fund believes
that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities to the Trustees. The Trustees
consider the following criteria in determining the liquidity of
certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and
the number of potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.

The Funds may invest in commercial paper issued in reliance on an
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) paper is restricted as to disposition under
federal securities law, and is generally sold to institutional
investors, such as a Fund, who agree that they are purchasing the
paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other
institutional investors, like the Funds, through or with the
assistance of the issuer or investment dealers who make a market in
Section 4(2), thus providing liquidity.
WARRANTS
Capital Appreciation Fund may invest in warrants. Warrants are
basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common
stock at issuance) valid for a specific period of time. Warrants may
have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, if the market price of the common
stock does not exceed the warrant's exercise price during the life of
the warrant, the warrant will expire worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. The percentage increase
or decrease in the market price of the warrant may tend to be greater
than the percentage increase or decrease in the market price of the
optioned common stock. The Fund will not invest more than 5% of its
net assets in warrants. No more than 2% of the Fund's net assets, to
be included within the overall 5% limit on investments in warrants,

may be warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange.
LOUISIANA MUNICIPAL BOND INSURERS
If a high-rated security loses its rating or has its rating reduced
after Louisiana Municipal Income Fund has purchased it, the Fund is
not required to drop the security from its portfolio, but may consider
doing so. If ratings made by Moody's Investors Services, Inc.
(`Moody's'') or Standard & Poor's Ratings Group (``S&P'') change
because of changes in those organizations or in their rating systems,
the Fund will try to use comparable ratings as standards in accordance
with the investment policies described in the Fund's prospectus.
Municipal bond insurance may be provided by one or more of the
following insurers or any other municipal bond insurer which is rated
Aaa by Moody's or AAA by S&P.

MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. (`MBIA'') is a wholly-owned
subsidiary of MBIA, Inc., a Connecticut insurance company, which is
owned by The Aetna Life and Casualty, Credit Local DeFrance CAECL,
S.A., The Fund American Companies, and the public. The investors of
MBIA, Inc., are not obligated to pay the obligations of MBIA. MBIA,
domiciled in New York, is regulated by the New York State Insurance
Department and licensed to do business in various states. The address
of MBIA is 113 King Street, Armonk, New York 10504, and its telephone
number is (914) 273-4345. S&P has rated the claims-paying ability of
MBIA `AAA.''

AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation (`AMBAC'') is a Wisconsin-domiciled stock
insurance company, regulated by the Insurance Department of Wisconsin,
and licensed to do business in various states. AMBAC is a wholly-
owned subsidiary of AMBAC, Inc., a financial holding company which is
owned by the public. Copies of certain statutorily required filings
of AMBAC can be obtained from AMBAC. The address of AMBAC's
administrative offices is One State Street Plaza, 17th Floor, New
York, New York 10004, and its telephone number is (212)668-0340. S&P
has rated the claims-paying ability of AMBAC `AAA.''
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company (`Financial Guaranty'') is a
wholly-owned subsidiary of FGIC Corporation, a Delaware holding
company. FGIC Corporation is wholly-owned by General Electric Capital
Corporation. The investors of FGIC Corporation are not obligated to
pay the debts of or the claims against Financial Guaranty. Financial
Guaranty is subject to regulation by the state of New York Insurance
Department and is licensed to do business in various states. The
address of Financial Guaranty is 115 Broadway, New York, New York
10006, and its telephone number is (212) 312-3000. S&P has rated the
claims-paying ability of Financial Guaranty `AAA.''
FINANCIAL SECURITY ASSURANCE INC.
Financial Security Assurance Inc. (FSA) insures municipal, asset-
backed and residential mortgage-backed obligations. FSA is a
majority-owned subsidiary of US West Capital Corp. US West is
attempting to find a buyer for FSA. The address of FSA is 350 Park
Avenue, New York, New York 10022, and its telephone number is (212)

826-0100. The claims-paying ability for FSA holds the highest
available ratings from Moody's (Aaa) and S&P (AAA).
ZERO-COUPON SECURITIES
The Funds may invest in Zero-Coupon Securities. Zero-coupon
securities are debt obligations which are generally issued at a
discount and payable in full at maturity, and which do not provide for
current payments of interest prior to maturity. Zero-coupon
securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities
which make current distributions of interest. As a result, the net
asset value of shares of a Fund investing in zero-coupon securities
may fluctuate over a greater range than shares of other Funds and
other mutual funds investing in securities making current
distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-
term bonds or notes and their unmatured interest coupons which have
been separated by their holder, typically a custodian bank or
investment brokerage firm. A number of securities firms and banks
have stripped the interest coupons from the underlying principal (the
`corpus'') of U.S. Treasury securities and resold them in custodial
receipt programs with a number of different names, including Treasury
Income Growth Receipts (`TIGRS'') and Certificates of Accrual on
Treasuries (`CATS''). The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or,
in the case of bearer securities (i.e., unregistered securities which

are owned ostensibly by the bearer of holder thereof), in trust on
behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial
ownership of particular interest coupons and corpus payments on
Treasury securities through the Federal Reserve book-entry record-
keeping system. The Federal Reserve program as established by the
Treasury Department is known as `STRIPS'' or ``Separate Trading of
Registered Interest and Principal of Securities.'' Under the STRIPS
program, a Fund will be able to have its beneficial ownership of U.S.
Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificated or other
evidence of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The
principal or corpus is sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the
security and does not receive any rights to periodic cash interest
payments. Once stripped or separated, the corpus and coupons may be
sold separately. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold in such
bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-
coupon securities issued directly by the obligor.
RATINGS
A nationally recognized statistical rating organization's ("NRSROs")
highest rating category is determined without regard for sub-categories and
gradations. For example, securities rated A-1 or A-1+ by S&P, Prime-1 by

Moody's, or F-1 (+ or -) by Fitch Investors Service (`Fitch'') are all
considered to be rated in the highest short-term rating category. Cash
Reserve Fund will follow applicable regulations in determining whether a
security rated by more than one NRSRO can be treated as being in the
highest short-term rating category; currently, such securities must be
rated by two NRSROs in their highest rating category. See "Regulatory
Compliance."
CREDIT ENHANCEMENT
Cash Reserve Fund typically evaluates the credit quality and ratings of
credit-enhanced securities based upon the financial condition and ratings
of the party providing the credit-enhancement (the "credit enhancer"),
rather than the issuer. However, the credit-enhanced securities will not be
treated as having been issued by the credit enhancer for diversification
purposes unless the Fund has invested more than 10% of its assets in
securities issued, guaranteed or otherwise credit enhanced by the credit
enhancer, in which case the securities will be treated as having been
issued by both the issuer and the credit enhancer. The Fund may have more
than 25% of its total assets invested in securities credit enhanced by
banks.
PORTFOLIO TURNOVER
Capital Appreciation Fund's portfolio turnover rate for the fiscal years
ended August 31, 1996, and 1995 were 69% and 69%, respectively.
Louisiana Municipal Income Fund conducts portfolio transactions to
accomplish its investment objective as interest rates change, to invest new
money obtained from selling its shares, and to meet redemption requests.
The Fund may trade or dispose of portfolio securities at any time if it
appears that trading or selling the securities will help the Fund achieve

its investment objective. For fiscal years ended August 31, 1996 and 1995,
the portfolio turnover rates were 17% and 22%, respectively.
Total Return Bond Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. For the fiscal
years ended August 31, 1996 and 1995, the portfolio turnover rates were 38%
and 91%, respectively.
Although U.S. Government Income Fund does not intend to invest for the
purpose of seeking short-term profits, securities in its portfolio will be
sold whenever the Fund's investment adviser believes it is appropriate to
do so in light of the Fund's investment objective, without regard to the
length of time a particular security may have been held. For the fiscal
years ended August 31, 1996 and 1995, the portfolio turnover rates were 27%
and 5%, respectively.
INVESTMENT LIMITATIONS

DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its total assets, Capital
Appreciation Fund will not purchase securities of any one issuer,
except cash and cash items and securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities,
if as a result more than 5% of the value of its total assets would be
invested in the securities of that issuer. To comply with certain
state restrictions, the Fund will not purchase securities of any
issuer, except for securities issued or guaranteed by the government
of the United States or its agencies or instrumentalities, if as a
result more than 5% of its total assets would be invested in
securities of that issuer. (If state restrictions change, this latter
restriction may be revised without shareholder approval or
notification.)

Capital Appreciation Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
With respect to 75% of the value of Total Return Bond Fund's total
assets, the Fund will not invest more than 5% of the value of its
total assets in any one issuer (except cash and cash items, repurchase
agreements, and U.S. government obligations). The Fund will not
acquire more than 10% of the outstanding voting securities of any one
issuer.
Cash Reserve Fund will not purchase securities issued by any one
issuer having a value of more than 5% of the value of its total assets
except cash or cash items, repurchase agreements, and U.S. government
obligations.
With respect to securities comprising 75% of the value of its total
assets, U.S. Treasury Money Market Fund will not purchase securities
of any one issuer (other than cash, cash items or securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities and repurchase agreements collateralized by U.S.
Treasury securities) if as a result more than 5% of the value of its
total assets would be invested in the securities of that issuer.
(For purposes of the foregoing limitations, the Funds consider
instruments issued by a U.S. branch of a domestic bank having capital,
surplus, and undivided profits in excess of $100,000,000 at the time
of investment to be "cash items.")
CONCENTRATION OF INVESTMENTS
Capital Appreciation Fund will not invest 25% or more of its total
assets in securities of issuers having their principal business
activities in the same industry. Total Bond Fund will not invest 25%
or more of the value of its total assets in any one industry.

However, investing in U.S. government obligations shall not be
considered investments in any one industry. Cash Reserve Fund will not
invest more than 25% of the value of its total assets in any one
industry except commercial paper of finance companies. However,
investing in bank instruments (such as time and demand deposits and
certificates of deposit), U.S. government obligations or instruments
secured by these money market instruments, such as repurchase
agreements, shall not be considered investments in any one industry.
ACQUIRING SECURITIES
Cash Reserve Fund will not acquire the voting securities of any
issuer. It will not invest in securities issued by any other
investment company. It will not invest in securities of a company for
the purpose of exercising control or management.
INVESTING IN COMMODITIES
Capital Appreciation Fund will not purchase or sell commodities,
commodity contracts, or commodity futures contracts. However, the
Fund may purchase put options on portfolio securities and on financial
futures contracts as a hedging strategy and not for speculative
purposes. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell
calls on financial futures contracts. The Fund will notify
shareholders before such a change in its operating policies is
implemented.
Louisiana Municipal Income Fund will not purchase or sell commodities,
commodity contracts, or commodity futures contracts. The Fund may,
however, enter into future contracts on financial instruments or
financial indexes and may purchase or sell options on such futures
contracts. Such investments will be used as a hedging strategy only

and not for speculative purposes and will not exceed 5% of the Fund's
total net assets.
Total Return Bond Fund will not purchase or sell commodities or
commodities futures contracts. However, the Fund may purchase put and
call options on portfolio securities and on financial futures
contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell
puts and calls on financial futures contracts.
U.S. Government Income Fund will not purchase or sell commodities,
except that the Fund may purchase or sell financial futures contracts
and related options.
Cash Reserve Fund will not invest in commodities or commodity
contracts.
U.S. Treasury Money Market Fund will not buy or sell commodities,
commodity contracts, or commodities futures contracts.
ISSUING SENIOR SECURITIES AND BORROWING
Capital Appreciation Fund, Louisiana Municipal Income Fund, U.S.
Government Income Fund, and Cash Reserve Fund will not issue senior
securities except that each Fund may borrow money and engage in
reverse repurchase agreements in amounts up to one-third of the value
of its total assets (net assets in the case of U.S. Government Income
Fund) including the amount borrowed. A Fund will not borrow money or
engage in reverse repurchase agreements for investment leverage, but
rather as temporary, extraordinary, or emergency measure or to
facilitate management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolios securities is
deemed to be inconvenient or disadvantageous. A Fund will not
purchase any securities while any borrowings in excess of 5% of its

total assets are outstanding. During the period any reverse
repurchase agreements are outstanding, a Fund will restrict the
purchase of portfolio securities to money market instruments maturing
on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse
repurchase agreements. With respect to Cash Reserve Fund, if a
percentage limit is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change in value
of net assets will not result in a violation of such restriction.
Total Return Bond Fund will not issue senior securities except that
the Fund may borrow money and engage in reverse repurchase agreements
in amounts up to one-third of the value of its net assets, including
the amounts borrowed. 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 portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets are
outstanding.
U.S. Treasury Money Market Fund will not issue senior securities
except that the Fund may borrow money in amounts up to one-third of
the value of its total assets, including the amount borrowed. The
Fund will not borrow money except as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous.

PLEDGING ASSETS
Capital Appreciation Fund, Louisiana Municipal Income Fund, and Cash
Reserve Fund will not mortgage, pledge, or hypothecate securities,
except to secure permissible borrowings. In those cases, a Fund may
pledge assets having a value of 15% of its assets taken at cost.
Total Return Bond Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those cases, it may
pledge assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 10% of the value of total assets at the
time of the borrowing.
U.S. Government Income Fund will not mortgage, pledge, or hypothecate
any assets except to secure permitted borrowings. In these cases, it
may pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15% of the value of total assets as the
time of the borrowing.
Neither the deposit of underlying securities and other assets in
escrow in connection with the writing of put or call options on U.S.
government securities nor margin deposits for the purchase and sale of
financial futures contracts and related options are deemed to be a
pledge.
To comply with certain state restrictions, the Funds will limit these
pledges of assets to 10% of its net assets at market. (If state
restrictions change, this latter restriction may be revised without
shareholder approval or notification.)
SELLING SHORT AND BUYING ON MARGIN
Capital Appreciation Fund will not purchase any securities on margin
but may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities.

Louisiana Municipal Income Fund will not sell securities short or
purchase any securities on margin but may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities.
Total Return Bond Fund and U.S. Government Income Fund will not sell
securities short or purchase any securities on margin but may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities. The deposit or payment by a Fund
of initial or variation margin in connection with financial futures
contracts or related options transactions is not considered the
purchase of a security on margin.
Cash Reserve Fund will not sell any money market instruments short or
purchase any money market instruments on margin but may obtain such
short-term credits as may be necessary for clearance of purchases and
sales of money market instruments.
UNDERWRITING
Capital Appreciation Fund and Louisiana Municipal Income Fund will not
underwrite any issue of securities, except as it may be deemed to be
an underwriter under the Securities Act of 1933 in connection with the
disposition of its portfolio securities.
Total Return Bond Fund, U.S. Government Income Fund, and U.S. Treasury
Money Market Fund will not underwrite any issue of securities, except
as it may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities in accordance with its
investment objectives, policies, and limitations.
Cash Reserve Fund will not engage in underwriting of securities issued
by others.

INVESTING IN REAL ESTATE
Capital Appreciation Fund and Louisiana Municipal Income Fund will not
purchase or sell real estate although a Fund may invest in securities
secured by real estate or interest in real estate or issued by
companies, including real estate investment trusts, which invest in
real estate or interests therein.
Total Return Bond and U.S. Government Income Fund will not buy or sell
real estate, including limited partnership interests, although a Fund
may invest in the securities of companies whose business involves the
purchase or sale of real estate or in securities which are secured by
real estate or interests in real estate.
Cash Reserve Fund will not invest in real estate, except that it may
purchase money market instruments issued by companies that invest in
real estate or sponsor such interests. In order to comply with
registration requirements of a particular state, Cash Reserve Fund
will not invest in real estate limited partnerships. (If state
requirements change, this limitation may be revised without notice to
shareholders.)
U.S. Treasury Money Market Fund will not purchase or sell real estate,
including limited partnership interests.
LENDING CASH OR SECURITIES
Capital Appreciation Fund will not lend any of its assets, except
portfolio securities . This shall not prevent the purchase or holding
of bonds, debentures, notes, certificates of indebtedness, or other
debt securities of an issuer, repurchase agreements or other
transactions which are permitted by its investment objective and
policies or the declaration of trust.

Louisiana Municipal Income will not lend any assets except portfolio
securities up to one-third of the value of its total assets. The Fund
may acquire publicly or non-publicly issued municipal bonds or
temporary investments or enter into repurchase agreements in
accordance with its investment objective, policies, and limitations.
Total Return Bond Fund will not lend any of its assets except
portfolio securities. This shall not prevent the purchase or holding
of corporate bonds, debentures, notes, certificates of indebtedness or
other debt securities of an issuer, repurchase agreements or other
transactions which are permitted by the Fund's investment objective
and policies.
U.S. Government Income Fund will not lend any of its assets except
portfolio securities up to one-third of the value of its total assets.
Cash Reserve Fund will not lend any of its assets, except that it may
purchase or hold money market instruments, including repurchase
agreements and variable amount demand master notes, permitted by its
investment objective and policies.
U.S. Treasury Money Market Fund will not lend any of its assets,
except that it may purchase or hold U.S. Treasury obligations,
permitted by its investment objective, policies and limitations or the
declaration of trust.
INVESTING IN MINERALS
Capital Appreciation Fund and Louisiana Municipal Income Fund will not
invest in interests in oil, gas, or other mineral exploration or
development programs, other than debentures or equity stock interests.
U.S. Government Income Fund will not purchase or sell oil, gas, or
other mineral exploration or development programs.

INVESTING IN RESTRICTED SECURITIES
Louisiana Municipal Income Fund will not invest more than 10% of its
total assets in securities subject to restrictions on resale under the
Securities Act of 1933.
Except as noted, the above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be changed
by the Trustees without shareholder approval. Except as noted,
shareholders will be notified before any material change in these
limitations becomes effective.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Funds will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
Capital Appreciation Fund will not invest more than 5% of its assets
in warrants. No more than 2% of the Fund's net assets, to be included
within the overall 5% limit on investments in warrants, may be
warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange. (If state restrictions change, this latter
restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants will be valued at
the lower of cost or market, except that warrants acquired by the Fund
in units with or attached to securities may be deemed to be without
value.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds will limit their investment in other investment companies to
no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of its total assets in any
investment company, or invest no more than 10% of its total assets in

investment companies in general. The Funds will purchase securities
of investment companies only in open-market transactions involving
only customary broker's commissions. However, these limitations are
not applicable if the securities are acquired in a merger,
consolidation, or acquisition of assets. It should be noted that
investment companies incur certain expenses, such as management fees,
and, therefore, any investment by a Fund in shares of another
investment company would be subject to such duplicate expenses. The
Funds will invest in other investment companies primarily for the
purposes of investing its short-term cash on a temporary basis. The
investment adviser will waive its investment advisory fee on assets
invested in securities of open-end investment companies.
INVESTING IN NEW ISSUERS
The Funds will not invest more than 5% of the value of their total
assets in securities of issuers which have records of less than three
years of continuous operations, including the operation of any
predecessor.
Louisiana Municipal Income Fund will not invest more than 5% of the
value of its total assets in industrial development bonds where the
payment of principal and interest is the responsibility of companies
(or, guarantors, where applicable) with less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF THE TRUST
The Funds will not purchase or retain the securities of any issuer if
the officers and Trustees of the Funds or their adviser owning
individually more than 1/2 of 1% of the issuer's securities together
own more than 5% of the issuer's securities.

ARBITRAGE TRANSACTIONS
To comply with certain state restrictions, the Funds will not enter
into transactions for the purpose of engaging in arbitrage. If state
requirements change, this restriction may be revised without
shareholder notification.
WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
Capital Appreciation Fund will not write call options on securities
unless the securities are held in the Fund's portfolio or unless the
Fund is entitled to them in deliverable form without further payment
or after segregating cash in the amount of any further payment. The
Fund will not purchase put options on securities, other than put
options on stock indices, unless the securities are held in the Fund's
portfolio and not more than 5% of the value of the Fund's net assets
would be invested in premiums on open put option positions.
Total Return Bond Fund will not purchase put options on securities
unless the securities are held in the Fund's portfolio. The Fund will
not write put or call options or purchase put or call options in
excess of 5% of the value of its total assets.
U.S. Government Income Fund will not write covered put and call
options on securities unless the securities are held in the Fund's
portfolio or unless the Fund is entitled to them in deliverable form
without further payment or after segregating cash or U.S. Treasury
obligations with a value equal to or greater than the exercise price
of the underlying securities. The Fund will not purchase put options
on securities unless the securities are held in the Fund's portfolio.
INVESTING IN RESTRICTED SECURITIES
Capital Appreciation Fund will not purchase restricted securities if
immediately thereafter more than 10% of the total assets of the Fund,

taken at market value, would be invested in such securities (except
for commercial paper issued under Section 4(2) of the Securities Act
of 1933). To comply with certain state restrictions, the Fund will
limit these transactions to 5% of its net assets. (If state
restrictions change, this latter restriction may be revised without
shareholder approval or notification.)
Total Return Bond Fund may invest up to 10% of its total assets in
restricted securities. Certain restricted securities which the
Trustees deem to be liquid will be excluded from this limitation. The
restriction is not applicable to commercial paper issued under Section
4(2) of the Securities Act of 1933.
INVESTING IN MINERALS
Total Return Bond Fund will not purchase in oil, gas, or other mineral
exploration or development programs or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
U.S. Treasury Money Market Fund will not purchase oil, gas, or other
mineral exploration or development programs or leases.
In order to comply with registration requirements of a particular
state, Cash Reserve Fund will not invest in oil, gas, or other mineral
leases. (If state requirements change, these limitations may be
revised without notice to shareholders.)
Capital Appreciation Fund did not borrow money, pledge securities or invest
in illiquid securities in excess of 5% of the value of its net assets in
the last fiscal year and has no present intent to do so during the coming
fiscal year. To comply with registration requirements in certain states,
the Fund (1) will limit the aggregate value of the assets underlying
covered call options or put options written by the Fund to not more than

25% of its net assets, (2) will limit the premiums paid for options
purchased by the Fund to 20% of its net assets, and (3) limit the margin
deposits on futures contracts entered into by the Fund to 5% of its net
assets. (If state requirements change, these restrictions may be revised
without shareholder notification.)
Louisiana Municipal Income Fund did not borrow money or pledge securities
in excess of 5% of the value of its net assets during the last fiscal year
and has no present intent to do so during the coming fiscal year.
U.S. Government Income Fund did not engage in reverse repurchase
agreements, borrow money, or invest in illiquid securities in excess of 5%
of the value of its net assets in the last fiscal year and has no present
intent to do so during the coming year.
Cash Reserve Fund did not borrow money or engage in when-issued and delayed
delivery transactions in excess of 5% of the value of its net assets during
the last fiscal year and has no present intent to do so during the coming
year.
U.S. Treasury Money Market Fund does not expect to borrow money in excess
of 5% of the value of its net assets during the coming fiscal year.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment a later increase or decrease in
percentage resulting from any change in value of a Fund's net assets will
not result in a violation of any of the above restrictions.
REGULATORY COMPLIANCE
The Money Market Funds may follow non-fundamental operational policies that
are more restrictive than their fundamental investment limitations, as set
forth in the prospectus and this Statement of Additional Information, in
order to comply with applicable laws and regulations, including the
provisions of and regulations under the Investment Company Act of 1940. In

particular, the Funds will comply with the various requirements of Rule 2a-
7, which regulates money market mutual funds. For example, with limited
exceptions, Rule 2a-7 prohibits the investment of more than 5% of a Fund's
total assets in the securities of any one issuer, although a Fund's
investment limitations only requires such 5% diversification with respect
to 75% of its assets. The Funds will invest more than 5% of their
respective assets in any one issuer only under circumstances permitted by
Rule 2a-7. The Funds will also determine the effective maturity of their
investments, as well as their ability to consider a security as having
received the requisite short-term ratings by NRSROs, according to Rule 2a-
7. Except as otherwise noted, the Funds may change these operational
policies to reflect changes in the laws and regulations without the
approval of their shareholders.
TOWER MUTUAL FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal
occupations, and present positions, including any affiliation with Hibernia
National Bank, Hibernia Corporation, Federated Investors, Federated
Securities Corp., and Federated Administrative Services.

Edward C. Gonzales*+
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Trustee and Treasurer
Vice Chairman, Treasurer and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research, and Passport Research Ltd.;

Executive Vice President and Director, Federated Securities Corp.;
Chairman, Federated Services Company; Trustee, Federated Shareholder
Services; Chairman, Treasurer and Trustee, Federated Administrative
Services; Executive Vice President and Treasurer and/or Trustee or Director
of certain investment companies advised or distributed by affiliates of
Federated Investors.

Robert L. diBenedetto, M.D.
781 Colonial Drive
Baton Rouge, LA
Birthdate:
Trustee
Gynecologist; Medical Director, Woman's Hospital; Vice President,
Investment and Audit; President, Louisiana Medical Mutual Insurance
Company; Medical Director, Women's Hospital Physician Hospital
Organization.

James A. Gayle, Sr.
613 Turtle Creek Drive
Shreveport, LA
Birthdate:
Trustee
Vice President of Government Affairs and Community Development and
Director, Shreveport Chamber of Commerce; Director, Louisiana Forestry
Association; Director, Anthony Forest Products Company, Inc.; Retired from
International Paper Company in August 1985.

J. Gordon Reische +
20 Dogwood Drive

Covington, LA
Birthdate: September 11, 1931
Trustee
Retired Managing Partner, New Orleans office, KPMG - Peat Marwick.

Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
Vice President and Director, Private Label Management, Federated
Administrative Services.

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
Birthdate: September 3, 1959
Secretary
Senior Corporate Counsel, Federated Investors.

*This Trustee is deemed to be an `interested person'' of the Fund or Tower
Mutual Funds as defined in the Investment Company Act of 1940.
+Members of Tower Mutual Funds' Executive Committee. The Executive
Committee of the Board of Trustees handles the responsibilities of the
Board of Trustees between meetings of the Board.
FUND OWNERSHIP
Officers and Trustees of the Trust own less than 1% of each Fund's
outstanding shares.
The following list indicates the beneficial ownership of shareholders who
are the beneficial owners of more than 5% of the outstanding shares of the

following Funds as of October 18, 1996: Hibernia National Bank, New
Orleans, LA, acting in various capacities for numerous accounts, was the
owner of record of 1,885,839 shares (19.62%) of Class A Shares of Capital
Appreciation Fund, 387,329 shares (5.28%) of Total Return Bond Fund,
9,925,710 shares (5.67%) of Cash Reserve Fund and 7,481,970 shares (5.38%)
of U.S. Treasury Money Market Fund; Bost & Co., Pittsburgh, PA, for the
benefit of Hibernia National Bank, was the owner of record of 51,565,127
shares (29.45%) of Cash Reserve Fund and 26,226,315 shares (18.88%) of U.S.
Treasury Money Market Fund; and Bost & Co., c/o Mellon Bank N.A., was the
owner of record of 88,996,516 shares (50.82%) of Cash Reserve Fund and
46,295,431 shares (33.32%) of U.S. Treasury Money Market Fund.
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST CORPORATION*+

Edward C. Gonzales $0
President, Trustee, Treasurer
Robert L. di Benedetto, $10,200

Trustee
James A. Gayle, Sr., $12,000
Trustee
J. Gordon Reische, $12,000
Trustee
*Information is furnished for the fiscal year ended August 31, 1996. The
Trust is the only investment company in the complex.

+The aggregate compensation is provided for the Trust which is comprised of
6 portfolios.
TRUSTEE LIABILITY
Tower Mutual Funds' Declaration of Trust provides that the Trustees are not
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICE

ADVISER TO THE TRUST
The Trust's investment adviser is Hibernia National Bank (the "Adviser").
It provides investment advisory services through its Trust Division.
Hibernia National Bank is a wholly-owned subsidiary of Hibernia
Corporation.
The Adviser shall not be liable to the Tower Mutual Funds, a Fund, or any
shareholder of any Fund for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with Tower Mutual Funds.
Because of the internal controls maintained by Hibernia National Bank to
restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Hibernia National Bank's or its affiliates'
lending relationships with an issuer.
ADVISORY FEES
For its advisory services, Hibernia National Bank receives an annual
investment advisory fee as described in the prospectuses. The following

shows all investment advisory fees incurred by the Funds and the amounts of
those fees that were voluntarily waived by the Adviser:
Year Ended Amount Year Ended Amount
Year Ended Amount
Fund Name Aug 31, 1996 Waived-1996 Aug 31, 1995
Waived-1995 Aug 31, 1994 Waived-1994

Capital Appreciation Fund $1,204,309 $0 $1,018,267
$0 $1,048,592 $0
Louisiana Municipal
Income Fund $298,550 $53,076 $314,904 $55,983 $ 384,286 $68,318
Total Return Bond Fund $501,491 $0 $491,566 $0 $ 451,203
$0
U.S. Government
Income Fund $183,788 $24,505 $223,677 $29,824 $354,418 $47,256
Cash Reserve Fund $778,592 $0 $814,726 $0 $681,321
$0
U.S. Treasury Money
Market Fund $500,504 $275,277 $341,980 $188,089 $ 164,112 $91,001
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If a Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1 1/2%

per year of the remaining average net assets, the Adviser will
reimburse a Fund for its expenses over the limitation.

If a Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount of
the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the
Funds or to the Adviser and may include; advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers may be used by the
Adviser or its affiliates in advising the Funds and other accounts. To the
extent that receipt of these services may supplant services for which the

Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The Adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the fiscal
years ended August 31, 1996, 1995, and 1994, Capital Appreciation Fund paid
$238,669, $304,546, and $839,421, respectively, in brokerage commissions on
brokerage transactions.
Although investment decisions for the Funds are made independently from
those of other accounts managed by the Adviser, investments of the type the
Funds may make may also be made by those other accounts. When the Funds and
one or more other accounts managed by the Adviser are prepared to invest
in, or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
Adviser to be equitable to each. In some cases, this procedure may
adversely affect the price paid or received by the Funds or the size of the
position obtained or disposed of by the Funds. In some cases, however, it
is believed that coordination and the ability to participate in volume
transactions will be to the benefit of the Funds.
OTHER SERVICES

TRUST ADMINISTRATION
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for
a fee described in the prospectus. The following shows all fees earned by
Federated Administrative Services and the amounts of those fees that were
voluntarily waived:

Year Ended Amount Year Ended Amount
Year Ended Amount
Fund Name Aug 31, 1996 Waived-1996 Aug 31, 1995
Waived-1995 Aug 31, 1994 Waived-1994
Capital Appreciation Fund $206,816 $0 $177,184 $0 $184,784
$0
Louisiana Municipal
Income Fund $85,488 $0 $ 91,349 $0 $112,857 $0
Total Return Bond Fund $92,287 $0 $ 91,672 $0 $ 85,233
$0
U.S. Government
Income Fund $52,624 $0 $ 64,915 $0 $104,100 $0
Cash Reserve Fund $250,721 $0 $265,774 $0 $225,124
$0
U.S. Treasury Money
Market Fund $161,067 $0 $111,430 $0 $ 54,326 $1,781
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a
subsidiary of Federated Services Company, is transfer agent for the shares
of the Funds and dividend disbursing agent for the Funds. It also provides
certain accounting and recordkeeping services with respect to the Funds'
portfolios of investments.
Federated Shareholder Services Company receives a fee based on the size,
type, and number of accounts and transactions made by shareholders.
Federated Shareholder Services Company also maintains the Funds' accounting
records. The fee is based on the level of a Fund's average net assets for
the period plus out-of-pocket expenses.

CUSTODIAN
For its services as custodian, Hibernia National Bank, New Orleans,
Louisiana, may receive an annual fee, payable monthly based on a percentage
of each Fund's average aggregate daily net assets, plus out-of-pocket
expenses.
INDEPENDENT AUDITORS
The independent auditors for the Funds are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES

Class A Shares of Capital Appreciation Fund and shares of Louisiana
Municipal Income Fund, Total Return Bond Fund, and U.S. Government Income
Fund are sold at their net asset value with a front end sales charge.
Class B Shares of Capital Appreciation Fund are sold at net asset value and
are subject to a contingent deferred sales charge within six full years of
purchase. The Money Market Funds are sold at net asset value without a
sales charge. Shares of the Funds are sold on days the New York Stock
Exchange is open for business. The procedure for purchasing shares is
explained in the combined prospectus under "Investing in the Funds" and in
the Capital Appreciation Fund Class B Shares prospectus under `Investing
in the Fund.''
DISTRIBUTION PLAN
Tower Mutual Funds has adopted a Plan pursuant to Rule 12b-1 which was
promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan permits the payment of fees to
brokers for distribution and administrative services and to administrators
for administrative services. The Plan is designed to (i) stimulate brokers
to provide distribution and administrative support services to shareholders
and (ii) stimulate administrators to render administrative support services

to shareholders. The administrative services are provided by a
representative who has knowledge of the shareholder's particular
circumstances and goals. By adopting the Plan, the Trustees expect that
the Funds will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Funds in seeking to achieve
their investment objectives. By identifying potential investors whose
needs are served by a Fund's objective, and properly servicing these
accounts, a Fund may be able to curb sharp fluctuations in rates of
redemptions and sales. Other benefits may include: (1) an efficient and
effective administrative system; (2) a more efficient use of shareholder
assets by having them rapidly invested with a minimum of delay and
administrative detail; and (3) an efficient and reliable shareholder
records system and prompt responses to shareholder requests and inquiries
concerning their accounts.
For the fiscal year ended August 31, 1996, payments in the amount of
$401,436, $179,104, and $486,620 were made pursuant to the distribution
plans for Capital Appreciation Fund (Class A Shares), Total Return Bond
Fund, and Cash Reserve Fund, all of which were paid to financial
institutions.
SHAREHOLDER SERVICES (CAPTIAL APPRECIATION FUND-CLASS B SHARES)
The Shareholder Services Agreement permits the payment of fees to Federated
Shareholder Services to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular
circumstances and goals. These activities may include, but are not limited
to: marketing efforts; providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder

accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend options,
account designations, and addresses. Other benefits, which may be realized
under either arrangement, may include: (1) providing personal services to
shareholders; (2) investing shareholder assets with a minimum of delay and
administrative detail; (3) enhancing shareholder recordkeeping systems; and
(4) responding promptly to shareholders' requests and inquiries concerning
their accounts.
CONVERSION TO FEDERAL FUNDS
It is the Funds' policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. Hibernia National
Bank or its affiliates act as the shareholder's agent in depositing checks
and converting them to federal funds.
DETERMINING NET ASSET VALUE

Net asset value of the Funds (except the Money Market Funds) generally
changes each day. The Money Market Funds attempt to stabilize the value of
a share at $1.00. The days on which the net asset value is calculated by a
Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Equity and Income Funds' portfolio securities are
determined as follows:
ofor equity securities, according to the last sale price on a
national securities exchange, if applicable;
oin the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
ofor unlisted equity securities, the latest bid prices;

ofor bonds and other fixed income securities, as determined by an
independent pricing service;
ofor short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or for
short-term obligations with remaining maturities of less than 60
days, at the time of purchase, at amortized cost; or
ofor all other securities, at fair value as determined in good faith
by the Board of Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data.
The Funds will value futures contracts, options, and put options on futures
and at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in
good faith that another method of valuing option positions is necessary to
appraise their fair value.
USE OF THE AMORTIZED COST METHOD
With respect to the Money Market Funds, the Trustees have decided that the
best method for determining the value of portfolio instruments is amortized
cost. Under this method, portfolio instruments are valued at the
acquisition cost as adjusted for amortization of premium or accumulation of
discount rather than at current market value.
The Funds' use of the amortized cost method of calling portfolio
instruments depends on its compliance with Rule 2a-7 (the `Rule'')
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish
procedures reasonably designed to stabilize the net asset value per share,

as computed for purposes of distribution and redemption, at $1.00 per
share, taking into account current market conditions and a Fund's
investment objective.
Under the Rule, a Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the Rule,
a demand feature entitles the Fund to receive the principal amount of the
instrument from the issuer or a third party on (1) no more than 30 days'
notice or (2) at specified intervals not exceeding 397 days on no more than
30 days' notice. A standby commitment entitles the Fund to achieve same
day settlement and to receive an exercise price equal to the amortized cost
of the underlying instrument plus accrued interest at the time of exercise.
The Fund acquires instruments subject to demand features and standby
commitments to enhance the instrument's liquidity. The Fund treats demand
features and standby commitments as a part of the underlying instruments,
because the Fund does not acquire then for speculative purposes and cannot
transfer them separately from the underlying instruments. Therefore,
although the Rule defines demand features and standby commitments as
`puts,'' the Fund does not consider them to be separate investments for
the purposes of its investment policies.

MONITORING PROCEDURES
The Trustees' 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 .5% between the two values. The Trustees will take any
steps they consider appropriate (such as redemption in kind or

shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the
two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that a Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organizations. The Rule also requires a
Fund to maintain a dollar weighted average portfolio maturity (not
more than 90 days) appropriate to the objective of maintaining a
stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar
weighted average portfolio maturity of more than 90 days, a Fund will
invest its available cash to reduce the average maturity to 90 days or
less as soon as possible. Shares of investment companies purchased by
a Fund will meet the same criteria and will have investment policies
consistent with Rule 2a-7.
A Fund 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 normal unrealized appreciation
or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on
shares of a Fund computed by dividing the annualized daily income on
the 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 a Fund 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.
EXCHANGE PRIVILEGE

REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
Class B Shares of Capital Appreciation Fund are not eligble for exchange
into other funds.
This privilege is available to shareholders residing in any state in which
the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Further information on the exchange privilege and prospectuses may be
obtained by calling the Fund at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee. Shares may also be exchanged by
telephone, but only between fund accounts that have identical shareholder
registrations.

REDEEMING SHARES

A Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions for Capital
Appeciation Fund-Class B Shares may be subject to a contingent deferred
sales charge. Redemption procedures are explained in the prospectuses under
`Redeeming Shares.'' Although the Fund does not charge for telephone
redemptions, it reserves the right to charge a fee for the cost of wire-
transferred redemptions of less than $5,000.
REDEMPTION IN KIND
A Fund is obligated to redeem shares solely in cash up to $250,000, or 1%
of the Fund's net asset value, whichever is less, for any one shareholder
within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will
pay all or a portion of the remainder of the redemption in portfolio
instruments, valued in the same way as net asset value is determined. The
portfolio instruments will be selected in a manner that the Trustees deem
fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.

MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of Tower Mutual
Funds. To protect shareholders, Tower Mutual Funds has filed legal
documents with Massachusetts that expressly disclaim the liability of
shareholders for such acts or obligations of Tower Mutual Funds. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument Tower Mutual Funds or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for
obligations of Tower Mutual Funds, Tower Mutual Funds is required to use
its property to protect or to compensate the shareholder. On request, Tower
Mutual Funds will defend any claim made and pay any judgment against a
shareholder for any act or obligation of Tower Mutual Funds. Therefore,
financial loss resulting from liability as a shareholder will occur only if
Tower Mutual Funds cannot meet its obligations to indemnify shareholders
and to pay judgments against them from its assets.
TAX STATUS

THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, a Fund must,
among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and gain from the sale of securities;

oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains reviewed as cash or additional shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital
gains, are taxable as ordinary income.
CAPITAL GAINS
Long -term capital gains distributed to Fund shareholders (except the Money
Market Funds) will be treated as long-term capital gains regardless of how
long shareholders have held Fund shares.
Capital gains experienced by a Money Market Fund could result in an
increase in dividends. Capital losses could result in a decrease in
dividends. If, for some extraordinary reason, a Fund realized net long-
term capital gains, it will distribute them at least once every 12 months.
TOTAL RETURN

Average annual total return is the average compounded rate of return for a
given period that would equate a $1,000 initial investment to the ending
redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period
by the maximum offering price per share at the end of the period. The
number of shares owned at the end of the period is based on the number of
shares purchased at the beginning of the period with $1,000, adjusted over

the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
Capital Appreciation Fund's average annual total returns for Class A Shares
for the one-year and five-year periods ended August 31, 1996 and for the
period from October 14, 1988 (date of initial public investment) to August
31, 1996 were 14.47%, 11.83 % and 13.82%, respectively.
Louisiana Municipal Income Fund's average annual total returns for the one-
year and five-year periods ended August 31, 1996, and, for the period from
October 14, 1988 (date of initial public investment) to August 31, 1996,
were 1.89%, 6.50%, and 6.93%, respectively.
Total Return Bond Fund's average annual total returns for the one-year
period ended August 31, 1996 and for the period from November 2, 1992 (date
of initial public investment) to August 31, 1996, were -0.18% and 4.56%,
respectively.
U.S. Government Income Fund's average annual total returns for the one-year
and five-year periods ended August 31, 1996 and for the period from October
14, 1988 (date of initial public investment) to August 31, 1996 were 0.64%,
5.36% and 7.19%, respectively.
Cash Reserve Fund's average annual total returns for the one-year and five-
year periods ended August 31, 1996 and for the period from October 14, 1988
(effective date of the Trust's registration statement) to August 31, 1996
were 4.79%, 3.74% and 5.32%, respectively.
U.S. Treasury Money Market Fund's average annual total return for the one-
year period and the period from July 19, 1993 (date of initial public
investment) to August 31, 1996 were 5.08% and 4.29%, respectively.
YIELD

The yield for a Fund (except the Money Market Funds) is determined by
dividing the net investment income per share (as defined by the Securities

and Exchange Commission) earned by a Fund over a thirty-day period by the
maximum offering price per share of the Fund on the last day of the period.
This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed
to be generated each month over a twelve month period and is reinvested
every six months. The yield does not necessarily reflect income actually
earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a
Fund, the performance will be reduced for those shareholders paying those
fees.
Capital Appreciation Fund's yield for Class A Shares for the thirty-day
period ended August 31, 1996 was 1.04%.
Louisiana Municipal Income Fund's yield for the thirty-day period ended
August 31, 1996 was 4.97%.
Total Return Bond Fund's yield for the thirty-day period ended August 31,
1996 was 5.63%.
U.S. Government Income Fund's yield for the thirty-day period ended August
31, 1996 was 6.20%.
The Money Market Funds calculate yield based upon the seven days ending on
the day of the calculation, called the `base period.'' This yield is
computed by: 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;

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 multiplying the base period return by 365/7.
Cash Reserve Fund's yield for the seven-day period ended August 31, 1996
was 4.51%.
U.S. Treasury Money Market Fund's yield for the seven-day period ended
August 31, 1996 was 4.81%.
TAX-EQUIVALENT YIELD

Louisiana Municipal Income Fund's tax-equivalent yield is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that
the Fund would have had to earn to equal its actual yield, assuming a
combined federal and state marginal tax rate of 45.60% and assuming that
the income is 100% tax-exempt.
The Fund's tax-equivalent yield for the thirty-day period ended August 31,
1996 was 9.13%.

TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF LOUISIANA

COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.00% 34.00% 37.00% 42.00% 45.60%

SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750

TAX-EXEMPT

YIELD TAXABLE YIELD EQUIVALENT

1.50% 1.85% 2.27% 2.38% 2.59% 2.76%
2.00% 2.47% 3.03% 3.17% 3.45% 3.68%
2.50% 3.09% 3.79% 3.97% 4.31% 4.60%
3.00% 3.70% 4.55% 4.76% 5.17% 5.51%
3.50% 4.32% 5.30% 5.56% 6.03% 6.43%
4.00% 4.94% 6.06% 6.35% 6.90% 7.35%
4.50% 5.56% 6.82% 7.14% 7.76% 8.27%
5.00% 6.17% 7.58% 7.94% 8.62% 9.19%
5.50% 6.79% 8.33% 8.73% 9.48% 10.11%
6.00% 7.41% 9.09% 9.52% 10.34% 11.03%
6.50% 8.02% 9.85% 10.32% 11.21% 11.95%
7.00% 8.64% 10.61% 11.11% 12.07% 12.87%
7.50% 9.26% 11.36% 11.90% 12.93% 13.79%
8.00% 9.88% 12.12% 12.70% 13.79% 14.71%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to
increase federal deductions.
PERFORMANCE INFORMATION

Performance depends upon such variables as: portfolio quality; average
portfolio maturity; type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities; changes
in expenses; and the relative amount of cash flow.
The Funds' (except the Money Market Funds) performance fluctuates on a
daily basis largely because net earnings and offering price per share

fluctuate daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Funds
use in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all income dividends and capital gains
distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the ``money market instruments funds'' category in
advertising and sales literature.
o Bank Rate Monitor National Index, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading
bank and thrift institution money market deposit accounts. The rates
published in the index are averages of the personal account rates
offered on the Wednesday prior to the date of publication by ten of the
largest banks and thrifts in each of the five largest Standard
Metropolitan Statistical Areas. Account minimums range upward from
$2,500 in each institution, and compounding methods vary. If more than
one rate is offered, the lowest rate is used. Rates are subject to
change at any time specified by the institution.
o Dow Jones Industrial Average (``DJIA'') represents share prices of
selected blue-chip industrial corporations as well as public utility and
transportation companies. The DJIA indicates daily changes in the

average price of stocks in any of its categories. It also reports total
sales for each group of industries. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator
for the stock market as a whole.
o Standards & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, compares total returns of funds
whose portfolios are invested primarily in common stocks. In addition,
the Standard & Poor's index assumes reinvestment of all dividends paid
by stock listed on the index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated in the
Standard & Poor's figures.
o Lehman Brothers Government/Corporate Total Index is compromised of
approximately 5,000 issues which include: non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate bonds
guaranteed by the U.S. government and quasi-federal corporations; and
publicly issued, fixed rate, non-convertible domestic bonds of companies
in industry, public utilities, and finance. The average maturity of
these bonds approximates nine years. Tracked by Lehman Brothers, Inc.,
the index calculates total returns for one-month, three-months, twelve
months, and ten-year periods and year-to-date.
o Salomon Brothers AAA-AA Corporate Index calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
o Merrill Lynch Corporate & Government Master Index is an unmanaged index
comprised of approximately 4,821 issues which include corporate debt
obligations rated BBB or better and publicly issued, non-convertible

domestic debt of the U.S. government or any agency thereof. These
quality parameters are based on composite of rating assigned by Standard
and Poor's Ratings Group and Moody's Investors Service, Inc. Only notes
and bonds with a minimum maturity of one year are included.
o Merrill Lynch Corporate Master Index is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better.
These quality parameters are based on composites of ratings assigned by
Standard and Poor's Ratings Group and Moody's Investors Service, Inc.
Only bonds with a minimum maturity of one year are included.
o Salomon Brothers Broad Investment-Grade (``Big'') Bond Index is designed
to provide the investment-grade bond manager with an all-inclusive
universe of institutionally traded U.S. Treasury, agency, mortgage and
corporate securities which can be used as a benchmark. The BIG Index is
market capitalization-weighted and includes all fixed rate bonds with a
maturity of one year or longer and a minimum of $50-million amount
outstanding at entry ($200 million for mortgage coupons) and remain in
the index until their amount falls below $25 million.
o Morningstar, Inc., an independent rating service , is the publisher of
the bi-weekly Mutual Funds Values. Mutual Funds Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Trust's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Trust can
compare its performance, or performance for the types of securities in

which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by the Trust portfolio managers and their views and
analysis on how such developments could affect the Funds. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute (`ICI'').
For example, according to the ICI, twenty-seven percent of American
households are pursuing their financial goals through mutual funds. These
investors, as well as businesses and institutions, have entrust over $3
trillion to the more than 5,000 funds available.
FINANCIAL STATEMENTS

The financial statements for the fiscal year ended August 31, 1996, are
incorporated herein by reference to the Funds' Annual Report dated August
31, 1996 . A copy of the Annual Report may be obtained without charge by
contacting the Funds at the address located on the back cover of the
prospectus or by calling the Funds toll-free 1-800-999-0124.

APPENDIX

STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the 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 effect 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.
BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payments of interest and/or repayment
of principal is in arrears.
MOODY'S INVESTORS SERVICE, INC., MUNICIPAL BOND RATING DEFINITIONS
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 edge.'' 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 compromise 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 risks 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 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 over the future. Uncertainty of
position characterizes bonds in this class.

B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
CA - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default of have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

FITCH INVESTORS SERVICE, INC., BOND RATING DEFINITIONS
AAA bonds (highest quality) - the obligator has an extraordinary ability to
pay interest and repay principal which is unlikely to be affected by
reasonably foreseeable events.
AA bonds (high quality) - the obligor's ability to pay interest and repay
principal, while very strong, is some-what less than for AAA rated
securities or more subject to possible change over the term of the issue.
MOODY'S INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING DEFINITIONS
PRIME-1 - Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics:

- - Leading market positions in well established industries.

- - High rates of return on funds employed.

- - Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

- - Broad margins in earning 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 related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3 - Issuers rated PRIME-3 (or related 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.
NOT PRIME- Issuers rated NOT PRIME do not fall within any of the Prime
rating categories.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING DEFINITIONS

F-1+- EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1- VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated
F-1+.
F-2- GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned F-1+ and F-1 ratings.
F-3- FAIR CREDIT QUALITY. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment
is adequate, however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S- WEAK CREDIT QUALITY. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
D- DEFAULT. Issues assigned this rating are in actual or imminent payment
default.
LOC- The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.