HERITAGE INCOME TRUST, N-30D, 1998-11-30

HERITAGE INCOME TRUST
N-30D, 1998-11-30

Previous: KANSAS TAX EXEMPT TRUST SERIES 29, 24F-2NT, 1998-11-30

Next: NUVEEN NEW YORK PERFORMANCE PLUS MUNICIPAL FUND INC, NSAR-B, 1998-11-30

<PAGE> 1
(HERITAGE
INCOME
TRUST
LOGO)

[pictures of people working and playing]

From Our Family to Yours: The Intelligent Creation of Wealth.

Intermediate Government Fund
High Yield Bond Fund

Annual Report
and Investment Performance
Review for the Year Ended
September 30, 1998

(HERITAGE LOGO)
-----------------
INCOME TRUST(TM)
-----------------
<PAGE> 2

November 19, 1998

Dear Fellow Shareholders:

I am pleased to provide you with the annual report for the fiscal year
ended September 30, 1998, for the Intermediate Government Fund and the High
Yield Bond Fund (the "Funds"), each a portfolio of Heritage Income Trust. During
the past year, bonds with higher credit quality generally outperformed those
with lower credit quality as investors demanded higher yields to accept any
credit risk.

The chart below presents total return data for the most recent fiscal year.
As you can see, unlike recent years past, investors were not rewarded for taking
more aggressive strategies during the past year. Both portfolios did outperform
their respective peer group averages for this period while the Intermediate
Government Fund also outperformed the unmanaged Lehman Brothers-Intermediate and
1-3 Year Index returns.

<TABLE>
<CAPTION>
TOTAL RETURN
(10/01/97-9/30/98)
-------------------
<S> <C>
INTERMEDIATE GOVERNMENT FUND
A Shares*................................................... +11.18
C Shares*................................................... +10.85
Lehman Brothers 1-3 Year Government Index................... + 7.93
Lehman Brothers Intermediate Government/Corporate Index..... +10.43
Lipper Intermediate U.S. Government Funds Average........... +10.53
HIGH YIELD BOND FUND
A Shares*................................................... - 0.52
C Shares*................................................... - 1.02
Salomon Brothers High Yield Market Index.................... + 2.48
Lipper High Current Yield Funds Average..................... - 1.77
</TABLE>

On February 1, 1998, your Funds introduced Class B shares. From their
inception through September 30, 1998, the Class B shares returned +7.16% and
- -3.58%, for the Intermediate Government Fund and High Yield Bond Fund,
respectively.*

During the past year, the parent company of Salomon Brothers Asset
Management Inc, the subadviser for the High Yield Bond Fund, was involved in two
major corporate combinations resulting in the ultimate parent of Salomon
Brothers Asset Management Inc now being Citigroup, Inc. We have not experienced,
and do not expect, any material change in the way your portfolio is managed as a
result of this new corporate structure.

In the pages that follow, you will find commentaries from Peter Wallace of
Heritage Asset Management, Inc. and Peter Wilby of Salomon Brothers Asset
Management Inc, the portfolio managers for your Funds. I hope you find their
comments helpful in understanding the recent performance of your Funds. We
continue to believe that fixed income investments can play an important part in
a well-diversified portfolio. We encourage you to meet with your financial
advisor to discuss how these or other Heritage funds may fit into your own
unique asset allocation strategies.

Thank you for your continuing investment with us. Please call us at (800)
709-3863 if there are ever ways in which you believe we can better serve you. On
behalf of all of us at Heritage, best wishes for a happy and healthy holiday
season.

<TABLE>
<S> <C>
Sincerely,
/s/ STEPHEN G. HILL
Stephen G. Hill
President
</TABLE>

- ---------------
* These returns are calculated without the imposition of either front- or
back-end sales charges.
<PAGE> 3

November 19, 1998

Dear Fellow Shareholders:

For investors in the Intermediate Government Fund (the "Fund"), the fiscal
year ended September 30, 1998 was quite rewarding. The Fund provided a steady
source of income and produced very attractive total returns even though market
volatility remained quite high. After expenses, the Fund returned +11.18%* in A
shares for the fiscal year which compares to the Lehman Intermediate
Government/Corporate Index return of +10.43% and the Lehman 1 to 3 year
Government Index return of +7.93%.

During the year, a number of factors came together that were very positive
for the U.S. Treasury sector of the bond market producing one of the sharpest
drops in bond yields in recent history. The primary factor influencing the move
lower in yields was the lack of inflationary pressure in our economy. After more
than eight years of expansion, the U.S. economy continued to grow at a moderate
rate. Inflation, which traditionally rises during the later stages of an
economic expansion, continued to decline with the Consumer Price Index showing
only a 1.5% year-over-year rate through September. The Producer Price Index
actually declined by 0.9% over the same period. Increased productivity and
companies' lack of ability to increase prices were the main reasons for this
beneficial trend in inflation.

As the year progressed, it became more evident that the problems in Asia,
notably Japan, were mounting. These pressures spread through the developing
nations of the world causing currencies to fall against the dollar. The
strengthening dollar reduced the prices of goods imported into the United States
and also helped contain domestic inflation. The weakening of foreign economies
also aided in the fall of commodity prices such as oil and agricultural
products. These factors also led investors to flee foreign markets, both equity
and debt, and to seek the safety of U.S. Treasury bonds. The "flight to quality"
brought the yield of the benchmark thirty year Treasury bond to below 5.00%
allowing the Treasury market to perform better than other bond market sectors.

In September, just prior to year-end, the Federal Reserve Open Market
Committee reduced the Federal Funds rate from 5.50% to 5.25%. The Federal
Reserve moved rates lower in order to avert a slowdown in the U.S. economy and
to ease credit conditions. This was followed by further 25 basis point
reductions in mid October and early November to add additional liquidity and to
reduce the risk of a "credit crunch".

During the year we reduced our exposure to the mortgage sector of the
markets and concentrated primarily on U.S. Treasuries. This benefited the Fund's
performance. We have maintained one mortgage position to add additional income
over and above that available from comparable Treasury securities. In hindsight,
which we find nearly always perfect, we could have improved our results even
more by selling all of our mortgage positions and investing in the ten year
sector of the yield curve.

We envision the Fed continuing to lower rates in 1999 as the economy
continues to weaken as the result of the worldwide economic slowdown and
financial pressures domestically. Currently we remain bullish on the Treasury
market over the balance of 1998 and into 1999, but we expect the markets to
continue to display unparalleled volatility of yields and prices. Strategically,
we plan to maintain a higher than normal exposure to the Treasury sector for the
foreseeable future.

Thanks for your continued confidence in the Heritage Income
Trust-Intermediate Government Fund.

Sincerely,

/s/ H. PETER WALLACE

H. Peter Wallace, CFA
Senior Vice President
Heritage Asset Management, Inc.
Portfolio Manager, Intermediate
Government Fund

- ---------------
* This return is calculated without the imposition of either front- or back-end
sales charges.
<PAGE> 4

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

GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-INTERMEDIATE GOVERNMENT FUND
CLASS A SHARES ON MARCH 1, 1990

(CLASS A SHARES GRAPH)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-INTERMEDIATE GOVERNMENT FUND
CLASS B SHARES ON FEBRUARY 2, 1998

(CLASS B SHARES GRAPH)
- --------------------------------------------------------------------------------
(See footnote on following page)

3
<PAGE> 5

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

GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-INTERMEDIATE GOVERNMENT FUND
CLASS C SHARES ON APRIL 3, 1995

(CLASS C SHARES GRAPH)
- --------------------------------------------------------------------------------

- ---------------
* Total return for the Intermediate Government Fund Class A, Class B and Class
C Shares are calculated in conformance with item 21 of Form N-1A. which
assumes reinvestment of dividends and a sales load of 3.75% for Class A
Shares. Performance presented represents historical data. The investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The Fund's past performance is not indicative of future
performance and should be considered in light of the Fund's investment policy
and objectives, the characteristics and quality of its portfolio securities,
and the periods selected. Since the period shown is less than one year the
aggregate total return in lieu of the annualized total return is used for
Class B Shares.

4
<PAGE> 6

November 4, 1998

Dear Shareholders:

The Heritage Income Trust-High Yield Bond Fund returned -0.52%* on its A
shares for the fiscal year ended September 30, 1998. By comparison, the Salomon
Brothers High Yield Market Index gained 2.48% and the Lipper High Current Yield
Fund category returned -1.77%.

The high yield market displayed surprising resilience during the first half
of the fiscal year in the face of the Asian currency crises; however, the market
became unhinged during the second half, with the rest of the financial markets,
as a result of the economic crisis in Russia. A "flight to quality" ensued with
upper-tier quality companies dramatically outperforming the lower-tier sector.
The high yield market was also hurt by an outflow of money from mutual funds and
a lack of capital from broker/dealers to support high yield positions. With the
domestic economy projected to slow, cyclical issues showed the worst
performance. In addition, companies requiring access to the capital markets
(selected telecommunications companies and liquidity-constrained companies) also
performed poorly.

According to the Salomon Brothers High Yield Market Index, the average
market yield at September 30, 1998 was 10.67%. This compares to 9.30% at year
end, and 8.84% at September 30, 1997. Spreads (the difference between the
average yield of the high yield market and comparable Treasury yields), which
were a narrow 285 basis points at September 30, 1997, widened to 360 basis
points at calendar year end and then subsequently widened to 630 basis points at
September 1998. These figures reflect the spread widening which occurred in all
global credit-spread markets as a result of liquidity constraints caused by the
financial distress experienced in Asia and Russia.

Leading the market over the last twelve months have been the utilities,
aerospace, containers, cable & media, and technology industries. Sectors that
have lagged include lower-rated securities, financials, energy, steel and paper.

In response to implications from the Asian and Russian crises, the Heritage
Income Trust-High Yield Bond Fund has been focused on upgrading credit quality
over the past year. The Fund has reduced its exposure to such basic industries
as chemicals, steels and papers and rotated its cyclical exposure to
manufacturing and container/packaging companies with limited global presence.
With regard to non-cyclicals, the Fund has reduced its exposure to
consumer-related companies and increased its weighting in the media and services
industries. In addition, the Fund has reduced its overweighting in energy
companies as commodity prices are unlikely to recover significantly over the
near term.

The Fund's performance was helped by its overweighting in containers,
aerospace and services, and its underweighting in telecommunications, papers and
steels. The Fund was hampered by its overweighting in energy and its
underweighting in utilities and cable and media.

Sincerely,

/s/ PETER J. WILBY

Peter J. Wilby
Managing Director
Salomon Brothers Asset Management Inc
Portfolio Manager, High Yield Bond
Fund

- ---------------
* These returns are calculated without the imposition of either front- or
back-end sales charges.

5
<PAGE> 7

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

GROWTH OF A $10,000 INVESTMENT SINCE THE APPROVAL OF
SALOMON AS SUBADVISER TO THE HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
ON FEBRUARY 1, 1996

(CLASS A SHARES W/ SALOMON AS SUBADVISER GRAPH)
- --------------------------------------------------------------------------------

The graph represents performance from February 1, 1996 through September 30,
1998. On February 1st Salomon Brothers Asset Management Inc. assumed portfolio
management responsibilities as the new subadviser to the Fund. At that time the
investment objective was changed to high current income and the investment
policies were modified to allow the Fund to primarily invest in lower- and
medium-rated high yield fixed income securities. Prior to February 1, 1996, the
Fund invested a minimum of 50% of the Fund's assets in U.S. Government
securities.
- --------------------------------------------------------------------------------

GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
CLASS A SHARES ON MARCH 1, 1990

(CLASS A SHARES SINCE INCEPTION GRAPH)
- --------------------------------------------------------------------------------

6
<PAGE> 8

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

GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
CLASS B SHARES ON FEBRUARY 2, 1998

(CLASS B SHARES SINCE INCEPTION GRAPH)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
CLASS C SHARES ON APRIL 3, 1995

(CLASS C SHARES SINCE INCEPTION GRAPH)
- --------------------------------------------------------------------------------

* Total return for the High Yield Bond Fund Class A, Class B and Class C
Shares are calculated in conformance with item 21 of Form N-1A, which
assumes reinvestment of dividends and a sales load of 3.75% for Class A
Shares. Performance presented represents historical data. The investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The Fund's past performance is not indicative of future
performance and should be considered in light of the Fund's investment
policy and objectives, the characteristics and quality of its portfolio
securities, and the periods selected. Since the period shown is less than
one year the aggregate total return in lieu of the annualized total return
is used for Class B Shares.

7
<PAGE> 9

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
INTERMEDIATE GOVERNMENT FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
--------- ---------- -----------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--95.6%(A)
- ---------------------------------------------------------------------------------
U.S. TREASURIES--90.0%(A)
$1,000,000 U.S. Treasury Notes, 5.375%................................. 06/30/00 $ 1,015,625
1,000,000 U.S. Treasury Notes, 5.25%.................................. 01/31/01 1,019,063
1,000,000 U.S. Treasury Notes, 6.25%.................................. 01/31/02 1,056,875
1,000,000 U.S. Treasury Notes, 5.875%................................. 09/30/02 1,054,688
1,000,000 U.S. Treasury Notes, 5.75%.................................. 11/30/02 1,051,875
2,000,000 U.S. Treasury Notes, 5.5%................................... 02/28/03 2,092,500
1,500,000 U.S. Treasury Notes, 5.5%................................... 03/31/03 1,573,125
1,300,000 U.S. Treasury Notes, 5.25%.................................. 08/15/03 1,358,094
2,000,000 U.S. Treasury Notes, 5.5%................................... 02/15/08 2,163,750
3,300,000 U.S. Treasury Notes, 5.625%................................. 05/15/08 3,609,375
-----------
Total U.S. Treasuries (cost $15,325,985).................... 15,994,970
-----------
U.S. GOVERNMENT AGENCIES--5.6%(A)
- ---------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--5.6%
1,000,000 REMIC 1992-119 E, Sequential Class, 8.0%.................... 07/25/20 1,001,671
-----------
Total U.S. Government Agencies (cost $1,030,156)............ 1,001,671
-----------
Total U.S. Government and Agency Securities (cost
$16,356,141)................................................ 16,996,641
-----------

REPURCHASE AGREEMENT--3.3%(A)
- ---------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Company, dated September
30, 1998, @ 5.4% to be repurchased at $591,088 on October 1, 1998, collateralized
by $575,000 United States Treasury Notes, 6.5% due August 31, 2001 (market value
$610,711 including interest) (cost $591,000)..................................... 591,000
-----------
TOTAL INVESTMENT PORTFOLIO (COST $16,947,141)(B), 98.9%(A)....................... 17,587,641
OTHER ASSETS AND LIABILITIES, NET, 1.1%(A)....................................... 189,937
-----------
NET ASSETS, 100.0%............................................................... $17,777,578
===========
</TABLE>

- ---------------
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
substantially the same. Market value includes net unrealized appreciation of
$640,500 which consists of aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost of
$668,985 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $28,485.

REMIC--Real Estate Mortgage Investment Conduit

The accompanying notes are an integral part of the financial statements.

8
<PAGE> 10

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
DOMESTIC CORPORATE BONDS--89.7%(A)
-------------------------------------------
AEROSPACE--2.7%
-------------------------------------------
$500,000 Burke Industries, Inc., 10.0%,
08/15/07...................... $ 497,500
500,000 L-3 Communications
Corporation, 10.375%,
05/01/07...................... 546,250
500,000 Stellex Industries, Inc.,
9.5%, 11/01/07................ 460,000
----------
1,503,750
----------
ALUMINUM--0.4%
-------------------------------------------
250,000 Commonwealth Aluminum
Corporation, 10.75%,
10/01/06...................... 242,500
----------
AUTO PARTS/EQUIPMENT--2.7%
-------------------------------------------
250,000 Breed Technologies, Inc.,
9.25%, 04/15/08............... 206,250
500,000 JH Heafner Company, 10%,
05/15/08...................... 482,500
500,000 Safelite Glass Corporation,
9.875%, 12/15/06.............. 485,000
350,000 Venture Holdings Trust, 9.75%,
04/01/04...................... 330,750
----------
1,504,500
----------
AUTO RENTAL/SERVICE--0.8%
-------------------------------------------
500,000 APCOA Inc., 9.25%, 03/15/08... 445,000
----------
BEVERAGES--1.0%
-------------------------------------------
250,000 Delta Beverage Group, Inc.,
9.75%, 12/15/03............... 250,000
500,000 Stroh Brewery Company, 11.1%,
07/01/06...................... 300,000
----------
550,000
----------
BROADCASTING--11.4%
-------------------------------------------
250,000 Adelphia Communications
Corporation, 9.875%,
03/01/07...................... 268,750
250,000 Adelphia Communications
Corporation, 10.5%,
07/15/04...................... 273,750
500,000 CSC Holdings Inc., 10.5%,
05/15/06...................... 570,000
1,000,000 Century Communications
Corporation, Zero Coupon Bond,
01/15/08...................... 470,000
500,000 Chancellor Media Corporation,
9.375%, 10/01/04.............. 520,000
500,000 Granite Broadcasting, 8.875%,
05/15/08...................... 477,500
1,000,000 International CableTel, Inc.,
0% to 2/1/01, 11.5% to
maturity(b), 02/01/06......... 790,000
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
500,000 Jacor Communications, Inc.,
9.75%, 12/15/06............... 541,250
500,000 LIN Television Corporation,
8.375%, 03/01/08.............. 482,500
250,000 Marcus Cable Company, 0% to
6/15/00, 14.25% to
maturity(b), 12/15/05......... 232,500
250,000 Mediacom LLC Capital, 8.5%,
04/15/08...................... 250,313
500,000 Rogers Communications, Inc.,
8.875%, 07/15/07.............. 492,500
329,000 SFX Broadcasting, Inc.,
10.75%, 05/15/06.............. 360,255
1,100,000 United International Holdings,
0% to 02/15/03, 10.75% to
maturity(b), 02/15/08......... 539,000
----------
6,268,318
----------
BUILDING--0.4%
-------------------------------------------
250,000 Nortek, Inc., 9.125%,
09/01/07...................... 245,000
----------
CHEMICALS--0.9%
-------------------------------------------
500,000 Texas Petrochemicals, 11.125%,
07/01/06...................... 485,000
----------
CONGLOMERATES/DIVERSIFIED--1.2%
-------------------------------------------
1,000,000 Jordan Industries, 0% to
4/1/02, 11.75% to maturity(b),
04/01/09...................... 650,000
----------
CONTAINERS--4.5%
-------------------------------------------
500,000 Ball Corporation, Inc., 8.25%,
08/01/08...................... 513,750
500,000 Indesco International Inc.,
9.75%, 04/15/08............... 465,000
500,000 Plastic Containers, Inc.,
10.0%, 12/15/06............... 515,000
250,000 Radnor Holdings, Inc., 10.0%,
12/01/03...................... 247,500
250,000 Radnor Holdings, Inc., Series
"B", 10.0%, 12/01/03.......... 247,500
500,000 Stone Container Corporation,
12.25%, 04/01/02.............. 477,500
----------
2,466,250
----------
COSMETICS/TOILETRIES--1.9%
-------------------------------------------
500,000 Jafra Cosmetics International,
Inc., 11.75%, 05/01/08........ 440,000
750,000 Revlon Worldwide Corporation,
Zero Coupon Bond, 03/15/01.... 573,750
----------
1,013,750
----------
DATA PROCESSING--0.5%
-------------------------------------------
250,000 Alvey Systems, Inc., 11.375%,
01/31/03...................... 252,500
----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

9
<PAGE> 11

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1998
(CONTINUED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
ELECTRONICS/ELECTRIC--2.4%
-------------------------------------------------------
$500,000 Amphenol Corporation, 9.875%,
05/15/07...................... $ 487,500
500,000 Axiohm Transaction Solutions,
Inc., 9.75%, 10/01/07......... 447,500
250,000 DecisionOne Corporation,
9.75%, 08/01/07............... 155,000
500,000 DecisionOne Holdings
Corporation, 0% to 8/1/02,
11.5% to maturity(b),
08/01/08...................... 200,000
----------
1,290,000
----------
FINANCE--2.8%
-------------------------------------------------------
500,000 Airplane Pass Through Trust,
Class "D", 10.875%,
03/15/19...................... 571,500
500,000 DVI, Inc., 9.875%, 02/01/04... 490,000
500,000 Morgan Stanley Aircraft
Finance, 8.7%, 03/15/23....... 485,180
----------
1,546,680
----------
FOOD--4.6%
-------------------------------------------------------
250,000 B&G Foods, Inc., 9.625%,
08/01/07...................... 232,500
500,000 CFP Holdings, Inc., 11.625%,
01/15/04...................... 295,000
250,000 Fleming Companies, Inc.,
10.5%, 12/01/04............... 242,500
500,000 Imperial Holly Corporation,
9.75%, 12/15/07............... 473,750
700,000 Nebco Evans Holding
Corporation, 0% to 07/15/02,
12.375% to maturity(b),
07/15/07...................... 329,000
500,000 North Atlantic Trading
Company, 11.0%, 06/15/04...... 470,000
500,000 SC International Services,
Inc., 9.25%, 09/01/07......... 486,250
----------
2,529,000
----------
HEALTH CARE CENTERS--1.0%
-------------------------------------------------------
400,000 Graham-Field Health Products,
Inc., 9.75%, 08/15/07......... 240,000
375,000 Vencor Operating Inc., 9.875%,
05/01/05...................... 294,375
----------
534,375
----------
HOTELS/MOTELS/INNS--1.8%
-------------------------------------------------------
500,000 HMH Properties, Inc., Series
B, 7.875%, 08/01/08........... 492,500
500,000 Prime Hospitality Corporation,
9.75%, 04/01/07............... 475,000
----------
967,500
----------
HOUSEHOLD PRODUCTS--1.9%
-------------------------------------------------------
500,000 Ekco Group, Inc., 9.25%,
04/01/06...................... 490,000
500,000 Shop Vac Corporation, 10.625%,
09/01/03...................... 528,750
----------
1,018,750
----------
JEWELRY/SILVERWARE/TIME PIECES/CHINA--0.8%
-------------------------------------------------------
500,000 Finlay Enterprises, Inc.,
9.0%, 05/01/08................ 450,000
----------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
LEISURE/AMUSEMENT--0.9%
-------------------------------------------------------
500,000 Grand Casinos, Inc., 9.0%,
10/15/07...................... 505,000
----------
MANUFACTURING/DISTRIBUTIONS--6.8%
-------------------------------------------------------
375,000 Foamex, L.P., 9.875%,
06/15/07...................... 450,439
500,000 Furon Company, 8.125%,
03/01/08...................... 491,250
500,000 High Voltage Engineering
Group, 10.5%, 08/15/04........ 475,000
325,000 Hines Horticulture, Inc.,
11.75%, 10/15/05.............. 339,625
500,000 Insilco Corporation, 10.25%,
08/15/07...................... 500,000
500,000 International Knife & Saw,
11.375%, 11/15/06............. 512,500
500,000 Neenah Corporation, Series
"D", 11.125%, 05/01/07........ 505,000
500,000 Polymer Group, Inc., 9.0%,
07/01/07...................... 477,500
----------
3,751,314
----------
MEDICAL EQUIPMENT/SUPPLY--4.2%
-------------------------------------------------------
500,000 Fresenius Medical Care, 9.0%,
12/01/06...................... 497,500
350,000 Kinetic Concepts, Inc., Series
"B", 9.625%, 11/01/07......... 348,250
500,000 Maxxim Medical, Inc., 10.5%,
08/01/06...................... 526,250
500,000 Packard Bioscience Company,
9.375%, 03/01/07.............. 457,500
500,000 Prime Medical Services, Inc.,
8.75%, 04/01/08............... 460,000
----------
2,289,500
----------
METAL--1.6%
-------------------------------------------------------
375,000 Envirosource, Inc., 9.75%,
06/15/03...................... 337,500
500,000 Renco Metals Inc., 11.5%,
07/01/03...................... 515,000
----------
852,500
----------
OIL & GAS--7.6%
-------------------------------------------------------
500,000 Benton Oil & Gas Company,
11.625%, 05/01/03............. 432,500
500,000 Clark R&M, Inc., 8.875%,
11/15/07...................... 430,000
500,000 Cliffs Drilling Company,
10.25%, 05/15/03.............. 537,500
250,000 Costilla Energy, Inc., 10.25%,
10/01/06...................... 216,250
500,000 Dailey International, Inc.,
9.5%, 02/15/08................ 290,000
500,000 Dawson Production Services,
Inc., 9.375%, 02/01/07........ 498,750
500,000 National Energy Group, Inc.,
10.75%(c), 11/01/06........... 210,000
500,000 P&L Coal Holdings Corporation,
8.875%, 05/15/08.............. 507,500
</TABLE>

The accompanying notes are an integral part of the financial statements.

10
<PAGE> 12

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1998
(CONTINUED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
$500,000 Parker Drilling Company,
Series "D", 9.75%, 11/15/06... $ 462,500
375,000 Transamerican Energy
Corporation, 0% to 6/15/99,
13.0% to maturity(b),
06/15/02...................... 180,000
450,000 Trico Marine Services, Inc.,
8.5%, 08/01/05................ 380,250
----------
4,145,250
----------
PLASTIC/PRODUCTS--1.0%
-------------------------------------------
500,000 Berry Plastics Corporation,
12.25%, 04/15/04.............. 520,625
----------
PETS & SUPPLIES--1.1%
-------------------------------------------
500,000 Doane Products Company,
10.625%, 03/01/06............. 586,670
----------
PUBLISHING--2.7%
-------------------------------------------
500,000 Advanstar Communications,
9.25%, 05/01/08............... 482,500
500,000 American Media Operation,
Inc., 11.625%, 11/15/04....... 520,000
500,000 Big Flower Press Holdings,
Inc., 8.875%, 07/01/07........ 485,000
----------
1,487,500
----------
REAL ESTATE/LAND DEVELOPMENT--0.9%
-------------------------------------------
500,000 Forest City Enterprises, Inc.,
8.5%, 03/15/08................ 490,000
----------
RETAIL STORES--4.5%
-------------------------------------------
500,000 Carr-Gottstein Foods Company,
12.0%, 11/15/05............... 570,000
500,000 Cole National Group, 9.875%,
12/31/06...................... 522,500
250,000 Hills Stores Company, 12.5%,
07/01/03...................... 119,062
250,000 Jitney Jungle Stores, 12.0%,
03/01/06...................... 273,750
500,000 Leslie's Poolmart, 10.375%,
07/15/04...................... 505,000
500,000 Musicland Group, 9.0%,
06/15/03...................... 472,500
----------
2,462,812
----------
SERVICES--7.0%
-------------------------------------------
500,000 Allied Waste Industries, Inc.,
0% to 6/1/02, 11.3% to
maturity(b), 06/01/07......... 370,000
500,000 Comforce Operating, Inc., 12%,
12/01/07...................... 490,000
250,000 Federal Data Corporation,
10.125%, 08/01/05............. 232,500
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
250,000 Iron Mountain, Inc., 10.125%,
10/01/06...................... 262,500
500,000 Kindercare Learning Centers,
Inc., 9.5%, 02/15/09.......... 480,000
500,000 LES, Inc., 9.25%, 06/01/08.... 502,500
500,000 Loomis Fargo & Company, 10.0%,
01/15/04...................... 477,500
500,000 Norcal Waste Systems, Inc.,
13.5%, 11/15/05............... 565,000
500,000 Sitel Corporation, 9.25%,
03/15/06...................... 450,000
----------
3,830,000
----------
SHIPPING/SHIP BUILDING--0.8%
-------------------------------------------
500,000 Enterprises Shipholding,
8.875%, 05/01/08.............. 440,000
----------
TELECOMMUNICATIONS--6.2%
-------------------------------------------
500,000 Comcast Cellular Holdings,
9.5%, 05/01/07................ 512,500
500,000 Facilicom International,
10.5%, 01/15/08............... 435,000
500,000 GST Telecommunications, 0% to
10/31/02, 10.5% to
maturity(b), 05/01/08......... 240,000
750,000 Intermedia Communications,
Inc., 8.6%, 06/01/08.......... 744,375
750,000 Nextel Communications, Inc.,
0% to 10/31/02, 9.75% to
maturity(b), 10/31/07......... 450,000
500,000 Nextlink Communications, Inc.,
12.5%, 04/15/06............... 535,000
500,000 PSINet, Inc., 10%, 02/15/05... 501,250
----------
3,418,125
----------
TRANSPORTATION--0.7%
-------------------------------------------
500,000 Holt Group, 9.75%, 01/15/06... 390,000
----------
Total Domestic Corporate Bonds
(cost $52,593,512)............ 49,132,169
----------

FOREIGN CONVERTIBLE CORPORATE
BONDS--0.7%(A)(D)
-------------------------------------------
PUBLISHING--0.7%
-------------------------------------------
1,000,000 Hollinger, Inc., Zero Coupon
Bond, 10/05/13................ 410,000
----------
Total Foreign Convertible
Corporate Bonds (cost
$378,051)..................... 410,000
----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

11
<PAGE> 13

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1998
(CONTINUED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
FOREIGN CORPORATE BONDS--4.0%(A)(D)
-------------------------------------------------------
BROADCASTING--0.3%
-------------------------------------------------------
$250,000 Diamond Cable Communications,
PLC, 0% to 12/15/00, 11.75% to
maturity(b), 12/15/05......... $ 198,750
----------
HOTELS/MOTELS/INNS--0.9%
-------------------------------------------------------
500,000 Sun International Hotels,
Ltd., 8.625%, 12/15/07........ 490,000
----------
METAL--0.8%
-------------------------------------------------------
500,000 Murrin Murrin Holdings
Property, 9.375%, 08/31/07.... 425,000
----------
PAPER/PRODUCTS--0.6%
-------------------------------------------------------
500,000 Millar Western Forest, 9.875%,
05/15/08...................... 310,000
----------
TEXTILES--0.1%
-------------------------------------------------------
250,000 Polysindo International
Finance Company, 9.375%(e),
07/30/07...................... 43,750
----------
TRANSPORTATION--0.5%
-------------------------------------------------------
250,000 Stena Line AB, 10.5%,
12/15/05...................... 257,500
----------
UTILITIES--DIVERSIFIED--0.8%
-------------------------------------------------------
500,000 International Utility
Structures, Inc., 10.75%,
02/01/08...................... 442,500
----------
Total Foreign Corporate Bonds
(cost $2,755,561)............. 2,167,500
----------
</TABLE>

<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------ ------
<C> <S> <C>
WARRANTS--0.1%(A)
- ---------------------------------------------------------
MEDICAL EQUIPMENT/SUPPLY--0.1%
- ---------------------------------------------------------
206 Wright Medical
Technology, Inc.......... 13,382
-----------
Total Warrants (cost
$40)..................... 13,382
-----------

Total investment portfolio
excluding repurchase agreement
(cost $55,727,164)(f),
94.4%(a)........................ 51,723,051
REPURCHASE AGREEMENT--3.4%(A)
- ---------------------------------------------------------

Repurchase Agreement with State Street
Bank and Trust Company, dated September
30, 1998 @ 5.4% to be repurchased at
$1,842,275 on October 1, 1998,
collateralized by $1,790,000 United States
Treasury Notes, 5.88% due September 30,
2002 (market value $1,886,213) (cost
$1,842,000)............................... 1,842,000
-----------

TOTAL INVESTMENT PORTFOLIO (COST
$57,569,164)(F), 97.8%(A)............... 53,565,051

OTHER ASSETS AND LIABILITIES, NET,
2.2%(A)................................. 1,196,070
-----------

NET ASSETS, 100.0%........................ $54,761,121
===========
</TABLE>

- ---------------
(a) Percentages are based on net assets.
(b) Bonds reset to applicable coupon rate at a future date.
(c) In grace period for coupon payment. Interest must be paid by December 2,
1998 or company will be in default.
(d) Denominated in U.S. dollars.
(e) Bond not current on interest payment.
(f) The aggregate identified cost for federal income tax purposes is
substantially the same. Market value includes net unrealized depreciation of
$4,004,113, which consists of aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost of
$775,483 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $4,779,596.

The accompanying notes are an integral part of the financial statements.

12
<PAGE> 14

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INTERMEDIATE HIGH YIELD
GOVERNMENT FUND BOND FUND
--------------- -----------
<S> <C> <C>
Assets
- ------------------------------------------------------------

Investments, at market value (identified cost $16,356,141
and $55,727,164, respectively) (Note 1)................... $16,996,641 $51,723,051
Repurchase agreement (identified cost $591,000 and
$1,842,000, respectively) (Note 1)........................ 591,000 1,842,000
Cash........................................................ 523 13
Receivables:
Investments sold.......................................... -- 217,247
Fund shares sold.......................................... 63 109,265
From Manager.............................................. 83,740 --
Dividends and interest.................................... 161,725 1,381,033
Deferred state qualification expenses (Note 1).............. 12,533 11,521
Prepaid Insurance........................................... 2,968 4,938
----------- -----------
Total Assets........................................ $17,849,193 $55,289,068
----------- -----------
Liabilities
- ------------------------------------------------------------

Payables (Note 4):
Investments purchased..................................... $ -- $ 315,792
Fund shares redeemed...................................... 10,753 68,732
Accrued management fee.................................... -- 56,400
Accrued distribution fee.................................. 5,711 19,049
Other accrued expenses.................................... 55,151 67,974
----------- -----------
Total Liabilities................................... 71,615 527,947
----------- -----------
Net assets, at market value................................. $17,777,578 $54,761,121
=========== ===========
Net Assets
- ------------------------------------------------------------

Net assets consist of:
Paid-in capital........................................... $23,549,673 $58,312,952
Undistributed net investment income (Note 1).............. 683,051 451,806
Accumulated net realized gain (loss) (Notes 1 and 5)...... (7,095,646) 476
Net unrealized appreciation (depreciation) on
investments............................................. 640,500 (4,004,113)
----------- -----------
Net assets, at market value................................. $17,777,578 $54,761,121
=========== ===========
Net assets, at market value
Class A Shares............................................ $12,638,764 $39,877,217
Class B Shares............................................ 126,529 1,785,308
Class C Shares............................................ 5,012,285 13,098,596
----------- -----------
Total............................................... $17,777,578 $54,761,121
=========== ===========
Shares of beneficial interest outstanding
Class A Shares............................................ 1,303,189 4,080,524
Class B Shares............................................ 13,088 183,506
Class C Shares............................................ 518,584 1,346,424
----------- -----------
Total............................................... 1,834,861 5,610,454
=========== ===========
Net Asset Value -- offering and redemption price per share
(Notes 1 and 2)
Class A Shares............................................ $9.70 $9.77
=========== ===========
Maximum offering price per share (100/96.25 of $9.70 and
$9.77, respectively)................................... $10.08 $10.15
=========== ===========
Class B Shares............................................ $9.67 $9.73
=========== ===========
Class C Shares............................................ $9.67 $9.73
=========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

13
<PAGE> 15

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INTERMEDIATE HIGH YIELD
GOVERNMENT FUND BOND FUND
--------------- -----------
<S> <C> <C>
Investment Income
- ------------------------------------------------------------
Income:
Interest.................................................. $ 887,268 $ 5,585,327
Expenses (notes 1 and 4):
Management fee............................................ 72,950 347,856
Distribution fee (Class A Shares)......................... 42,128 124,763
Distribution fee (Class B Shares)*........................ 219 6,165
Distribution fee (Class C Shares)......................... 9,413 114,646
Professional fees......................................... 55,211 54,326
Custodian/Fund accounting fees............................ 43,602 73,131
State qualification expenses.............................. 31,059 34,185
Federal registration fees................................. 608 1,573
Reports to shareholders................................... 20,060 22,217
Shareholder servicing fees................................ 11,011 35,424
Trustees' fees and expenses............................... 7,677 8,751
Insurance................................................. 2,528 4,051
Other..................................................... 253 701
---------- -----------
Total expenses before waiver and reimbursement...... 296,719 827,789
Fees waived by Manager (Note 4)..................... (72,950) (60,462)
Reimbursement from Manager.......................... (84,666) --
---------- -----------
Total expenses after waiver and reimbursement....... 139,103 767,327
---------- -----------
Net investment income....................................... 748,165 4,818,000
---------- -----------
Realized and Unrealized Gain (Loss) on Investments
- ------------------------------------------------------------
Net realized gain from investment transactions.............. 280,582 761,512
Net increase (decrease) in unrealized appreciation of
investments during the period............................. 585,698 (5,944,103)
---------- -----------
Net gain (loss) on investments...................... 866,280 (5,182,591)
---------- -----------
Net increase (decrease) in net assets resulting from
operations................................................ $1,614,445 $ (364,591)
========== ===========
</TABLE>

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

* For the period February 2, 1998 (commencement of Class B Shares) to September
30, 1998.

The accompanying notes are an integral part of the financial statements.

14
<PAGE> 16

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
INTERMEDIATE GOVERNMENT FUND SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- ------------------------------------------------------------ ------------------ ------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 748,165 $ 922,102
Net realized gain (loss) on investment transactions....... 280,582 (136,028)
Net increase in unrealized appreciation of investments
during the year......................................... 585,698 354,485
----------- -----------
Net increase in net assets resulting from operations...... 1,614,445 1,140,559
Distributions to shareholders from:
Net investment income Class A Shares, ($0.49 and $0.52 per
share, respectively).................................... (694,550) (897,448)
Net investment income Class B Shares, ($0.26 per
share)*................................................. (1,541) --
Net investment income Class C Shares, ($0.47 and $0.50 per
share, respectively).................................... (72,672) (41,089)
Increase (decrease) in net assets from Fund share
transactions (Note 2)..................................... 2,061,901 (3,448,028)
----------- -----------
Increase (decrease) in net assets........................... 2,907,583 (3,246,006)
Net assets, beginning of year............................... 14,869,995 18,116,001
----------- -----------
Net assets, end of year (including undistributed net
investment income of $683,051 and $703,649,
respectively)............................................. $17,777,578 $14,869,995
=========== ===========
FOR THE FOR THE
YEAR ENDED YEAR ENDED
High Yield Bond Fund SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- ------------------------------------------------------------ ----------- -----------
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 4,818,000 $ 4,135,801
Net realized gains on investment transactions............. 761,512 739,688
Net increase (decrease) in unrealized appreciation of
investments during the year............................. (5,944,103) 1,414,530
----------- -----------
Net increase in net assets resulting from operations...... (364,591) 6,290,019
Distributions to shareholders from:
Net investment income Class A Shares, ($0.89 and $0.89 per
share, respectively).................................... (3,625,981) (3,120,267)
Net investment income Class B Shares, ($0.48 per
share)*................................................. (55,927) --
Net investment income Class C Shares, ($0.84 and $0.84 per
share, respectively).................................... (1,143,752) (890,714)
Increase in net assets from Fund share transactions (Note
2)........................................................ 5,333,666 12,731,865
----------- -----------
Increase in net assets...................................... 143,415 15,010,903
Net assets, beginning of year............................... 54,617,706 39,606,803
----------- -----------
Net assets, end of year (including undistributed net
investment income of $451,806 and $414,731,
respectively)............................................. $54,761,121 $54,617,706
=========== ===========
</TABLE>

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

* For the period February 2, 1998 (commencement of Class B Shares) to September
30, 1998.

The accompanying notes are an integral part of the financial statements.

15
<PAGE> 17

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-INTERMEDIATE GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements.

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------------ -------------- ---------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------ ---------------------------------
1998* 1997* 1996* 1995 1994* 1998++* 1998* 1997* 1996* 1995+
------ ------ ------ ------ ------ -------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR........................... $ 9.20 $ 9.08 $ 9.29 $ 9.10 $ 9.44 $ 9.28 $ 9.18 $ 9.06 $ 9.27 $ 9.05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a)....... 0.48 0.51 0.50 0.62 0.43 0.33 0.41 0.49 0.49 0.21
Net realized and unrealized
gain (loss) on investments... 0.51 0.13 (0.21) 0.12 (0.40) 0.32 0.55 0.13 (0.21) 0.23
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations................... 0.99 0.64 0.29 0.74 0.03 0.65 0.96 0.62 0.28 0.44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (0.49) (0.52) (0.50) (0.55) (0.37) (0.26) (0.47) (0.50) (0.49) (0.22)
Distributions from net realized
gains........................ -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions............ (0.49) (0.52) (0.50) (0.55) (0.37) (0.26) (0.47) (0.50) (0.49) (0.22)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR.... $ 9.70 $ 9.20 $ 9.08 $ 9.29 $ 9.10 $ 9.67 $ 9.67 $ 9.18 $ 9.06 $ 9.27
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(D)............. 11.18 7.28 3.24 8.47 0.36 7.16(c) 10.85 7.02 3.04 4.90(c)
RATIOS
(%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net
assets(a).................... 0.92 0.93 0.94 0.95 0.95 1.20(b) 1.20 1.20 1.20 1.20(b)
Net investment income to
average daily net assets..... 5.18 5.65 5.42 5.50 4.60 4.59(b) 4.74 5.38 5.22 5.19(b)
Portfolio turnover rate........ 188 69 135 162 214 188 188 69 135 162
Net assets, end of period ($
millions).................... 13 14 18 24 41 0.13 5 1 0.6 0.07
</TABLE>

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

* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the period
since use of the undistributed income method does not correspond with
results of operations.
+ For the period April 3, 1995 (commencement of Class C Shares) to September
30, 1995.
++ For the period February 2, 1998 (commencement of Class B Shares) to
September 30, 1998.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.10, $.07, $.06, $.06 and $.03 per Class A Share,
respectively. The operating expense ratios including such items would have
been 2.00%, 1.67%, 1.61%, 1.47% and 1.18% per Class A Share, respectively.
Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.06 per Class B Share. The operating expense ratio including
such items would have been 2.28% (annualized). Excludes management fees
waived and expenses reimbursed by the Manager in the amount of $.10, $.07,
$.06 and $.06 per Class C Share, respectively. The operating expense ratios
including such items would have been 2.28%, 1.94%, 1.87% and 1.72%
(annualized) per Class C Share, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.

The accompanying notes are an integral part of the financial statements.

16
<PAGE> 18

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements.

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------------ -------------- ----------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------ ----------------------------------
1998 1997 1996 1995 1994 1998++ 1998 1997 1996 1995+
------ ------ ------ ------ ------ -------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR.......................... $10.69 $10.22 $ 9.94 $ 9.65 $10.65 $10.57 $10.65 $10.18 $ 9.91 $ 9.62
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a)...... 0.88 0.90 0.84(e) 0.72 0.69 0.51 0.83 0.85 0.79(e) 0.31
Net realized and unrealized
gain (loss) on
investments................. (0.91) 0.46 0.24 0.31 (0.84) (0.87) (0.91) 0.46 0.24 0.28
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations.................. (0.03) 1.36 1.08 1.03 (0.15) (0.36) (0.08) 1.31 1.03 0.59
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income...................... (0.89) (0.89) (0.80) (0.74) (0.71) (0.48) (0.84) (0.84) (0.76) (0.30)
Distributions from net
realized gains.............. -- -- -- -- (0.07) -- -- -- -- --
Distribution in excess of net
realized gains.............. -- -- -- -- (0.07) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions........... (0.89) (0.89) (0.80) (0.74) (0.85) (0.48) (0.84) (0.84) (0.76) (0.30)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR... $ 9.77 $10.69 $10.22 $ 9.94 $ 9.65 $ 9.73 $ 9.73 $10.65 $10.18 $ 9.91
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(D)............ (0.52) 14.00 11.44 11.23 (1.59) (3.58)(c) (1.02) 13.53 10.93 6.18(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net
assets(a)................... 1.19 1.21 1.23 1.25 1.25 1.70(b) 1.70 1.70 1.70 1.70(b)
Net investment income to
average daily net assets.... 8.44 8.76 8.41 7.35 6.76 7.90(b) 7.93 8.26 8.39 6.67(b)
Portfolio turnover rate....... 87 101 143 109 135 87 87 101 143 109
Net assets, end of year($
millions)................... 40 42 33 30 36 2 13 13 6 0.6
</TABLE>

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

+ For the period April 3, 1995 (commencement of Class C Shares) to September
30, 1995.
++ For the period February 2, 1998 (commencement of Class B Shares) to
September 30, 1998.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.01, $.01, $.03, $.03 and $.02 per Class A Share,
respectively. The operating expense ratios including such items would have
been 1.30%, 1.30%, 1.51%, 1.51% and 1.42% per Class A Share, respectively.
Excludes management fees waived and expenses reimbursed by the manager in
the amount of $.01 per Class B Share. The operating expense ratio including
such items would have been 1.80% (annualized). Excludes management fees
waived by the Manager in the amount of $.01, $.01, $0.03 and $0.03 per Class
C Share, respectively. The operating expense ratios including such items
would have been 1.80%, 1.79%, 1.98% and 1.96% (annualized) per Class C
Share, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
(e) Amounts calculated prior to reclassification of $16,079. The effect of such
reclassification would have resulted in an increase in net investment income
of $.01 for Class A Shares and $0.01 for Class C Shares.

The accompanying notes are an integral part of the financial statements.

17
<PAGE> 19

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Note 1:
SIGNIFICANT ACCOUNTING POLICIES. Heritage Income Trust (the "Trust") is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company consisting of two separate investment
portfolios, the Intermediate Government Fund (formerly known as the
Limited Maturity Government Portfolio) and the High Yield Bond Fund
(formerly known as the Diversified Portfolio) (each, a "Fund" and
collectively, the "Funds"). The Intermediate Government Fund has an
investment objective of high current income consistent with the
preservation of capital. The High Yield Bond Fund has an investment
objective of high current income. The Funds currently issue Class A, Class
B and Class C Shares. Class A Shares are sold subject to a maximum sales
charge of 3.75% of the amount invested payable at the time of purchase.
Class B Shares, which were offered to shareholders beginning February 2,
1998, are sold subject to a 5% maximum contingent deferred sales load
(based on the lower of purchase price or redemption price) declining over
a six-year period. Class C Shares, which were offered to shareholders
beginning April 3, 1995, are sold subject to a contingent deferred sales
charge of 1% of the lower of net asset value or purchase price payable
upon any redemptions made in less than one year of purchase. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies.

Security Valuation: Each Fund values investment securities at market value
based on the last sales price as reported by the principal securities
exchange on which the security is traded. If no sale is reported, market
value is based on the most recent quoted bid price and in the absence of a
market quote, securities are valued using such methods as the Board of
Trustees believes would reflect fair market value. Investments in certain
debt instruments not traded in an organized market, are valued on the
basis of valuations furnished by independent pricing services or
broker/dealers that utilize information with respect to market
transactions in such securities or comparable securities, quotations from
dealers, yields, maturities, ratings and various relationships between
securities. Short term investments having a maturity of 60 days or less
are valued at amortized cost, which approximates market.

Repurchase Agreements: Each Fund enters into repurchase agreements whereby
a Fund, through its custodian, receives delivery of the underlying
securities, the market value of which at the time of purchase is required
to be in an amount equal to at least 100% of the resale price.

Federal Income Taxes: Each Fund is treated as a single corporate taxpayer
as provided for in The Tax Reform Act of 1986, as amended. Each Fund's
policy is to comply with the requirements of the Internal Revenue Code of
1986, as amended which are applicable to regulated investment companies
and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no provision has been made for federal income
and excise taxes.

Distribution of Income and Gains: Distributions of net investment income
are made monthly. Net realized gains from investment transactions for each
Fund during any particular year in excess of available capital loss
carryforwards, which, if not distributed, would be taxable to each Fund,
will be distributed to shareholders in the following fiscal year. Each
Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting
purposes.

Expenses: Each Fund is charged for those expenses that are directly
attributable to it, such as management fee, custodian/fund accounting
fees, distribution fee, etc., while other expenses such as professional
fees, insurance expense, etc., are allocated proportionately among all
Heritage mutual funds. Expenses of each Fund are allocated to each class
of shares based upon their relative percentage of current net assets. All
expenses that are directly attributable to a specific class of shares,
such as distribution fees, are charged directly to that class.

State Qualification Expenses: State qualification fees are amortized based
either on the time period covered by the qualification or as related
shares are sold, whichever is appropriate for each state.

Capital Accounts: The Funds report the undistributed net investment income
and accumulated net realized gain (loss) accounts on a basis approximating
amounts available for future tax distributions (or to offset future
taxable realized gains when a capital loss carryforward is available).
Accordingly, the Funds may periodically make reclassifications among
certain capital accounts without impacting the net asset value of the
Fund.

Other: For purposes of these financial statements, investment security
transactions are accounted for on a trade date basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income is recorded on the accrual basis except when income is not
expected. All original issue discounts are accreted for both federal
income tax and financial reporting purposes.

18
<PAGE> 20

- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------

Note 2:
FUND SHARES: At September 30, 1998, there was an unlimited number of
shares of beneficial interest of no par value authorized.

Transactions in Class A and Class C Shares of the Fund during the year
ended September 30, 1998 and Class B Shares from February 2, 1998
(commencement of Class B Shares) to September 30, 1998 were as follows:

INTERMEDIATE GOVERNMENT FUND

<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
------------------------ ------------------------ ------------------------
FOR THE YEAR ENDED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
SEPTEMBER 30, 1998 --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 185,461 $ 1,724,681 13,028 $ 121,126 474,673 $ 4,433,013
Shares issued on reinvestment of
distributions.................. 67,011 619,953 60 561 7,594 70,281
Shares redeemed.................. (476,959) (4,427,313) -- -- (51,881) (480,401)
--------- ----------- --------- ----------- --------- -----------
Net increase (decrease).......... (224,487) $(2,082,679) 13,088 $ 121,687 430,386 $ 4,022,893
=========== =========== ===========
Shares outstanding:
Beginning of year.............. 1,527,676 -- 88,198
--------- --------- ---------
End of year.................... 1,303,189 13,088 518,584
========= ========= =========
</TABLE>

Transactions in Class A and Class C Shares of the Fund during the year
ended September 30, 1997 were as follows:

<TABLE>
<CAPTION>
A SHARES C SHARES
------------------------ ------------------------
FOR THE YEAR ENDED SHARES AMOUNT SHARES AMOUNT
SEPTEMBER 30, 1997 --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 29,039 $ 263,983 45,681 $ 417,167
Shares issued on reinvestment of
distributions.................. 86,848 790,115 4,462 40,481
Shares redeemed.................. (518,637) (4,719,949) (26,520) (239,825)
--------- ----------- --------- -----------
Net increase (decrease).......... (402,750) $(3,665,851) 23,623 $ 217,823
=========== ===========
Shares outstanding:
Beginning of year.............. 1,930,426 64,575
--------- ---------
End of year.................... 1,527,676 88,198
========= =========
</TABLE>

HIGH YIELD BOND FUND

<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
------------------------ ------------------------ ------------------------
FOR THE YEAR ENDED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
SEPTEMBER 30, 1998 --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 787,959 $ 8,314,882 196,020 $ 2,056,707 607,408 $ 6,390,589
Shares issued on reinvestment of
distributions.................. 234,628 2,462,134 2,626 27,135 86,303 901,721
Shares redeemed.................. (854,815) (8,945,724) (15,140) (157,348) (547,574) (5,716,430)
--------- ----------- --------- ----------- --------- -----------
Net increase..................... 167,772 1,831,292 183,506 $ 1,926,494 146,137 $ 1,575,880
=========== =========== ===========
Shares outstanding:
Beginning of year.............. 3,912,752 -- 1,200,287
--------- --------- ---------
End of year.................... 4,080,524 183,506 1,346,424
========= ========= =========
</TABLE>

Transactions in Class A and Class C Shares of the Fund during the year
ended September 30, 1997 were as follows:

<TABLE>
<CAPTION>
A SHARES C SHARES
------------------------ ------------------------
FOR THE YEAR ENDED SHARES AMOUNT SHARES AMOUNT
SEPTEMBER 30, 1997 --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 1,150,318 $11,941,684 947,310 $ 9,722,280
Shares issued on reinvestment of
distributions.................. 217,347 2,240,553 73,430 753,853
Shares redeemed.................. (698,065) (7,227,798) (456,608) (4,698,707)
--------- ----------- --------- -----------
Net increase..................... 669,600 $ 6,954,439 564,132 $ 5,777,426
=========== ===========
Shares outstanding:
Beginning of year.............. 3,243,152 636,155
--------- ---------
End of year.................... 3,912,752 1,200,287
========= =========
</TABLE>

19
<PAGE> 21

Note 3:
PURCHASES AND SALES OF SECURITIES. For the year ended September 30, 1998,
purchases, sales and paydowns of investment securities (excluding
repurchase agreements and short-term obligations) were as follows:

<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER
----------------------------------------- --------------------------
PURCHASES SALES PAYDOWNS PURCHASES SALES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Intermediate Government Fund............. $28,037,664 $25,978,211 $ 448,850 -- --
High Yield Bond Fund..................... -- -- -- $51,966,140 $46,780,532
</TABLE>

Note 4:
MANAGEMENT, SUBADVISORY, DISTRIBUTION, SHAREHOLDER SERVICING AGENT, FUND
ACCOUNTING AND TRUSTEES' FEES. Under the Fund's Investment Advisory and
Administrative Agreement with Heritage Asset Management, Inc. (the
"Manager"), the Intermediate Government Fund agrees to pay to the Manager
a fee equal to an annual rate of 0.50% of the Fund's average daily net
assets, computed daily and payable monthly. For the High Yield Bond Fund
the management fee is 0.60% on the first $100,000,000 and 0.50% of any
excess over $100,000,000 of net assets. The Manager voluntarily will waive
its investment advisory fees and, if necessary, reimburse each Fund to the
extent that Class A, Class B and Class C annual operating expenses exceed
that Fund's average daily net assets attributable to that class for the
1998 fiscal year as follows:

<TABLE>
<CAPTION>
CLASS A CLASS B AND CLASS C
------- -------------------
<S> <C> <C>
Intermediate Government Fund................................ 0.95% 1.20%
High Yield Bond Fund........................................ 1.25% 1.70%
</TABLE>

Under this agreement, management fees of $72,950 were waived and $84,666
of expenses were reimbursed for the Intermediate Government Fund and
management fees of $60,462 were waived in the High Yield Bond Fund for the
year ended September 30, 1998. If total Fund expenses fall below the
expense limitation agreed to by the Manager before the end of the year
ended September 30, 2000, the Funds may be required to pay the Manager a
portion or all of the waived management fees. In addition, the Funds may
be required to pay the Manager a portion or all of the management fees
waived in fiscal 1996 and 1997 if total Fund expenses fall below the
annual expense limitations before the end of the year ending September 30,
1999.

At a special meeting of shareholders held on February 23, 1998,
shareholders approved the re-appointment of Salomon Brothers Asset
Management Inc (SBAM) a wholly owned subsidiary of Travelers Group, Inc.,
as subadviser to the High Yield Bond Fund. The re-appointment was
necessary because of a merger between a wholly owned subsidiary of
Travelers Group Inc. and Salomon Inc., resulting in a change of control of
SBAM and in an automatic termination of the subadvisory agreement. The
Manager entered into an agreement with SBAM to provide investment advice,
portfolio management services (including the placement of brokerage
orders) and certain compliance and other services for a fee payable by the
Manager equal to 50% of the fees payable by the High Yield Bond Fund to
the Manager without regard to any reduction due to the imposition of
expense limitations. For the year ended September 30, 1998 the Manager
paid $173,928 for subadviser fees.

The Manager also is the Dividend Paying and Shareholder Servicing Agent
for the Intermediate Government Fund and High Yield Bond Fund. The amount
payable to the Manager for such expenses as of September 30, 1998 was
$3,000 and $9,000, respectively. In addition, the Manager performs Fund
accounting services and charged $33,363 and $50,573 during the current
period of which $8,400 and $12,300 was payable as of September 30, 1998,
respectively.

Raymond James & Associates, Inc. (the "Distributor") has advised the Trust
that the Intermediate Government Fund received $12,451 in front-end sales
charges for Class A Shares and $354 in contingent deferred sales charges
for Class C Shares for the year ended September 30, 1998. The High Yield
Bond Fund received $134,157 in front-end sales charges for Class A Shares,
$774 in contingent deferred sales charges for Class B Shares and $6,388 in
contingent deferred sales charges for Class C Shares for the year ended
September 30, 1998. From these fees, the Distributor paid sales
commissions to salespersons and incurred other distribution costs.

Pursuant to the Class A Distribution Plan adopted in accordance with Rule
12b-1 of the Investment Company Act of 1940, as amended, the Trust is
authorized to pay the Distributor a fee up to .35% of the average daily
net assets for Class A Shares. Under the Class B and Class C Distribution
Plan, the Trust may pay the Distributor a fee of up to .60% for the
Intermediate Government Fund and up to .80% for the High Yield Bond Fund
of the average daily net assets for Class B and Class C Shares. Such fees
are accrued daily and payable monthly. B Shares will convert to A Shares
eight years after the end of the calendar month in which the shareholder's
order to purchase was accepted. The Manager, Distributor, Fund Accountant
and Shareholder Servicing Agent are all wholly owned subsidiaries of
Raymond James Financial, Inc.

Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Income-Growth Trust, Heritage Capital Appreciation Trust,
Heritage Series Trust and Heritage U.S. Government Income Fund, investment
companies that also are advised by the Manager of the Trust (collectively
referred to as the Heritage mutual funds). Each Trustee of the Heritage
mutual funds who is not an employee of the Manager or employee of an
affiliate of the Manager receives an annual fee of $8,666 and an
additional fee of $3,250 for each combined quarterly meeting of the
Heritage mutual funds attended. Trustees' fees and expenses are shared
equally by each of the Heritage mutual funds.

20
<PAGE> 22

Note 5:
FEDERAL INCOME TAXES. For the year ended September 30, 1998, to reflect
reclassifications arising from permanent book/tax differences primarily
due to paydown losses and market discount, respectively, the Funds made
the following adjustments:

INTERMEDIATE GOVERNMENT FUND
-----------------------------------
As of September 30, 1998, the Fund has a net tax basis capital loss
carryforwards of $7,095,646, which may be applied against any realized
net taxable gains until their expiration dates of September 30, 2001
($237,373), September 30, 2002 ($3,838,721), September 30, 2003
($2,492,779) and September 30, 2004 ($526,773). The Fund utilized
$150,698 of net tax basis capital losses during the current year
against net realized gains from investment transactions.

HIGH YIELD BOND FUND
-----------------------------------
The Fund credited undistributed net investment income and charged
accumulated net realized gain $44,735 in the current year. The Fund
utilized $716,301 of net tax basis capital losses during the current
year against net realized gains from investment transactions.

21
<PAGE> 23

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

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
Heritage Income Trust

In our opinion, the accompanying statements of assets and liabilities,
including the investment portfolios, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Heritage Income
Trust-Intermediate Government Fund and the Heritage Income Trust-High Yield Bond
Fund (constituting the Heritage Income Trust, hereafter referred to as the
"Trust") at September 30, 1998, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.

/S/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Tampa, Florida
November 12, 1998

22
<PAGE> 24

HERITAGE FAMILY OF FUNDS (TM)
From Our Family to Yours: The Intelligent Creation of Wealth.

HERITAGE MONEY MARKET FUNDS
Cash Trust Money Market
Cash Trust Municipal Money Market

HERITAGE INCOME FUNDS
Intermediate Government
High Yield

HERITAGE GROWTH FUNDS
Aggressive Growth
Capital Appreciation
Growth Equity
Income-Growth
International
Mid Cap
Small Cap
Value Equity

We are pleased that many of you are also investors in these funds. For
information and a prospectus for any of these mutual funds, please contact your
financial advisor. Please read the prospectus carefully before you invest in
any of the funds.

This report is for the information of shareholders of Heritage Income Trust
Intermediate Government Fund and Heritage Income Trust-High Yield Bond
Fund. It may also be used as sales literature when preceded or accompanied by a
prospectus.

8M 9/98 [RECYCLE LOGO] Printed on recycled paper

AR5320INC
[HERITAGE LOGO] Heritage Income-Trust
P.O. Box 33022
St. Petersburg, FL 33733
- ----------------------------------------------------------------
Address Change Requested