TOWER MUTUAL FUNDS, 497, 1996-10-31

TOWER MUTUAL FUNDS
497, 1996-10-31

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PROSPECTUS
OCTOBER 31, 1996

============
TOWER
MUTUAL FUNDS
============
Tower Capital Appreciation Fund
Class A Shares

Tower Louisiana Municipal Income Fund

Tower Total Return Bond Fund

Tower U.S. Government Income Fund

Tower Cash Reserve Fund

Tower U.S. Treasury Money Market Fund

TOWER MUTUAL FUNDS
PROSPECTUS

Tower Mutual Funds (the "Trust") is an open-end management investment company (a
mutual fund). This prospectus offers investors interests in the following six
investment portfolios (collectively referred to as the "Funds" and individually
as the "Fund"), each having a distinct investment objective and policies:

EQUITY AND INCOME FUNDS
Tower Capital Appreciation Fund--Class A Shares

Tower Louisiana Municipal Income Fund

Tower Total Return Bond Fund

Tower U.S. Government Income Fund

MONEY MARKET FUNDS

Tower Cash Reserve Fund

Tower U.S. Treasury Money Market Fund

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 SHARES OFFERED BY THIS PROSPECTUS 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 CAN BE NO ASSURANCE
THAT THESE FUNDS WILL BE ABLE TO DO SO.

This prospectus contains the information you should read and know before you
invest in any of the Funds of the Trust. Keep this prospectus for future
reference.

Additional information about the Trust is contained in the Trust's Statement of
Additional Information dated October 31, 1996, which has also been filed with
the Securities and Exchange Commission ("SEC"). The information contained in the
Statement is incorporated by reference into this prospectus. You may request a
copy of the Statement, free of charge, obtain other information, or make
inquiries about any of the Funds by writing to the Trust or calling toll-free
1-800-999-0124. The Statement, material incorporated by reference into this
document, and other information regarding the Trust 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 October 31, 1996

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

SYNOPSIS 1
- ------------------------------------------------------

SUMMARY OF FUND EXPENSES--
EQUITY AND INCOME FUNDS 3
- ------------------------------------------------------

SUMMARY OF FUND EXPENSES--
MONEY MARKET FUNDS 4
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS 6
- ------------------------------------------------------
OBJECTIVE AND POLICIES OF EACH FUND 10
- ------------------------------------------------------

Capital Appreciation Fund 10
Louisiana Municipal Income Fund 11
Total Return Bond Fund 17
U.S. Government Income Fund 20
Cash Reserve Fund 21
U.S. Treasury Money Market Fund 23

PORTFOLIO INVESTMENTS AND STRATEGIES 23
- ------------------------------------------------------

Borrowing Money 23
Foreign Securities 23
Investing in Securities of Other
Investment Companies 24
Lending of Portfolio Securities 24
Put and Call Options 25
Financial Futures and Options
on Futures 25
Repurchase Agreements 26
Restricted and Illiquid Securities 27
Temporary Investments 27
U.S. Government Securities 28
When-Issued and Delayed Delivery
Transactions 28

TOWER MUTUAL FUNDS INFORMATION 29
- ------------------------------------------------------

Management of Tower Mutual Funds 29
Distribution of Fund Shares 30
Fund Administration 31
Brokerage Transactions 32

NET ASSET VALUE 32
- ------------------------------------------------------

INVESTING IN THE FUNDS 32
- ------------------------------------------------------

Share Purchases 32
Minimum Investment Required 33
What Shares Cost 33
Reducing the Sales Charge 35
Systematic Investment Program 37
Exchanging Securities for Fund Shares 37
Certificates and Confirmations 37
Dividends 37
Capital Gains 38

EXCHANGE PRIVILEGE 38
- ------------------------------------------------------

REDEEMING SHARES 39
- ------------------------------------------------------

Systematic Withdrawal Program 41
Accounts with Low Balances 41

SHAREHOLDER INFORMATION 41
- ------------------------------------------------------

Voting Rights 41
EFFECT OF BANKING LAWS 42
- ------------------------------------------------------

TAX INFORMATION 42
- ------------------------------------------------------

Federal Income Tax 42
Louisiana Municipal Income Fund--
Additional Tax Information 43
Other State and Local Taxes 44

PERFORMANCE INFORMATION 44
- ------------------------------------------------------

OTHER CLASSES OF SHARES 45
- ------------------------------------------------------

ADDRESSES 46
- ------------------------------------------------------
SYNOPSIS
- --------------------------------------------------------------------------------

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. Capital Appreciation Fund currently offers a single
class of shares, which are designated as Class A Shares. This Fund intends to
offer a second class of shares to be called Class B Shares beginning November
30, 1996. Each Fund is designed for institutions and individuals as a convenient
means of accumulating an interest in a professionally managed portfolio. This
prospectus relates only to Tower Louisiana Municipal Income Fund, Tower Total
Return Bond Fund, Tower U.S. Government Income Fund, Tower Cash Reserve Fund,
Tower U.S. Treasury Money Market Fund and Class A Shares of Tower Capital
Appreciation Fund (collectively, the "Funds.")

As of the date of this prospectus, shares are offered in the following Funds:

Tower Capital Appreciation Fund (Class A Shares) ("Capital Appreciation
Fund")--seeks to provide growth of capital and income by investing
primarily in a diversified portfolio of common stocks;

Tower Louisiana Municipal Income Fund ("Louisiana Municipal Income
Fund")--seeks to provide current income which is generally exempt from
federal regular income tax and the personal income taxes imposed by the
state of Louisiana by investing primarily in a non-diversified portfolio
of Louisiana municipal securities;

Tower Total Return Bond Fund ("Total Return Bond Fund")--seeks to
maximize total return by investing in a diversified portfolio of
government, mortgage-backed, asset-backed and corporate securities, as
well as collateralized mortgage obligations;

Tower U.S. Government Income Fund ("U.S. Government Income Fund")--seeks
to provide current income by investing in a diversified portfolio
consisting primarily of U.S. government securities;

Tower Cash Reserve Fund ("Cash Reserve Fund")--seeks to provide current
income consistent with stability of principal by investing in a
diversified portfolio of high quality money market instruments; and

Tower U.S. Treasury Money Market Fund ("U.S. Treasury Money Market Fund"
and together with Cash Reserve Fund, the "Money Market Funds")--seeks to
provide current income consistent with stability of principal and
liquidity by investing in a portfolio limited to short-term U.S. Treasury
obligations.

For information on how to purchase shares of any of the Funds, please refer to
"Investing in the Funds." In most cases, the minimum initial investment of
$1,000 is required for each Fund; in the case of the Money Market Funds, a
minimum initial investment of $1,000 is required unless the investment is in a
retirement plan, in which case the minimum initial investment is $250. See
"Minimum Investment Required." Shares of the Money Market Funds are sold at net
asset value
without a sales charge. Shares of Capital Appreciation Fund are sold at net
asset value plus a maximum sales charge of 4.50%. Shares of Louisiana Municipal
Income Fund, Total Return Bond Fund, and U.S. Government Income Fund are sold at
net asset value plus a maximum sales charge of 3.00%. Sales charges may be
reduced as discussed under "Reducing the Sales Charge." Shares of the Funds are
redeemed at net asset value. Information on redeeming shares may be found under
"Redeeming Shares." Additionally, information regarding the exchange privilege
offered with respect to the Trust may be found under "Exchange Privilege."
Hibernia National Bank is the investment adviser and custodian to the Funds and
receives compensation for these services.

One or more Funds may make certain investments and employ certain investment
techniques that involve risks, including entering into repurchase agreements,
lending portfolio securities, and entering into futures contracts and related
options as hedges. These risks and those associated with investing in Louisiana
municipal securities, mortgage-backed securities, asset-backed securities,
when-issued securities, and variable rate securities are described under
"Objective and Policies of Each Fund" and "Portfolio Investments and
Strategies."

SUMMARY OF FUND EXPENSES--EQUITY AND INCOME FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL LOUISIANA TOTAL U.S.
APPRECIATION MUNICIPAL RETURN GOVERNMENT
FUND INCOME BOND INCOME
CLASS A SHARES FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................ 4.50% 3.00% 3.00% 3.00%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................ None None None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)...... None None None None
Redemption Fee (as a percentage of amount redeemed,
if applicable)............................................. None None None None
Exchange Fee................................................. None None None None

<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C> <C> <C>
Management Fees(1)........................................... 0.75% 0.37% 0.70% 0.39%
12b-1 Fees(2)................................................ 0.25% 0.00% 0.25% 0.00%
Total Other Expenses......................................... 0.24% 0.37% 0.34% 0.48%
Total Operating Expenses(3).......................... 1.24% 0.74% 1.29% 0.87%
</TABLE>

(1) The management fees of Louisiana Municipal Income Fund and U.S. Government
Income Fund have been reduced to reflect the voluntary waivers by the
investment adviser. The adviser may terminate these voluntary waivers at any
time at its sole discretion. The maximum management fees for Louisiana
Municipal Income Fund and U.S. Government Income Fund are each 0.45%.

(2) Under the Rule 12b-1 distribution plans, Louisiana Municipal Income Fund and
U.S. Government Income Fund can pay the distributor up to 0.25% as a 12b-1
fee. The 12b-1 fee has been reduced to reflect the voluntary waiver of a
portion of the 12b-1 fee for these two Funds. The distributor can terminate
this voluntary waiver at any time at its sole discretion.

(3) Total Operating Expenses for Louisiana Municipal Income Fund and U.S.
Government Income Fund were 0.82% and 0.93%, respectively, absent the
voluntary waivers described above in note (1).

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS 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 FUNDS."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.

EXAMPLE
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% for Class A Shares of
Capital Appreciation Fund and maximum sales charge of 3.00% for Louisiana
Municipal Income Fund, Total Return Bond Fund, and U.S. Government Income Fund.
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION LOUISIANA U.S.
FUND MUNICIPAL TOTAL RETURN GOVERNMENT
CLASS A SHARES INCOME FUND BOND FUND INCOME FUND
<S> <C> <C> <C> <C>
1 Year............................ $ 57 $ 37 $ 43 $ 39
3 Years........................... $ 83 $ 53 $ 70 $ 57
5 Years........................... $ 110 $ 70 $ 99 $ 77
10 Years.......................... $ 188 $ 119 $ 181 $ 134
</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.

SUMMARY OF FUND EXPENSES--MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
TREASURY
CASH MONEY
RESERVE MARKET
FUND FUND
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)............... None None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).... None None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable).................................................................. None None
Redemption Fee (as a percentage of amount redeemed, if applicable).......................... None None
Exchange Fee................................................................................ None None

<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fees(1).......................................................................... 0.40% 0.18%
12b-1 Fees(2)............................................................................... 0.25% 0.00%
Total Other Expenses........................................................................ 0.22% 0.26%
Total Operating Expenses(3)......................................................... 0.87% 0.44%
</TABLE>

(1) The management fee for U.S. Treasury Money Market Fund has been reduced to
reflect the voluntary waiver by the investment adviser. The adviser may
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee for U.S. Treasury Money Market Fund is 0.40%

(2) Under the Rule 12b-1 distribution plan, U.S. Treasury Money Market Fund can
pay the distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee has been
reduced to reflect the voluntary waiver of a portion of the 12b-1 fee for
the U.S. Treasury Money Market Fund. The distributor can terminate this
voluntary waiver at any time at its sole discretion.

(3) Total Operating Expenses for U.S. Treasury Money Market Fund were 0.66%
absent the voluntary waiver described above in note (1).

EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period.
The Funds charge no redemption fees.

<TABLE>
<CAPTION>
CASH U.S. TREASURY
RESERVE MONEY MARKET
FUND FUND
<S> <C> <C>
1 Year........................................................................ $ 9 $ 5
3 Years....................................................................... $ 28 $14
5 Years....................................................................... $ 48 $25
10 Years...................................................................... $107 $55
</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.
ADDRESSES

THIS PAGE INTENTIONALLY LEFT BLANK

FINANCIAL HIGHLIGHTS--EQUITY AND INCOME FUNDS
- --------------------------------------------------------------------------------

The following table has been audited by Ernst & Young LLP, the Funds'
independent auditors. Their report dated October 10, 1996 on the Funds'
financial statements is incorporated by reference to the Annual Report dated
August 31, 1996. This table should be read in conjunction with the Funds'
financial statements and notes thereto, which may be obtained from the Funds.
<TABLE>
<CAPTION>
DISTRIBUTIONS
NET ASSET NET REALIZED DISTRIBUTIONS DISTRIBUTIONS IN
VALUE, NET AND UNREALIZED TOTAL FROM FROM NET FROM NET EXCESS OF NET
YEAR ENDED BEGINNING INVESTMENT GAIN/(LOSS) ON INVESTMENT INVESTMENT REALIZED GAIN INVESTMENT
AUGUST 31, OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME ON INVESTMENTS INCOME
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION FUND--CLASS A SHARES
1989(a) $ 10.17 0.33 2.68 3.01 (0.24) -- --
1990 $ 12.94 0.38 (0.76) (0.38) (0.39) (0.22) (0.02)(f)
1991 $ 11.93 0.33 2.45 2.78 (0.36) -- --
1992 $ 14.35 0.29 0.11 0.40 (0.27) (0.46) --
1993 $ 14.02 0.30 2.00 2.30 (0.30) (1.42) --
1994 $ 14.60 0.23 0.36 0.59 (0.25) (1.13) --
1995 $ 13.81 0.22 2.54 2.76 (0.21) (0.27) --
1996 $ 16.09 0.19 2.62 2.81 (0.19) (0.84) --
LOUISIANA MUNICIPAL INCOME FUND
1989(a) $ 10.00 0.43 0.14 0.57 (0.43) -- --
1990 $ 10.14 0.64 (0.16) 0.48 (0.64) -- --
1991 $ 9.98 0.64 0.48 1.12 (0.64) -- --
1992 $ 10.46 0.64 0.48 1.12 (0.64) (0.03) --
1993 $ 10.91 0.62 0.73 1.35 (0.62) (0.04) --
1994 $ 11.60 0.59 (0.68) (0.09) (0.59) (0.10) --
1995 $ 10.82 0.59 0.24 0.83 (0.58) (0.08) --
1996 $ 10.99 0.60 (0.05) 0.55 (0.60) -- --
TOTAL RETURN BOND FUND
1993(b) $ 10.00 0.56 0.48 1.04 (0.55) -- --
1994 $ 10.49 0.57 (0.83) (0.26) (0.57) (0.02) --
1995 $ 9.64 0.56 0.39 0.95 (0.54) -- --
1996 $ 10.05 0.56 (0.27) 0.29 (0.57) -- --
U.S. GOVERNMENT INCOME FUND
1989(a) $ 10.17 0.69 0.03 0.72 (0.69) -- --
1990 $ 10.20 0.86 (0.11) 0.75 (0.86) (0.02) --
1991 $ 10.07 0.85 0.43 1.28 (0.85) (0.01) --
1992 $ 10.49 0.79 0.30 1.09 (0.79) (0.04) --
1993 $ 10.75 0.74 0.12 0.86 (0.74) (0.01) (0.01)(f)
1994 $ 10.85 0.69 (0.89) (0.20) (0.69) (0.04) --
1995 $ 9.92 0.71 0.20 0.91 (0.69) -- --
1996 $ 10.14 0.67 (0.30) 0.37 (0.69) -- --
</TABLE>

(a) Reflects operations for the period from October 14, 1988 (date of initial
public investment) to August 31, 1989.

(b) Reflects operations for the period from November 2, 1992 (date of initial
public investment) to August 31, 1993.

(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(d) Computed on an annualized basis.

(e) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(f) 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.

Further information about the Funds' performance is contained in the Annual
Report dated August 31, 1996, which can be obtained free of charge.
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
NET ASSETS,
END OF
NET ASSET NET PERIOD PORTFOLIO AVERAGE
TOTAL VALUE, END TOTAL INVESTMENT EXPENSE (000 TURNOVER COMMISSION
DISTRIBUTIONS OF PERIOD RETURN(c) EXPENSES INCOME WAIVER(e) OMITTED) RATE RATE PAID
<C> <C> <C> <C> <C> <C> <C> <C> <C>
(0.24) $ 12.94 32.29% 0.56%(d) 4.00%(d) 0.83%(d)$ 48,093 70% --
(0.63) $ 11.93 (3.11%) 0.42% 3.06% 0.75% $ 60,448 123% --
(0.36) $ 14.35 23.77% 0.74% 2.58% 0.29% $ 87,927 124% --
(0.73) $ 14.02 2.93% 0.83% 1.99% 0.25% $ 73,653 163% --
(1.72) $ 14.60 17.89% 0.85% 2.10% 0.18% $ 140,808 127% --
(1.38) $ 13.81 4.27% 1.09% 1.67% -- $ 139,081 118% --
(0.48) $ 16.09 20.71% 1.25% 1.46% -- $ 144,476 69% --
(1.03) $ 17.87 18.03% 1.24% 1.08% -- $ 169,648 69% $ 0.0632
(0.43) $ 10.14 5.82% 0.62%(d) 6.57%(d) 0.61%(d)$ 12,285 28% --
(0.64) $ 9.98 4.89% 0.81% 6.35% 0.41% $ 31,380 32% --
(0.64) $ 10.46 11.59% 0.74% 6.29% 0.20% $ 42,210 26% --
(0.67) $ 10.91 11.02% 0.65% 6.04% 0.16% $ 57,547 19% --
(0.66) $ 11.60 12.75% 0.66% 5.59% 0.14% $ 85,914 32% --
(0.69) $ 10.82 (0.76%) 0.71% 5.24% 0.08% $ 79,698 33% --
(0.66) $ 10.99 8.20% 0.77% 5.54% 0.08% $ 67,600 22% --
(0.60) $ 10.94 5.04% 0.74% 5.37% 0.08% $ 65,717 17% --
(0.55) $ 10.49 10.39% 0.77%(d) 6.56%(d) 0.22%(d)$ 63,608 78% --
(0.59) $ 9.64 (2.46%) 1.21% 5.62% -- $ 72,088 96% --
(0.54) $ 10.05 10.19% 1.30% 5.71% -- $ 69,455 91% --
(0.57) $ 9.77 2.90% 1.29% 5.57% -- $ 71,188 38% --
(0.69) $ 10.20 9.20% 0.59%(d) 8.64%(d) 0.52%(d)$ 15,753 42% --
(0.88) $ 10.07 7.48% 0.69% 8.50% 0.45% $ 32,596 32% --
(0.86) $ 10.49 13.27% 0.68% 8.30% 0.17% $ 48,482 20% --
(0.83) $ 10.75 10.72% 0.69% 7.51% 0.11% $ 61,646 36%
(0.76) $ 10.85 8.11% 0.68% 7.03% 0.11% $ 86,597 61% --
(0.73) $ 9.92 (1.67%) 0.74% 6.68% 0.06% $ 67,051 26% --
(0.69) $ 10.14 9.60% 0.82% 7.02% 0.06% $ 42,593 5% --
(0.69) $ 9.82 3.72% 0.87% 6.64% 0.06% $ 37,544 27% --
</TABLE>

FINANCIAL HIGHLIGHTS--MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

(a) Reflects operations for the period from October 14, 1988 (date of initial
public investment) to August 31, 1989.

(b) Reflects operations for the period from July 19, 1993 (date of initial
public investment) to August 31, 1993.

(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(d) Computed on an annualized basis.

(e) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

OBJECTIVE AND POLICIES OF EACH FUND
- --------------------------------------------------------------------------------

The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus, and, in the case of the Money
Market Funds, by complying with the diversification and other requirements of
Rule 2a-7 under the Investment Company Act of 1940 which regulates money market
mutual funds.

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

Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below appear in the
"Portfolio Investments and Strategies" section of this prospectus and in the
Statement of Additional Information.

CAPITAL APPRECIATION FUND

The investment objective of Capital Appreciation 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.

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 and Strategies."

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.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Investing in Securities of Other Investment
Companies," "Lending of Portfolio Securities," and "Restricted and Illiquid
Securities."

LOUISIANA MUNICIPAL INCOME FUND

The investment objective of Louisiana Municipal Income Fund is to provide
current income which is generally exempt from federal regular income tax and the
personal income taxes imposed by the state of Louisiana. (Federal regular income
tax does not include the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.)

ACCEPTABLE INVESTMENTS. The Fund attempts to achieve its investment objective by
investing in a professionally managed portfolio primarily limited to Louisiana
municipal securities. As a matter of fundamental investment policy, the Fund
will invest its assets so that, under normal circumstances, at least 80% of its
annual interest income is exempt from federal regular and Louisiana state income
taxes or at least 80% of its total assets are invested in obligations, the
interest income from which is exempt from federal regular and Louisiana state
income taxes.

MUNICIPAL SECURITIES. The municipal securities in which the Fund invests
are:

debt obligations, including industrial development bonds, issued on
behalf of the state of Louisiana, its political subdivisions or agencies;

debt obligations issued by or on behalf of any state, territory or
possession of the United States, including the District of Columbia, or
any political subdivision or agency of any of these; and

participation interests, as described below, in any of the above
obligations;

the interest from which is, in the opinion of bond counsel for the issuers,
or in the opinion of officers of Tower Mutual Funds and/or the investment
adviser to the Fund, exempt from both federal regular income tax and the
personal income tax imposed by the state of Louisiana. (Municipal
securities not issued by the state of Louisiana, its political subdivisions
or agencies,

which may generate interest income subject to the Louisiana personal income
tax, may also be purchased by the Fund.) As a matter of investment policy
which may be changed without shareholder approval, at least 65% of the
Fund's total assets will be invested in Louisiana municipal securities. It
is likely that shareholders will be required to include interest from a
portion of the municipal securities owned by the Fund in calculating the
federal individual alternative minimum tax or the federal alternative
minimum tax for corporations.

CHARACTERISTICS. The municipal securities which the Fund buys are:

rated Baa or above by Moody's Investors Service, Inc. ("Moody's") or BBB
or above by Standard & Poor's Ratings Group ("S&P"). Bonds rated BBB by
S&P or Baa by Moody's have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than higher
rated bonds. A description of the rating categories is contained in the
Appendix to the Statement of Additional Information;

insured by a municipal bond insurance company which is rated AAA by S&P
or Aaa by Moody's;

guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest; fully collateralized by an escrow of
U.S. government securities; or

unrated if determined to be of comparable quality to one of the foregoing
rating categories by the Fund's investment adviser.

PARTICIPATION INTERESTS. The Fund may purchase participation interests
from financial institutions such as commercial banks, savings associations,
and insurance companies. These participation interests give the Fund an
undivided interest in Louisiana municipal securities.

The municipal securities subject to the participation interests are not
limited to maturities of one year or less, so long as the participation
interests include the right to demand payment, typically within seven days,
from the issuers of those interests. The Fund will purchase only
participation interests which have such a demand feature or which mature in
less than one year. The financial institutions from which the Fund
purchases participation interests frequently provide or secure irrevocable
letters of credit or guarantees to assure that the participation interests
are of high quality. The Trustees will determine that participation
interests meet the prescribed quality standards for the Fund.
OTHER INVESTMENT TECHNIQUES. The Fund may purchase a right to sell a security
held by it back to the issuer or to another party at an agreed upon price at any
time during a stated period or on a certain date. These rights may be referred
to as "liquidity puts" or "standby commitments."

The Fund may also hedge all or a portion of its investments by entering into put
and call options and by entering into futures contracts or options on them. Any
gains realized on these futures contracts and options are taxable. Before the
Fund begins using these investment techniques, it will notify shareholders.

In addition, the Fund may concentrate certain of its investments, engage in
when-issued and delayed delivery transactions, and invest in temporary
investments and repurchase agreements. See "Portfolio Investments and
Strategies."

LOUISIANA MUNICIPAL SECURITIES. Louisiana municipal securities are generally
issued to finance public works, such as airports, bridges, highways, housing,
hospitals, mass transportation projects, schools, streets, and water and sewer
works. They are also issued to repay outstanding obligations, to raise funds for
general operating expenses, and to make loans to other public institutions and
facilities.

Louisiana municipal securities include industrial development and pollution
control bonds issued by or on behalf of public authorities to provide financing
aid to acquire sites or construct and equip facilities for privately or publicly
owned corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby increases
local employment.

The two principal classifications of municipal securities are "general
obligation bonds" and "revenue bonds." General obligation bonds are secured by
the issuer's pledge of its full faith and credit and taxing power for the
payment of principal and interest. Interest on and principal of revenue bonds,
however, are payable only from the revenue generated by the facility financed by
the bond or other specified sources of revenue or collateral. Revenue bonds do
not represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial development
bonds and pollution control bonds are typically classified as revenue bonds.

The Fund may invest more than 25% of the value of its total assets in industrial
development and pollution control bonds, which may result in more than 25% of
the Fund's total assets being invested in one industry. The Fund may also invest
more than 25% of its assets in housing bonds, which are revenue bonds.
Legislative actions at the state or federal level, changes in national or
regional economic conditions, or changes in the quality of mortgages securing
some housing bonds are some of the factors that could affect housing bonds.

MUNICIPAL BOND INSURANCE. The Fund may purchase municipal securities covered by
insurance which guarantee the timely payment of principal at maturity and
interest on such securities. These insured municipal securities are either (1)
covered by an insurance policy applicable to a particular security, whether
obtained by the issuer of the security or by a third party ("Issuer-Obtained
Insurance") or (2) insured under master insurance policies issued by municipal
bond insurers, which may be purchased by the Fund (the "Policies").

The Fund will require or obtain municipal bond insurance when purchasing
municipal securities which would not otherwise meet the Fund's quality
standards. The Fund may also require or obtain municipal bond insurance when
purchasing or holding specific municipal securities when, in the opinion of the
Fund's investment adviser, such insurance would benefit the Fund, for example,
through improvement of portfolio quality or increased liquidity of certain
securities. The Fund's investment adviser anticipates that more than 50% of the
Fund's net assets will be invested in municipal securities which are insured.

Issuer-Obtained Insurance policies are noncancellable and continue in force as
long as the municipal securities are outstanding and their respective insurers
remain in business. If a municipal security is covered by Issuer-Obtained
Insurance, then such security need not be insured by the Policies purchased by
the Fund.

The Fund may purchase two types of Policies issued by municipal bond insurers.
One type of Policy covers certain municipal securities only during the period in
which they are in the Fund's portfolio. In the event that a municipal security
covered by such a Policy is sold from the Fund, the insurer of the relevant
Policy will be liable only for those payments of interest and principal which
are then due and owing.

The other type of Policy covers municipal securities not only while they remain
in the Fund's portfolio but also until their final maturity even if they are
sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the investment adviser,
the Fund would receive net proceeds from the sale of those securities, after
deducting the cost of such permanent insurance and related fees, significantly
in excess of the proceeds it would receive if such municipal securities were
sold without insurance.

The premiums for the Policies are paid by the Fund and the yield on the Fund's
portfolio is reduced thereby. Premiums for the Policies are paid by the Fund
monthly, and are adjusted for purchases and sales of municipal securities during
the month. Depending upon the characteristics of the municipal security held by
the Fund, the annual premium for the Policies are estimated to range from 0.1%
to 0.25% of the value of the municipal securities covered under the Policies,
with an average annual premium rate of approximately 0.175%.

The Fund may purchase Policies from MBIA Corp. ("MBIA"), AMBAC Indemnity
Corporation ("AMBAC"), Financial Guaranty Insurance Company ("FGIC"), Bond
Investors Guaranty Insurance Company ("BIG"), or any other municipal bond
insurer which is rated AAA by S&P or Aaa by Moody's. A more detailed description
of these insurers may be found in the Statement of Additional Information. Each
Policy guarantees the payment of principal and interest on the municipal
securities it insures. The Policies will have the same general characteristics
and features. A municipal security will be eligible for coverage if it meets
certain requirements set forth in a Policy. In the event interest or principal
on an insured municipal security is not paid when due, the insurer covering the
security will be obligated under its Policy to make such payment not later than
30 days after it has been notified by the Fund that such non-payment has
occurred. The insurance feature reduces financial risk, but the cost thereof and
the restrictions on investments imposed by the guidelines in the insurance
policies reduce the yield to shareholders.

MBIA, AMBAC, FGIC, and BIG will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, FGIC, and BIG cancel their Policies for
any reason except failure to pay premiums when due. MBIA, AMBAC, FGIC, and BIG
will reserve the right at any time upon 90 days' written notice to the Fund to
refuse to insure any additional municipal securities purchased by the Fund after
the effective date of such notice. The Trustees will reserve the right to
terminate any policy if it determines that
the benefits to the Fund of having its portfolio insured under such policy are
not justified by the expense involved.

Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of mandatory sinking fund payment), default or otherwise, the payments
guaranteed will be made in such amounts and at such times as payments of
principal would have been due had there not been such acceleration. The
municipal bond insurers will be responsible for such payments less any amounts
received by the Fund from any trustee for the municipal bond issuers or from any
other source. The Policies do not guarantee payment on an accelerated basis, the
payment of any redemption premium, the value of the shares of the Fund, or
payments of any tender purchase price upon the tender of the municipal
securities. The Policies also do not insure against nonpayment of principal of
or interest on the securities resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for the securities.
However, with respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds covered by the Policies, the municipal
bond insurers guarantee the full and complete payments required to be made by or
on behalf of an issuer of such municipal securities, if there occurs any change
in the tax-exempt status of interest on such municipal securities, including
principal, interest or premium payments, if any, as and when required to be made
by or on behalf of the issuer pursuant to the terms of such municipal
securities. A "when-issued" municipal security will be covered under the
Policies upon the settlement date of the issuer of such "when-issued" municipal
security. In determining to insure municipal securities held by the Fund, each
municipal bond insurer has applied its own standards, which correspond generally
to the standards established for determining the insurability of new issues of
municipal securities. This insurance is intended to reduce financial risk, but
the cost thereof and compliance with investment restrictions imposed under the
Policies will reduce the yield to shareholders of the Fund.

If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the Fund,
whether or not the securities are in default or subject to significant risk of
default, unless the option to obtain permanent insurance is exercised. On the
other hand, since Issuer-Obtained Insurance will remain in effect as long as the
insured municipal securities are outstanding, such insurance may enhance the
marketability of municipal securities covered thereby, but the exact effect, if
any, on marketability cannot be estimated. The Fund generally intends to retain
any securities that are in default or subject to significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market value of
similar securities of minimum investment grade (i.e., rated "BBB") that are not
in default. To the extent that the Fund holds defaulted securities, it may be
limited in its ability to manage its investments and to purchase other municipal
securities. Except as described above with respect to securities that are in
default or subject to significant risk of default, the Fund will not place any
value on the insurance in valuing the municipal securities that it holds.

INVESTMENT RISKS. The value of the Fund's shares will fluctuate. The amount of
this fluctuation is dependent upon the quality and maturity of the municipal
securities in the Fund's portfolio, as well as on market conditions. Municipal
security prices are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates have
increased from the time a security was purchased, the security, if sold, might
be sold at a price less than its cost. Similarly, if market interest rates have
declined from the time a security was purchased, the security, if sold, might be
sold at a price greater than its cost. (In either instance, if the security was
held to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)

Yields on Louisiana municipal securities depend on a variety of factors,
including: the general conditions of the money market and the taxable and
municipal security markets; the size of the particular offering; the maturity of
the obligations; and the credit quality of the issue. The ability of the Fund to
achieve its investment objective also depends on the continuing ability of the
issuers of Louisiana municipal securities to meet their obligations for the
payment of interest and principal when due.

Further, any adverse economic conditions or developments affecting the state of
Louisiana or its municipalities could impact the Fund's portfolio. Investing in
Louisiana municipal securities which meet the Fund's quality standards may not
be possible if the state of Louisiana and its municipalities do not maintain
their current credit ratings.

NON-DIVERSIFICATION. The Fund is a non-diversified investment company. An
investment in the Fund, therefore, may entail greater risk than would exist in a
diversified investment company because the higher percentage of investments
across fewer issuers could result in greater fluctuation in the total market
value of the Fund's portfolio. Any economic, political, or regulatory
developments affecting the value of the securities in the Fund's portfolio could
have a greater impact on the total value of the portfolio than would be the case
if the portfolio were diversified among more issuers.

The Fund will attempt to minimize the risks associated with a non-diversified
portfolio by limiting, with respect to 75% of the Fund's total assets,
investments in one issuer to not more than 10% of the value of its total assets.
The total amount of the remaining 25% of the value of the Fund's total assets
could be invested in a single issuer, but only if the investment adviser
believes such a strategy to be prudent. In addition, the Fund intends to comply
with Subchapter M of the Internal Revenue Code. This undertaking requires that
at the end of each quarter of the taxable year, the aggregate value of all
investments in any one issuer (except U.S. government obligations, cash, and
money market instruments) which exceed 5% of the Fund's total assets not exceed
50% of the value of the Fund's total assets.

TOTAL RETURN BOND FUND

The investment objective of Total Return Bond Fund is to maximize total return.
The Fund manages its portfolio to achieve both income and capital appreciation.

ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by primarily
investing in U.S. government securities, mortgage-backed securities,
asset-backed securities and corporate bonds and other securities, as well as
collateralized mortgage obligations. Under normal market conditions, the Fund
will attempt to invest at least 65% of its assets in bonds. The securities in
which the Fund may invest are as follows:

domestic issues of corporate debt obligations (rated Baa or better by
Moody's; BBB or better by S&P; or BBB or better by Fitch Investors
Service, Inc. ("Fitch")). Bonds rated BBB by S&P or Fitch or Baa by
Moody's have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to weakened capacity to
make principal and interest payments than higher rated bonds. A
description of the rating categories is contained in the Appendix to the
Statement of Additional Information;

obligations of the United States;

notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, 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, The
Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration;

commercial paper which matures in 270 days or less so long as at least
two ratings are high quality ratings by nationally recognized statistical
rating organizations ("NRSROs"). Such ratings would include: A-1 or A-2
by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch;
time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"), or in institutions whose accounts are
insured by the Savings Association Insurance Fund ("SAIF"), which is also
administered by the FDIC, including certificates of deposit issued by and
other time deposits in foreign branches of BIF-insured banks;

bankers' acceptances;

securities of other investment companies;

repurchase agreements collateralized by eligible investments; and

municipal securities.

If a security invested in by the Fund loses its rating or has its rating reduced
after the Fund has purchased it, the Fund is not required to sell or otherwise
dispose of the security, but may consider doing so.

The Fund may also purchase and sell put and call options on its portfolio
securities (including over-the-counter options), purchase and sell financial
futures contracts, and purchase and sell put and call options on financial
futures contracts.

In addition, the Fund may engage in when-issued and delayed delivery
transactions and invest in foreign securities, temporary investments, and
repurchase agreements. See "Portfolio Investments and Strategies."

MORTGAGE-BACKED SECURITIES. Some of the U.S. government securities in which the
Fund will invest can represent an undivided interest in a pool of residential
mortgages or may be collateralized by a pool of residential mortgages
("mortgage-backed securities"). Mortgage-backed securities have yield and
maturity characteristics corresponding to the underlying mortgages.
Distributions to holders of mortgage-backed securities include both interest and
principal payments. Principal payments represent the amortization of the
principal of the underlying mortgages and any prepayments of principal due to
prepayment, refinancing, or foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to 30 years,
amortization and prepayments substantially shorten the effective maturities of
mortgage-backed securities. Due to these features, mortgage-backed securities
are less effective as a means of "locking-in" attractive long-term interest
rates than fixed-income securities which pay only a stated amount of interest
until maturity, when the entire principal amount is returned. This is caused by
the need to reinvest at lower interest rates both distributions of principal
generally and significant prepayments which become more likely as mortgage
interest rates decline. Since comparatively high interest rates cannot be
effectively "locked in," mortgage-backed securities may have less potential for
capital appreciation during periods of declining interest rates than other
non-callable fixed-income government securities of comparable stated maturities.
However, mortgage-backed securities may experience less pronounced declines in
value during periods of rising interest rates.

ASSET-BACKED SECURITIES. Asset-backed securities are obligations of trusts or
special purpose corporations that directly or indirectly represent a
participation in, or are secured by and payable from various types of assets. At
the present time, automobile and credit card receivables are the most common
collateral supporting asset-backed securities. In general, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. As with
mortgage-backed securities, asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties and use
similar credit enhancement techniques.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of

such receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.

In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the investment adviser considers
the financial strength of the guarantor or other provider of credit support, the
type and extent of credit enhancement provided as well as the documentation and
structure of the issue itself and the credit support.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related to
the construction industry. Most of the CMOs in which the Fund would invest use
the same basic structure:
Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of
securities: the first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date; the final class (or Z bond)
typically receives the residual income from the underlying investment
after payments are made to the other classes.

The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.

The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A bonds).
When those securities are completely retired, all principal payments are
then directed to the next-shortest-maturity security (or B bond). This
process continues until all of the classes have been paid off.

Because the cash flow is distributed sequentially instead of pro rata as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. The interest portion of
these payments is distributed by the Fund as income, and the capital portion is
reinvested. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.

The Fund will invest only in CMOs which are rated AAA by an NRSRO and which may
be: (a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (b) collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c) securities in
which the proceeds of

the issuance are invested in mortgage securities and payment of the principal
and interest are supported by the credit of an agency or instrumentality of the
U.S. government.

U.S. GOVERNMENT INCOME FUND

The investment objective of U.S. Government Income Fund is to provide current
income. Current income includes, in general, discount earned on U.S. Treasury
bills and agency discount notes, interest earned on all other U.S. government
securities and mortgage-related securities, and short-term capital gains.

ACCEPTABLE INVESTMENTS. The Fund invests primarily in securities which are
guaranteed as to payment of principal and interest by the U.S. government or
U.S. government agencies or instrumentalities. The Fund may also invest in
certain privately issued mortgage-related securities, as defined below.

The Fund will invest, under normal circumstances, at least 65% of the value of
its total assets in U.S. government securities. The U.S. government securities
in which the Fund invests include:

direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;

notes, bonds and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of
the United States; and

notes, bonds and discount notes of other U.S. government agencies or
instrumentalities which receive or have access to federal funding.

The Fund may also invest in mortgage-related securities which are issued by
private entities such as investment banking firms and companies related to the
construction industry. The mortgage-related securities in which the Fund may
invest may be: (i) privately issued securities which are collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; and (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of any agency or instrumentality of the U.S. government.

The mortgage-related securities provide for a periodic payment consisting of
both interest and principal. The interest portion of these payments will be
distributed by the Fund as income, and the capital portion will be reinvested.

CASH RESERVE FUND

The investment objective of Cash Reserve Fund is current income consistent with
stability of principal.
The Fund pursues its investment objective by investing in a portfolio of money
market instruments maturing in one year or less. As a matter of fundamental
policy, the average maturity of the securities in the Fund's portfolio, computed
on a dollar-weighted basis, will be 120 days or less. As a matter of operating
policy, which may be changed without shareholder approval, the Fund will limit
the average maturity of its portfolio to 90 days or less, in order to meet
regulatory requirements.

ACCEPTABLE INVESTMENTS. The Fund invests in high quality money market
instruments that are either rated in the highest short-term rating category by
one or more NRSROs or of comparable quality to securities having such ratings.

Examples of acceptable investments include, but are not limited to:

domestic issues of corporate debt obligations, including variable rate
demand notes;

commercial paper (including Canadian Commercial Paper and Europaper);

certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");

short-term credit facilities, such as demand notes;

asset-backed securities;

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

other money market instruments.

The Fund invests only in instruments denominated and payable in U.S. dollars.

In addition, the Fund may concentrate certain of its investments, engage in
when-issued and delayed delivery transactions, and invest in repurchase
agreements. See "Portfolio Investments and Strategies."

VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days prior notice. Other notes only permit the Fund to tender
the security at the time of

each interest rate adjustment or at other fixed intervals. See "Demand
Features." The Fund treats variable rate demand notes as maturing on the
later of the date of the next interest adjustment or the date on which the
Fund may next tender the security for repurchase.

BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank Instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs"), and Eurodollar Time Deposits ("ETDs"). The Fund will treat
securities credit enhanced with a bank's letter of credit as Bank
Instruments.

SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.

ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interest in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.

CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may be
credit-enhanced by a guaranty, letter of credit or insurance. Any bankruptcy,
receivership, default or change in the credit quality of the party providing the
credit enhancement will adversely affect the quality and marketability of the
underlying security and could cause losses to the Fund and affect its share
price. The Fund may have more than 25% of its total assets invested in
securities credit-enhanced by banks.

DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.

CONCENTRATION OF INVESTMENTS. Generally, in excess of 50% of the total assets of
Cash Reserve Fund will be invested in commercial paper and variable rate demand
notes. Commercial paper issued by finance companies will comprise more than 25%
of the Fund's total assets, unless the Fund is in a temporary defensive position
as a result of economic conditions. These policies may not

be changed without shareholder approval. Concentration of the Fund's portfolio
in such obligations may entail additional risks which are not encountered by
funds with more diversified portfolios.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Investing in Securities of Other Investment
Companies," and "Restricted and Illiquid Securities."

U.S. TREASURY MONEY MARKET FUND

The investment objective of U.S. Treasury Money Market Fund is current income
consistent with stability of principal and liquidity. The Fund pursues its
investment objective by investing in a portfolio of short-term U.S. Treasury
obligations which are issued by the U.S. government and are fully guaranteed as
to payment of principal and interest by the United States.

ACCEPTABLE INVESTMENTS. The Fund invests only in short-term U.S. Treasury
obligations maturing in 397 days or less. The average maturity of the U.S.
Treasury obligations in the Fund's portfolio, computed on a dollar-weighted
basis, will be 90 days or less.

In addition, the Fund may engage in when-issued and delayed delivery
transactions and invest in repurchase agreements. See "Portfolio Investments and
Strategies."

PORTFOLIO INVESTMENTS AND STRATEGIES
- --------------------------------------------------------------------------------

BORROWING MONEY

The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which a Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date)
except, under certain circumstances, a Fund may borrow up to one-third of the
value of its total assets. Capital Appreciation Fund, Louisiana Municipal Income
Fund, U.S. Government Income Fund and Cash Reserve Fund may each pledge up to
15%, and Total Return Bond Fund may pledge up to 10%, of the value of their
respective assets to secure such borrowings. This policy cannot be changed
without the approval of holders of a majority of a Fund's shares.

FOREIGN SECURITIES

Capital Appreciation Fund and Total Return Bond 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 Funds' 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 Funds' standards and objectives. The
Funds 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 Funds may invest in the securities of other open-end investment companies,
as well as closed-end investment companies. The Funds, however, will not own
more than 3% of the total outstanding voting stock of any investment company,
invest more than 5% of their respective total assets in any one investment
company, or invest more than 10% of their respective 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
their short-term cash on a temporary basis. The Funds' 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, each of the Funds (except the Money Market Funds)
may lend portfolio securities on a short-term or long-term basis, or both, up to
one-third of the value of their respective total assets to broker/dealers,
banks, or other institutional borrowers of securities. The Funds 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 with respect to any Fund
without the approval of holders of a majority of such Fund's shares.

There is the risk that when lending portfolio securities, the securities may not
be available to a 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 Funds (except the Money Market Funds) may engage in or reserve the right to
engage in put and call options as discussed for those Funds under "Objective and
Policies of Each Fund." The Funds may purchase put and call options on their
portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Funds hold or will be purchasing against decreases
or increases in value. The Funds may also write (sell) put and call options on
all or any portion of their portfolio to generate income for the Funds. The
Funds will write call options on securities either held in their portfolio or
which they have the right to obtain without payment of further consideration or
for which they have segregated cash or U.S. government in the amount of any
additional consideration. In the case of put options, the Funds will segregate
cash or U.S. Treasury obligations with a value equal to or greater than the
exercise price of the underlying securities. Each Fund will limit its purchase
of options so that not more than 20% of its net assets will be invested in
option premiums. Each 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 Funds 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 a Fund are not
traded on an exchange. The Funds purchase and write options only with investment
dealers and other financial institutions (such as commercial banks or savings
associations) deemed creditworthy by each 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 Funds (except the Money Market Funds) may engage in or reserve the right to
engage in financial futures and options on futures as discussed for those Funds
under "Objective and Policies of Each Fund." The Funds may purchase and sell
financial futures contracts to hedge all or a portion of their portfolio of
securities against changes in interest rates or as a hedge to attempt to protect
securities which the Funds hold against decreases in value. (For the immediate
future, Capital Appreciation 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 Funds may write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect securities in their portfolio against
decreases in value resulting from anticipated increases in market interest
rates. When a 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, a Fund is entitled (but not obligated) to sell a
futures contract at the fixed price during the life of the option.

The Funds (except Capital Appreciation Fund) may also write put options and
purchase call options on financial futures contracts as a hedge against rising
purchase prices of portfolio securities resulting from anticipated decreases in
market interest rates. The Funds will use these transactions to attempt to
protect their ability to purchase portfolio securities in the future at price
levels existing at the time it enters into the transactions. When a Fund writes
a put option on a futures contract, it is undertaking to buy a particular
futures contract at a fixed price at any time during a specified period if the
option is exercised. If the anticipated rise in purchase prices of portfolio
securities occurs, a Fund may use the premiums it receives from writing put
options to offset such increased prices. As a purchaser of a call option on a
futures contract, a Fund is entitled (but not obligated) to purchase a futures
contract at a fixed price at any time during the life of the option.

The Funds may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on a Fund's
existing futures position and premiums paid for related options would exceed 5%
of the market value of such Fund's total assets. When a Fund purchases futures
contracts or writes put options on futures contracts, an amount of cash and cash
equivalents equal to the underlying commodity value of the futures contracts
(less any related margin deposits) or equal to the exercise price of the put
options 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 a 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 a 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 a 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 Funds' ability
to establish and close out futures and options positions depends on this
secondary market.

REPURCHASE AGREEMENTS

Each of the Funds 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 a 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 Funds or their 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 a
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 a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of the Funds' portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Funds and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by each Fund's investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.

RESTRICTED AND ILLIQUID SECURITIES

The Funds may invest up to 10% of their respective 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 a Fund may otherwise invest
pursuant to its investment objective and policies but which are subject to
restriction on resale under federal securities law.

Capital Appreciation Fund, Louisiana Municipal Income Fund, Total Return Bond
Fund, and U.S. Government Income 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 their respective net assets. The
Money Market Funds will limit investments in illiquid securities to 10% of their
respective net assets.

TEMPORARY INVESTMENTS

During times of unusual market conditions, for defensive purposes and to
maintain liquidity, Capital Appreciation Fund, Total Return Bond Fund, and U.S.
Government Income Fund may invest in cash and money market instruments, such as
the following:

prime commercial paper (rated A-2 or above by S&P, Prime-2 or above by
Moody's, or F-2 or above by Fitch) 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 NRSROs, 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 FDIC or the Federal
Savings and Loan Insurance Corporation. These instruments include
certificates of deposit, demand and time deposits, savings shares, ECDs,
ETDs, 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 Funds may invest.

Louisiana Municipal Income Fund may, from time to time, on a temporary basis, or
when the investment adviser determines that market conditions call for a
temporary defensive posture, invest in short-term tax-exempt or taxable
temporary investments. These temporary investments include: notes issued by or
on behalf of municipal or corporate issuers; obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; other debt securities;
commercial paper; certificates of deposit of banks; and repurchase agreements.

Louisiana Municipal Income Fund has no rating requirements applicable to
temporary investments. However, the investment adviser will limit temporary
investments to those it considers to be of high quality. Although the Fund is
permitted to make taxable, temporary investments, there is no current intention
of generating income subject to federal regular income tax.

For defensive purposes only, Total Return Bond Fund may also invest in
acceptable investments of the Fund with short-term maturities.

U.S. GOVERNMENT SECURITIES

The types of U.S. government securities in which the Funds 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 and obligations of the Farmers Home Administration, are backed by the
full faith and credit of the U.S. Treasury. Obligations of the Farmers Home
Administration are also backed by the issuer's right to borrow from the U.S.
Treasury. Obligations of Federal Home Loan Banks and the Farmers Home
Administration 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, Farmers Home Administration, 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, and 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 Funds may purchase securities on a when-issued or delayed delivery basis.
(Cash Reserve Fund will limit the securities purchased on a when-issued and
delayed delivery basis to short-term U.S. government obligations.) These
transactions are arrangements in which a Fund purchases

securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause a Fund to miss a price or yield
considered to be advantageous. The Funds engage in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with each Fund's investment objective and policies, not for
investment leverage. 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, a Fund may pay more/less than the market
value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Funds'
investment adviser deems it appropriate to do so. In addition, the Funds may
enter into transactions to sell their purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Funds 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, each 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 a Fund's net assets will not result in a violation
of any of the above restrictions.

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

ADVISORY FEES. The Adviser receives an annual investment advisory fee at
annual rates equal to percentages of the relevant Fund's average net
assets, as follows: Capital Appreciation Fund--0.75%; Louisiana Municipal
Income Fund--0.45%; Total Return Bond Fund--0.70%; U.S. Government Income
Fund--0.45%; and Cash Reserve Fund and U.S. Treasury Money Market
Fund--0.40%. The Adviser may voluntarily choose to waive a portion of its
fee or reimburse a 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 with respect to a Fund at its sole
discretion. The Adviser has also undertaken to reimburse the Funds 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 Capital Appreciation 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.

Jeffrey R. Tanguis has been Louisiana Municipal Income Fund's portfolio
manager since 1988 and U.S. Government Income Fund's portfolio manager from
1992 to October 1996. Mr. Tanguis began to manage Total Return Bond Fund in
1995. Mr. Tanguis joined Hibernia in 1984 and is currently a Vice President
and Trust Investment Officer of Hibernia. Mr. Tanguis received a B.S. from
Louisiana State University.

James L. Chassen became the portfolio manager of U.S. Government Income
Fund, Cash Reserve Fund and U.S. Treasury Money Market Fund in October of
1996. Mr. Chassen is a Vice President and Trust Investment Officer of
Hibernia National Bank. Prior to joining Hibernia he worked for an
investment advisory firm in Dallas, Texas. Previously, he was an investment
manager for J.C. Penney Company. Mr. Chassen earned his B.S. from Florida
State University and his M.B.A. from the University of Texas at Austin.

DISTRIBUTION OF FUND SHARES

Federated Securities Corp. is the principal distributor for shares of the Funds.
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 a Fund
or class will be reimbursed by the relevant Fund or class up to 0.25% of average
daily net assets of the Fund.

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 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 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 a Fund or class relate
directly to the net asset value of the shares of a Fund or class, it is possible
that fees paid by a Fund or class may be used to provide similar services for
other of the Trust's funds. In addition, a Fund or class 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 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.

FUND ADMINISTRATION

ADMINISTRATIVE SERVICES. Federated Administrative Services ("FAS"), Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services necessary to operate each Fund,
such as legal and accounting services. FAS 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% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>

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

BROKERAGE TRANSACTIONS

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

With respect to Capital Appreciation Fund, Louisiana Municipal Income Fund,
Total Return Bond Fund, and U.S. Government Income Fund, 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 a Fund, less liabilities attributable to that
class of shares, by the number of shares outstanding within that class.

With respect to the Money Market Funds, each Fund attempts to stabilize the net
asset value of its shares at $1.00 by valuing its portfolio securities using the
amortized cost method. The net asset value per share is determined by
subtracting total liabilities from total assets and dividing the remainder by
the number of shares outstanding. Of course, the Money Market Funds cannot
guarantee that their net asset value will always remain at $1.00 per share.

INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares of the Funds are sold on days on which the New York Stock Exchange is
open for business. Shares of Capital Appreciation Fund, Louisiana Municipal
Income Fund, Total Return Bond Fund, and U.S. Government Income Fund may be
purchased through Hibernia National Bank or through brokers or dealers which
have a sales agreement with the distributor. Shares of the Money Market Funds
may be purchased through Hibernia National Bank or directly from the
distributor. In connection with the sale of shares of the Funds, the distributor
may from time to time offer certain items of nominal value to any shareholder or
investor. The Funds reserve the right to reject any purchase request.

THROUGH HIBERNIA NATIONAL BANK. An investor may call Hibernia National Bank to
place an order to purchase shares of the Funds (Call toll-free 1-800-999-0124.)
Texas residents must purchase shares through Hibernia Investment Securities,
Inc., at 1-800-999-0426. For Shares of Capital Appreciation Fund, Louisiana
Municipal Income Fund, Total Return Bond Fund, and U.S. Government Income Fund,
orders purchased through Hibernia National Bank are considered received when the
appropriate Fund is notified of the purchase order. Purchase orders must be
received by Hibernia National Bank before 3:00 p.m. (Central Standard Time) and
must be transmitted by Hibernia

National Bank to the appropriate 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 Hibernia National Bank to transmit orders promptly.

Payment for shares of the Money Market Funds may be made either by check or
federal funds. Payment by check must be included with the order. Orders are
considered received after payment by check is converted by Hibernia National
Bank into federal funds. When payment is made with federal funds, the order is
considered received immediately. Payment by federal funds must be received
before 11:00 a.m. (Central Standard Time) on the same day as the order to earn
dividends for that day. Federal funds should be wired as follows: Hibernia
National Bank, New Orleans, Louisiana; for Credit to: include name of Fund (if
applicable, "Class A Shares"), Title or name of account; and Wire Order Number.
Shares cannot be purchased by wire on Columbus Day, Veterans Day, or Martin
Luther King Day.

THROUGH AUTHORIZED BROKER/DEALERS. An investor may place an order through
authorized brokers and dealers to purchase shares of Capital Appreciation Fund,
Louisiana Municipal Income Fund, Total Return Bond Fund and U.S. Government
Income Fund. Shares will be purchased at the public offering price next
determined after the Fund receives the purchase request from Hibernia National
Bank, which forwards the request to the transfer agent. Purchase requests
through registered broker/dealers must be received by Hibernia National Bank 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.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in each Fund, by an investor is $1,000. With
respect to the Money Market Funds, if the investment is in a retirement plan,
the minimum initial investment is $250. Subsequent investments must be in
amounts of at least $100. The Funds may choose to waive these minimum investment
requirements for Hibernia National Bank or its affiliates and for directors and
employees of Hibernia National Bank.

WHAT SHARES COST

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

Class A Shares of Capital Appreciation Fund are sold with a sales charge as
follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A
PERCENTAGE OF PUBLIC PERCENTAGE OF NET
AMOUNT OF TRANSACTION INVESTED OFFERING PRICE AMOUNT INVESTED
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $750,000 2.00% 2.04%
$750,000 but less than $1 million 1.00% 1.01%
$1 million but less than $2 million 0.50% 0.50%
$2 million or more 0.25% 0.25%
</TABLE>

Shares of Louisiana Municipal Income Fund, Total Return Bond Fund and U.S.
Government Income Fund are sold with a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A
PERCENTAGE OF PUBLIC PERCENTAGE OF NET
AMOUNT OF TRANSACTION INVESTED OFFERING PRICE AMOUNT INVESTED
<S> <C> <C>
Less than $100,000 3.00% 3.09%
$100,000 but less than $250,000 2.75% 2.83%
$250,000 but less than $500,000 2.00% 2.04%
$500,000 but less than $750,000 1.00% 1.01%
$750,000 but less than $1 million 0.75% 0.76%
$1 million but less than $2 million 0.50% 0.50%
$2 million or more 0.25% 0.25%
</TABLE>

There is no sales charge imposed by the Money Market Funds.

On Monday through Friday, the Money Market Funds calculate net asset value at
11:00 a.m. (Central Standard Time) and 3:00 p.m. (Central Standard Time), while
Capital Appreciation Fund, Louisiana Municipal Income Fund, Total Return Bond
Fund, and U.S. Government Income Fund determine 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.

PURCHASES AT NET ASSET VALUE. Shares of Capital Appreciation Fund, Louisiana
Municipal Income Fund, Total Return Bond Fund, and U.S. Government Income Fund
may be purchased at net asset value, without a sales charge, by the Trust
Division of Hibernia National Bank or other affiliates of Hibernia for funds
which are held in a fiduciary, agency, custodial, or similar capacity. Trustees/
Directors and employees of the Trust, Hibernia National Bank, or Federated
Securities Corp. or their affiliates, retired Trustees/Directors and retired
employees of Hibernia National Bank, or any bank or investment dealer who has a
sales agreement with Federated Securities Corp. with regard to the Funds, and
their spouses, children under 21, and any accounts for which such an employee
serves in a fiduciary, agency, custodial, or similar capacity, may also buy
shares at net asset value, without a sales charge. In addition, shares may be
purchased at net asset value, without a sales charge, by investors who purchase
shares through The Personal Portfolio Manager, an investment program sponsored
by Hibernia Investment Securities, Inc. or other similar asset allocation
programs made available through financial institutions who have established
dealer agreements with Federated Securities Corp. Shares may also be purchased
at net asset value with proceeds from the redemption of shares of an
unaffiliated investment company.

Investors may also purchase shares of the Funds through Hibernia Investment
Securities, Inc., at net asset value, without a sales charge, with proceeds from
the redemption of shares of an unaffiliated investment company.

SALES CHARGE REALLOWANCE. For sales of shares of Capital Appreciation Fund,
Louisiana Municipal Income Fund, Total Return Bond Fund, and U.S. Government
Income Fund, Hibernia National Bank and any authorized dealer will normally
receive up to 100% of the applicable sales charge. Any portion of the sales
charge which is not paid to Hibernia National Bank or a dealer will be retained
by the distributor. However, the distributor, in its sole discretion, may
uniformly offer to pay to Hibernia National Bank or a dealer selling shares of
the Funds, all or a portion of the sales charge it normally retains. If accepted
by Hibernia National Bank 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 Funds 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, 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.

REDUCING THE SALES CHARGE

The sales charges can be reduced through:

quantity discounts and accumulated purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

concurrent purchases.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table on the
previous page, larger purchases of Class A Shares of Capital Appreciation Fund
and shares of Louisiana Municipal Income Fund, Total Return Bond Fund, or U.S.
Government Income Fund reduce the sales charge paid. The distributor will
combine purchases made on the same day by the investor, his spouse, and his
children under age 21 when it calculates the sales charge.

If an additional purchase of shares of Capital Appreciation Fund, Louisiana
Municipal Income Fund, Total Return Bond Fund, or U.S. Government Income Fund is
made, the distributor will consider the previous purchases still invested in
Capital Appreciation Fund, Louisiana Municipal Income Fund, Total Return Bond
Fund, or U.S. Government Income Fund. For example, if the shareholder already
owns shares of Louisiana Municipal Income Fund having a current value at the
public offering price of $90,000 and he purchases $10,000 more at the current
public offering price, the sales charge on the additional purchase according to
the schedule now in effect would be 2.75%, not 3.00%.

To receive the sales charge reduction, Hibernia National Bank or the distributor
must be notified by the shareholder in writing at the time the purchase is made
that shares of Capital Appreciation Fund, Louisiana Municipal Income Fund, Total
Return Bond Fund, or U.S. Government Income Fund are already owned or that
purchases are being combined. The distributor will reduce the sales charge after
it confirms the purchases.

LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
Class A Shares of Capital Appreciation Fund and shares of Louisiana Municipal
Income Fund, Total Return Bond Fund, or U.S. Government Income Fund over the
next 13 months, the sales charge may be reduced by signing a letter of intent to
that effect. This letter of intent includes a provision for a sales charge
adjustment depending on the amount actually purchased within the 13-month period
and a provision for the Fund's custodian to hold 3.00%, in the case of Louisiana
Municipal Income Fund, Total Return Bond Fund and U.S. Government Income Fund,
and in the case of Class A Shares of Capital Appreciation Fund, 4.50% of the
total amount intended to be purchased in escrow (in shares of that Fund) until
such purchase is completed.

The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.

This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days; however, these previous purchases will not receive the reduced sales
charge.

REINVESTMENT PRIVILEGE. If Class A Shares of Capital Appreciation Fund and
shares of Louisiana Municipal Income Fund, Total Return Bond Fund, or U.S.
Government Income Fund have been redeemed, the shareholder has a one-time right,
within 30 days (within 120 days for IRA accounts), to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Hibernia National Bank or the distributor must be notified by the shareholder in
writing or by his financial institution of the reinvestment in order to
eliminate a sales charge. If the shareholder redeems his shares in a Fund, there
may be tax consequences.

CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction, a
shareholder has the privilege of combining concurrent purchases of two or more
funds in the Trust, the purchase price of which includes a front end sales
charge. For example, if a shareholder concurrently invested $30,000 in one of
the Funds with a front end sales charge and $70,000 in another Fund with a front
end sales charge, the sales charge would be reduced.

To receive this sales charge reduction, the distributor must be notified by the
shareholder in writing or by Hibernia National Bank at the time the concurrent
purchases are made. The sales charge will be reduced after the purchase is
confirmed.

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 Fund shares at the net asset value next determined after an order is
received, plus the applicable sales charge, if any. A shareholder may apply for
participation in this program through Hibernia National Bank.

EXCHANGING SECURITIES FOR FUND SHARES

The Funds may accept securities in exchange for Fund shares. A 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 Funds, 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 Hibernia National Bank in writing.

With respect to shares of Capital Appreciation Fund, Louisiana Municipal Income
Fund, Total Return Bond Fund, and U.S. Government Income Fund, detailed
confirmations of each purchase or redemption are sent to each shareholder.
Monthly confirmations are sent to report dividends paid during that month. With
respect to the Money Market Funds, monthly confirmations are sent to report
transactions such as purchases and redemptions as well as dividends paid during
the month.

DIVIDENDS

With respect to the Money Market Funds, dividends are declared daily and paid
monthly. Dividends are automatically reinvested on payment dates in additional
shares of the respective Fund unless cash payments are requested by writing to
one of these Funds or Hibernia National Bank. Share purchase orders received by
one of these Funds or Hibernia National Bank before 11:00 a.m. (Central Standard
Time) earn dividends that day.

Dividends are declared and paid monthly to all shareholders invested in
Louisiana Municipal Income Fund, Total Return Bond Fund, and U.S. Government
Income Fund and are declared and paid quarterly to all shareholders in Capital
Appreciation Fund on the record date. Dividends are automatically reinvested in
additional shares of the respective Fund on payment dates at the ex-dividend
date net asset value without a sales charge, unless cash payments are requested
by writing to one of these Funds or Hibernia National Bank.

CAPITAL GAINS

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

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

Shareholders of any of the Funds are shareholders of Tower Mutual Funds.
Shareholders in a Fund have easy access to each of the portfolios of Tower
Mutual Funds through a telephone exchange program.

EXCHANGING SHARES. Shares of those Funds with a front end sales charge may be
exchanged at net asset value for shares of the same class of any of the other
Funds in the Trust with an equal front end sales charge or no front end sales
charge. Shares of Funds with no front end sales charge acquired by direct
purchase or reinvestment of dividends on such shares may be exchanged for shares
of the same class of any of the other Funds in the Trust with a front end sales
charge at net asset value plus the applicable front end sales charge.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000.

When an exchange is made from a Fund with a front end sales charge to a Fund
with no front end sales charge, the shares exchanged and additional shares which
have been purchased by reinvesting dividends on such shares retain the character
of the exchanged shares for purposes of exercising further exchange privileges;
thus, an exchange of such shares for shares of a Fund with a front end sales
charge would be at net asset value.

The exchange privilege is available to shareholders residing in any state in
which the Fund shares being acquired may legally be sold. Upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange will be redeemed at the next-determined net asset value. Written
exchange instructions may require a signature guarantee. Exercise of this
privilege is treated as a sale for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.

The exchange privilege may be terminated at any time. Prior to such termination,
shareholders will be notified of the termination of the exchange privilege at
least 60 days before the date of termination. A shareholder may obtain further
information on the exchange privilege by calling Hibernia National Bank.

EXCHANGE-BY-TELEPHONE. Instructions for exchanges between Funds which are part
of Tower Mutual Funds may be given by telephone to Hibernia National Bank at
1-800-999-0124 or to the distributor. Shares may be exchanged by telephone only
between fund accounts having identical shareholder registrations. Exchange
instructions given by telephone may be electronically recorded.

Any shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent by Hibernia National Bank and deposited to the
shareholder's mutual fund account before being exchanged.

Telephone exchange instructions must be received before 3:00 p.m. (Central
Standard Time) for shares to be exchanged the same day. The telephone exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of such modification or termination at least 60 days prior to the date
of modification or termination. Shareholders may have difficulty in making
exchanges by telephone through banks, brokers, and other financial institutions
during times of drastic economic or market changes. If a shareholder cannot
contact his bank, broker, or financial institution by telephone, it is
recommended that an exchange request be made in writing and sent by overnight
mail. If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.

WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending a mail request to Hibernia National Bank, 313 Carondelet
Street, New Orleans, Louisiana 70130. In addition, an investor may exchange
shares by sending a written request to his or her authorized broker directly.

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

The Funds redeem shares at their net asset value next determined after the
relevant 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 Hibernia
National Bank or directly to the respective Fund.

BY TELEPHONE. A shareholder may redeem shares of a Fund by calling Hibernia
National Bank 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
Hibernia National Bank. Redemption instructions given by telephone may be
electronically recorded.

With respect to shares of Capital Appreciation Fund, Louisiana Municipal Income
Fund, Total Return Bond Fund, and U.S. Government Income Fund, redemption
requests through Hibernia National Bank must be received by Hibernia National
Bank before 3:00 p.m. (Central Standard Time) and must be transmitted by
Hibernia National Bank to the appropriate Fund before 3:00 p.m. (Central
Standard Time) in order for shares to be redeemed at that day's net asset value.
Redemption requests through registered broker/dealers must be received by
Hibernia National Bank and transmitted to the appropriate Fund before 3:00 p.m.
(Central Standard Time) in order for shares to be redeemed at that day's net
asset value. Hibernia National Bank is responsible for promptly submitting
redemption requests and providing proper written redemption instructions to a
Fund. Other registered broker/dealers may charge customary fees and commissions
for this service. With respect to the Money Market Funds, for calls received
before 10:00 a.m. (Central Standard Time), proceeds will normally be wired the
same day to the shareholder's account at a domestic commercial bank that is a
member of the Federal Reserve Wire System or a check will be sent to the address
of record.

For calls received after 10:00 a.m. (Central Standard Time), proceeds will
normally be wired the following business day. In no event will proceeds be wired
more than five days after a proper request for redemption has been received.

A daily dividend will be paid on shares of the Money Market Funds redeemed if
the redemption request is received after 10:00 a.m. (Central Standard Time).
However, the proceeds are normally not wired until the following business day.
Redemption requests received before 10:00 a.m. (Central Standard Time) will
normally be paid the same day but will not be entitled to that day's dividend.
If at any time, the Money Market Funds shall determine it necessary to terminate
or modify this method of redemption, shareholders would be promptly notified.

An authorization form permitting the Funds to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Hibernia National Bank or the distributor.

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. If reasonable
procedures are not followed by the Funds, they may be liable for losses due to
unauthorized or fraudulent telephone instructions.

BY MAIL. Shareholders may redeem shares of a Fund by sending a written request
to Hibernia National Bank. The written request should include the shareholder's
name, the Fund name (if applicable, "Class A Shares"), 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 Hibernia National Bank. Shareholders should
call Hibernia National Bank 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 a 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 BIF,
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 SAIF,
which is administered by the FDIC; or

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

The Funds do 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 of a
Fund 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 Fund shares, and the fluctuation of the net asset value of Fund
shares redeemed under this program, redemptions may reduce, and eventually
deplete, the shareholder's investment in a Fund. For this reason, payments under
this program should not be considered as yield or income on the shareholder's
investment in a 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 Hibernia National Bank. Due to
the fact that 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 with a sales charge, it is not advisable for shareholders
to be purchasing shares of those Funds while participating in this program.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Funds 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 a 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 a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in
Tower Mutual Funds have equal voting rights, except that in matters affecting
only a particular Fund or class, only shareholders of that Fund or 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. As of October 7, 1996,
Hibernia National Bank and Bost & Co. may for certain purposes be deemed to
control the Funds because they are owner of record of certain shares of the
Funds.

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 banking 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 such a customer.

Some entities providing services to the Funds are subject to such banking laws
and regulations. They believe, based on the advice of their counsel, that they
may perform those services for any Fund contemplated by any agreement entered
into with the Funds 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 such 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 Funds will pay no federal income tax because each 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.

Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a 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.

LOUISIANA MUNICIPAL INCOME FUND--ADDITIONAL TAX INFORMATION

Shareholders are not required to pay federal regular income tax on any dividends
received from Louisiana Municipal Income Fund that represent net interest on
tax-exempt municipal securities. However, under the Tax Reform Act of 1986,
dividends representing net interest earned on some
municipal securities may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for corporations.

The alternative minimum tax, equal to up to 28% of alternative minimum taxable
income for individuals and 20% for corporations, applies when it exceeds the
regular tax for the taxable year. Alternative minimum taxable income is equal to
the regular taxable income of the taxpayer increased by certain "tax-preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.

The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax-preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. Louisiana Municipal Income
Fund may purchase all types of municipal securities, including private activity
bonds. Thus, in any tax year, a portion of the Fund's dividends may be treated
as a tax-preference item.

In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax-preference item.

"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.

Dividends of Louisiana Municipal Income Fund representing net interest income
earned on some temporary investments and any realized net short-term gains are
taxed as ordinary income.

These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.

LOUISIANA TAXES. Under existing Louisiana laws, distributions made by the Fund
are not subject to Louisiana income taxes provided that such distributions
qualify as exempt-interest dividends, and represent interest from obligations
which are issued by the State of Louisiana or any of its political subdivisions,
which interest is exempt from federal income tax. Conversely, to the extent that
distributions made by the Fund are attributable to other types of obligations,
such distributions will be subject to Louisiana income taxes.

OTHER STATE AND LOCAL TAXES

Income from Louisiana Municipal Income Fund is not necessarily free from state
income taxes in states other than Louisiana or from personal property taxes.
With respect to all the Funds, shareholders are urged to consult their own tax
advisers regarding the status of their accounts under state and local tax laws.

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

From time to time each Fund may advertise its total return and yield.
Additionally, Louisiana Municipal Income Fund may advertise its tax-equivalent
yield, and each Money Market Fund may also advertise its effective yield.

Total return represents the change, over a specified period of time, in the
value of an investment in a 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 each Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by such 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. With respect to Louisiana Municipal Income Fund, the tax-equivalent
yield is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that that Fund would have had to earn to equal its actual yield,
assuming a specific tax rate. Yield and tax-equivalent yield do not necessarily
reflect income actually earned by a Fund and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
With respect to Capital Appreciation Fund, total return and yield will be
calculated separately for Class A Shares (currently offered) and Class B Shares
(to be offered beginning November 30, 1996). Expense differences between Class A
Shares and Class B Shares may affect the performance of each class.

With respect to the Money Market Funds, the effective yield is calculated
similarly to the yield, but, when annualized, the income earned by an investment
in a Money Market Fund is assumed to be reinvested daily. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment. For those Funds sold with a sales charge, the performance
information normally reflects the effect of the maximum sales charge which, if
excluded, would increase the total return, yield, and tax-equivalent yield.
Occasionally, performance information which does not reflect the effect of the
sales charge may be quoted in advertising.

From time to time, advertisements for the Trust may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Trust's performance to certain indices.

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

Capital Appreciation Fund is expected to offer Class B Shares beginning November
30, 1996. Class B Shares will be sold at net asset value primarily to customers
of financial institutions and will be subject to a minimum initial investment of
$1,000. Class B Shares will be subject to certain of the same expenses as Class
A Shares. Class B Shares will be distributed pursuant to a 12b-1 Plan adopted by
the Fund and will also adopt a shareholder services plan. This, plus other
expense differences between Class A Shares and Class B Shares, may affect the
performance of each class.

Following the offering of Class B Shares, investors may call 1-800-999-0124 to
obtain more information and a prospectus for Class B Shares.

ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>

Tower Capital Appreciation Fund
Class A Shares

Tower Louisiana Municipal Income Fund
Tower Total Return Bond Fund
Tower U.S. Government Income Fund
Tower Cash Reserve Fund
Tower U.S. Treasury Money Market Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------

Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------

Investment Adviser
Hibernia National Bank Attention: Tower Mutual Funds
P.O. Box 61540
New Orleans, Louisiana 70161
- ---------------------------------------------------------------------------------------------------------------------

Custodian
Hibernia National Bank Attention: Tower Mutual Funds
P.O. Box 61540
New Orleans, Louisiana 70161
- ---------------------------------------------------------------------------------------------------------------------

Transfer Agent and Dividend Disbursing Agent
Federated Shareholder
Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

891836108
891836207
891836306
891836504
891836405
891836603

Federated Securities Corp. is distributor of the fund. O06584 (10/96)

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; and
Class B Shares (to be offered beginning November 30, 1996);
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 prospectus of the Funds dated
October 31, 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 October 31, 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 CAN 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
Cusip 891836306
Cusip 891836504
Cusip 891836405
Cusip 891836207
Cusip 891836603
006897 (10/96)

GENERAL INFORMATION ABOUT THE FUNDS 4

INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS 4

When-Issued and Delayed Delivery Transactions 4
Lending of Portfolio Securities 5
Reverse Repurchase Agreements 5
Futures and Options Transactions 6
Ratings 17
Credit Enhancement 18
Portfolio Turnover 18
INVESTMENT LIMITATIONS 19

Regulatory Compliance 32
TOWER MUTUAL FUNDS MANAGEMENT 33

Officers and Trustees 33
Fund Ownership 35
Trustees Compensation 36
Trustee Liability 37
INVESTMENT ADVISORY SERVICE 37

Adviser to the Trust 37
Advisory Fees 37
BROKERAGE TRANSACTIONS 39

OTHER SERVICES 40

Trust Administration 40
Transfer Agent, Dividend Disbursing Agent, and
Portfolio Accounting Services 41

Custodian 42
Independent Auditors 42
PURCHASING SHARES 42

Distribution Plan (All Funds) 42
Shareholder Services (Captial Appreciation
Fund-Class B Shares (to be offered)) 43
Conversion To Federal Funds 44
DETERMINING NET ASSET VALUE 44

Determining Market Value of Securities 45
Use of the Amortized Cost Method 46
Monitoring Procedures 47
Investment Restrictions 47
EXCHANGE PRIVILEGE 48

Requirements for Exchange 48
Making an Exchange 49
REDEEMING SHARES 49

Redemption in Kind 49
Massachusetts Partnership Law 50
TAX STATUS 51

The Funds' Tax Status 51
Shareholders' Tax Status 51
Capital Gains 51
TOTAL RETURN 52

YIELD 53

TAX-EQUIVALENT YIELD 55

PERFORMANCE INFORMATION 56

Economic and Market Information 60
FINANCIAL STATEMENTS 60

APPENDIX 60

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 a single class of shares, which
is designated as Class A Shares. This Fund intends to offer a second class
called Class B Shares which will be offered beginning November 30, 1996.
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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of potential buyers;
o dealer undertakings to make a market in the security; and
o the 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: April 14, 1928
Trustee
Gynecologist; Medical Director, Woman's Hospital; President, Louisiana
Medical Mutual Insurance Company.

James A. Gayle, Sr.
613 Turtle Creek Drive
Shreveport, LA
Birthdate: September 27, 1923
Trustee
President, Jim Gayle Interests, Inc.; Director, Louisiana Forestry
Association; 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 7, 1996: Hibernia National Bank, acting in
various capacities for numerous accounts, was the owner of record of

8,564,459 shares (89.84%) of Class A Shares of Capital Appreciation Fund,
387,028 shares (5.30%) of Total Return Bond Fund, 9,857,940 shares (5.62%)
of Cash Reserve Fund and 7,481,970 shares (5.82%) of U.S. Treasury Money
Market Fund; Bost & Co., for the benefit of Hibernia National Bank, was the
owner of record of 48,958,227 shares (27.90%) of Cash Reserve Fund and
24,020,700 shares (18.70%) of U.S. Treasury Money Market Fund; and Bost &
Co., c/o Mellon Bank N.A., was the owner of record of 91,070,310 shares
(51.90%) of Cash Reserve Fund and 40,222,174 shares (31.31%) 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 prospectus. 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. 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
prospectus under "Investing in the Funds."
DISTRIBUTION PLAN (ALL FUNDS)
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 (TO BE
OFFERED))
Class B Shares of Capital Appreciation Fund are expected to be offered
beginning November 30, 1996. Class B Shares will enter into a Shareholder
Services Agreement. As of November 30, 1996, Class B Shares of Capital
Appreciation Fund will not be accruing or paying shareholder services fees.
Class B Shares of Capital Appreciation Fund do not intend to accrue or pay
shareholder services fees until a detemination is made that investors will
be subject to such fees.

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 acts 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:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for 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
o for 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.
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 Hibernia National Bank at the numbers 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 Hibernia
National Bank receives the redemption request. Shareholder redemptions for
Capital Appeciation Fund-Class B Shares (to be offered) may be subject to a
contingent deferred sales charge. Redemption procedures are explained in
the prospectus under `Redeeming Shares.'' Although Hibernia National Bank
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:
o derive at least 90% of its gross income from dividends, interest, and
gain from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute 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. Class B Shares of
Capital Appreciation Fund will be offered at a future time.
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%. Class B Shares of Capital
Appreciation Fund will be offered at a future time.
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.