SM&R CAPITAL FUNDS INC, 497, 1997-07-14

SM&R CAPITAL FUNDS INC
497, 1997-07-14

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<PAGE>
GOVERNMENT INCOME FUND SERIES

[AMERICAN NATIONAL]
PRIMARY FUND SERIES
TAX FREE FUND SERIES

[SM&R CAPITAL FUNDS]
P R O S P E C T U S

SM&R CAPITAL FUNDS, INC. - One Moody Plaza - Galveston,
Texas 77550
Telephone Number: (409) 763-8272 - Toll Free: 1 (800)
231-4639
December 15, 1996 As Revised and Reprinted July 31, 1997

<TABLE>
<S> <C>
OFFICERS
Michael W. McCroskey, President and CEO
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
</TABLE>

INVESTMENT ADVISOR AND MANAGER UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc. Securities Management and Research,
Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550

CUSTODIAN TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc. Securities Management and Research,
Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550

LEGAL COUNSEL INDEPENDENT AUDITORS
Greer, Herz & Adams, L.L.P. KPMG Peat Marwick LLP
One Moody Plaza 700 Louisiana
Galveston, Texas 77550 Houston, Texas 77002
- --------------------------------------------------------------------------------

PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. SHARES OF THE FUND
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK.
FURTHER, SHARES OF THE FUND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

LIKE ALL MUTUAL FUNDS, 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.

Information contained in this Prospectus should be read carefully by a
prospective investor before an investment is made. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information dated December 15, 1996 as revised and
reprinted July 31, 1997 which information is incorporated herein by reference
and is available without charge upon written request to Securities Management
and Research, Inc. ("SM&R"), One Moody Plaza, 14th Floor, Galveston, Texas
77550, or by phoning Toll Free 1-800-231-4639 or 1-409-763-8272.

This Prospectus contains information about the SM&R Capital Funds, Inc. (the
"Fund") a diversified, open-end management investment company consisting of
three separate series ("Series") each of which has its own investment objective
designed to meet different investment goals. These investment objectives and
suitability are further described under "The Fund at a Glance" and "Investment
Objectives and Policies". For investment purposes, each Series is a separate
fund and a separate series of capital securities is issued for each Series.

Form 9201 (7/97)

1
<PAGE>
TABLE OF CONTENTS

<TABLE>
<S> <C>
THE FUND AT A GLANCE...................................................... 2
TABLE OF FEES AND EXPENSES................................................ 4
FINANCIAL HIGHLIGHTS...................................................... 5
PERFORMANCE............................................................... 8
INVESTMENT OBJECTIVES AND POLICIES........................................ 8
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES............................. 13
THE FUND AND ITS MANAGEMENT............................................... 14
HOW TO PURCHASE SHARES.................................................... 16
WHEN ARE PURCHASES EFFECTIVE?............................................. 17
DETERMINATION OF OFFERING PRICE........................................... 17
SPECIAL PURCHASE PLANS AND SERVICES....................................... 20
RETIREMENT PLANS.......................................................... 23
DIVIDENDS AND DISTRIBUTIONS............................................... 23
TAXES..................................................................... 24
HOW TO REDEEM............................................................. 25
OTHER INFORMATION CONCERNING THE FUND..................................... 27
APPENDIX.................................................................. 31
</TABLE>

THE FUND AT A GLANCE

SM&R Capital Funds, Inc. (the "Fund") was incorporated under the laws of
Maryland on November 6, 1991. The Fund offers three separate Series each of
which pursues unique investment objectives. The investment objectives and
investor suitability profile of each Series are as follows:

AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES ("GOVERNMENT INCOME SERIES")

OBJECTIVE: To provide as high a level of current income, liquidity and safety
of principal as is consistent with prudent investment risks through investment
in a portfolio consisting primarily of securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.

INVESTOR SUITABILITY PROFILE: The Government Income Series is for investors
desiring the security of investing primarily in the strength and stability of
the U.S. Government, its agencies or instrumentalities in order to meet their
current needs. However, an investor should keep in mind the Series may invest in
other instruments in order to meet its objectives.

AMERICAN NATIONAL PRIMARY FUND
SERIES ("PRIMARY SERIES")

OBJECTIVE: To seek maximum current income consistent with capital
preservation and liquidity through investment primarily in commercial paper.

INVESTOR SUITABILITY PROFILE: The Primary Series is for fixed income
investors who desire minimal investment risk yet may be looking to move
cautiously into the investment arena.

AMERICAN NATIONAL TAX FREE FUND
SERIES ("TAX FREE SERIES")

OBJECTIVE: To provide as high a level of interest income largely exempt from
federal income taxes as is consistent with preservation of capital through
investment of at least 80% of its net assets in tax-exempt securities during
normal market conditions.

INVESTOR SUITABILITY PROFILE: The Tax Free Series is for the investor
desiring income exempt from federal income tax and, under certain conditions,
exempt from state and local taxes based on his tax bracket. An investor must
keep in mind that income may be subject to the Alternative Minimum Tax (AMT)
under certain conditions.

2
<PAGE>
Each Series is, for investment purposes, in effect a separate investment fund,
and a separate class of capital stock is issued for each. In other respects, the
Fund is treated as one entity. Each share of capital stock issued with respect
to a Series represents a pro-rata interest in the assets of that Series and has
no interest in the assets of any other Series. Each Series bears its own
liabilities. An investor should keep in mind that investments in the Primary
Series are not insured or guaranteed by the U.S. Government.

PORTFOLIO TURNOVER RATES: Historical turnover rates for each Series are
included in the Financial Highlights tables herein. Each of the Series does not
expect their portfolio turnover rates to exceed eighty percent (80%). An
explanation of turnover rate calculations and brokerage fees can be found in the
Fund's Statement of Additional Information.

MANAGEMENT: Securities Management and Research, Inc. ("SM&R") makes the
investment choices for the Fund. SM&R has served as adviser and distributor to
mutual funds since 1966. Refer to THE FUND AND ITS MANAGEMENT for additional
information.

PORTFOLIO MANAGEMENT PERSONAL INVESTING: The Fund's Board of Directors has
approved a Code of Ethics which prescribes policies relative to the personal
investment practices of its portfolio management. These policies are stated in
the Fund's Statement of Additional Information.

PURCHASING SHARES: Shares of the Government Income Series and the Tax Free
Series are offered at their respective net asset value plus a sales charge of
4.5% of the public offering price which is reduced on purchases of $100,000 or
more. Shares of the Primary Series are offered at net asset value. The
Government Income Series and Tax Free Series minimum initial and subsequent
investments are $100 and $20, respectively. The Primary Series' minimum initial
and subsequent investments are $1,000 and $100, respectively. See "SPECIAL
PURCHASE PLANS AND SERVICES" and "HOW TO PURCHASE SHARES".

REDEMPTIONS: Information on redeeming shares can be found under the heading
"HOW TO REDEEM".

3
<PAGE>
TABLE OF FEES AND EXPENSES
- --------------------------------------------------------------------------------

The purpose of the following table is to assist an investor in understanding the
various costs and expenses that an investor will bear directly or indirectly.
The fees and expenses are based on the average net assets of each Series of the
Fund for the fiscal year ended August 31, 1996. Total operating expenses have
been adjusted to reflect current expense reimbursement levels. Without fee
waivers or expense reimbursements, management fees, service fees and other
expenses, respectively, would have been .50%, .25%, and .45% with respect to the
Government Income Series, .50%, .25%, and .40% with respect to the Primary
Series, and .50%, .25%, and .43% with respect to the Tax Free Series for the
periods ended August 31, 1996.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
Government Primary Tax Free
Income Series Series Series
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price) 4.50% None 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a Percentage of offering price) None None None
Deferred Sales Load Redemption Fees* None None None
Exchange Fees None None None
</TABLE>

ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)

<TABLE>
<CAPTION>
Government Primary Tax Free
Income Series Series Series
<S> <C> <C> <C>
Management Fee, After Expense
Reimbursement 0.30%** 0.16%** 0.00%**
Service Fee 0.25% 0.25% 0.25%**
Other Expenses After Expense
Reimbursement 0.45% 0.40% 0.43%**
Total Fund Operating Expense After
Expense Reimbursement 1.00%** 0.81%** 0.68%**
</TABLE>

* An $8.00 transaction fee is charged for each expedited wire redemption.
**After fee waivers or expense reimbursements.

NOTE: The Tax Free Series expense information has been restated to reflect
current fees.

Investors should be aware that this table is not intended to reflect in detail
the fees and expenses associated with an individual shareholder's own investment
in any of the series listed. It is being provided to assist investors in gaining
a more complete understanding of fees, charges and expenses which are discussed
in greater detail in the appropriate sections of the Prospectus.

EXAMPLE OF EXPENSES

The following example illustrates the expenses an investor would pay on a
$1,000 investment in each series over various time periods, assuming (1) 5%
annual return and (2) redemption at the end of each period. Because the Series'
have no redemption fee, you would pay the same expenses whether or not you
redeemed your investment at the end of each period. An investor should not view
this example as a representation of past or future expenses and actual expenses
may be more or less than those shown.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Government Income
Series $55 $75 $98 $162
Primary Series 8 26 45 100
Tax Free Series 52 66 81 126
</TABLE>

4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each period)

GOVERNMENT INCOME SERIES

The table that follows has been audited by KPMG Peat Marwick LLP, independent
auditors, whose unqualified report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.

<TABLE>
<CAPTION>
March 16, 1992
(date
operations
commenced)
Year Ended August 31 thru August 31
------------------------------------ ---------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.51 $10.07 $10.87 $10.56 $10.00
Investment income--net 0.65 0.70 0.54 0.50 0.25
Net realized and
unrealized gain
(loss) on
investments during
the period (0.37) 0.44 (0.79) 0.49 0.55
------ ------ ------ ------ ---------------
TOTAL FROM
INVESTMENT
OPERATIONS 0.28 1.14 (0.25) 0.99 0.80
------ ------ ------ ------ ---------------
Less Distributions
Distributions from
investment
income--net (0.65) (0.70) (0.55) (0.50) (0.24)
Distributions from
capital gains 0.00 0.00 0.00 (0.18) 0.00
------ ------ ------ ------ ---------------
TOTAL DISTRIBUTIONS (0.65) (0.70) (0.55) (0.68) (0.24)
------ ------ ------ ------ ---------------
Net Asset Value End of
period $10.14 $10.51 $10.07 $10.87 $10.56
------ ------ ------ ------ ---------------
------ ------ ------ ------ ---------------
TOTAL RETURN 2.63% 11.85% (2.41)% 10.23% 7.96%**
------ ------ ------ ------ ---------------
------ ------ ------ ------ ---------------
</TABLE>

RATIOS/SUPPLEMENTAL DATA

<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted) $21,127 $20,466 $19,790 $19,783 $ 12,529
Ratio of Expenses to
average net assets 1.00%(1) 0.70%(1) 1.12% 1.07% 1.00 %*
Ratio of Net investment
income to average net
assets 6.17% 6.90% 5.11% 5.07% 4.82 %*
Portfolio turnover rate 30.17% 2.20% 45.48% 18.14% 49.70 %
</TABLE>

* Ratios annualized
** Returns are not annualized.

(1) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.20% and 1.06% for the
years ended August 31, 1996 and 1995, respectively.

5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each period)

PRIMARY SERIES

The table below has been audited by KPMG Peat Marwick LLP, independent
auditors, whose unqualified report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.

<TABLE>
<CAPTION>
March 16, 1992
(date
operations
commenced)
Year Ended August 31 thru August 31
------------------------------------ ---------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income--net 0.05 0.05 0.03 0.02 0.015
TOTAL FROM INVESTMENT
OPERATIONS 0.05 0.05 0.03 0.02 0.015
------ ------ ------ ------ ---------------
Less Distributions
Dividends from
investment
income--net (0.05) (0.05) (0.03) (0.02) (0.015)
------ ------ ------ ------ ---------------
Net Asset Value End of
period 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ---------------
------ ------ ------ ------ ---------------
TOTAL RETURN 5.07% 5.01% 2.91% 2.59% 1.50%**
------ ------ ------ ------ ---------------
------ ------ ------ ------ ---------------
</TABLE>

RATIOS/SUPPLEMENTAL DATA

<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted) $37,465 $20,984 $15,208 $15,539 $12,432
Ratio of Expenses to
average net assets(1) 0.81% 0.84% 0.79% 0.85% 0.70%*
Ratio of Net investment
income to average net
assets 4.93% 4.91% 2.88% 2.47% 2.99%*
Portfolio turnover
rate(2) 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>

* Ratios annualized
** Returns are not annualized.

(1) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement the ratio of
expenses to average net assets would have been 1.15%, 1.21%, 1.20%,
1.23% and 1.04% (annualized) for the years ended August 31, 1996, 1995,
1994, 1993 and the period ended August 31, 1992, respectively.

(2) The Primary Series experienced no portfolio turnover because the
majority of securities held during such periods had maturities of one
year or less at the time of acquisition.

6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each period)

TAX FREE SERIES

<TABLE>
<CAPTION>
September 9,
1993
(date
operations
Year Ended commenced) thru
August 31 August 31
---------------- ---------------
1996 1995 1994
------ ------ ---------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.95 $ 9.62 $10.00
Investment income--net .53 0.51 0.24
Net realized and
unrealized gain
(loss) on
investments during
the period (0.02) 0.33 (0.38)
------ ------ -------
TOTAL FROM
INVESTMENT
OPERATIONS 0.51 0.84 (0.14)
------ ------ -------
Less Distributions
Dividends from
investment
income--net (0.53) (0.51) (0.24)
------ ------ -------
Net Asset Value End of
Period $ 9.93 $ 9.95 $ 9.62
------ ------ -------
------ ------ -------
TOTAL RETURN 5.18% 9.15% (1.49)%**
------ ------ -------
------ ------ -------
</TABLE>

RATIOS/SUPPLEMENTAL DATA

<TABLE>
<S> <C> <C> <C>
Net Assets, End of Period
(000's omitted) $9,148 $8,399 $ 7,259
Ratio of Expenses to
average net assets --(1) --(1) 1.11 %*
Ratio of Net investment
income to average net
assets 5.27% 5.43% 2.50 %*
Portfolio turnover rate 18.44% 12.63% 16.49 %
</TABLE>

* Ratios annualized
** Returns are not annualized

(1) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.18% and 1.25% for the
years ended August 31, 1996 and 1995, respectively.

7
<PAGE>
PERFORMANCE

Each Series' performance may be quoted in advertising in terms of yield or
total return. All advertisements will disclose the maximum sales charge to which
investments in shares of each Series may be subject. If any advertised
performance data does not reflect the maximum sales charge (if any), such
advertisement will disclose that the sales charge has not been deducted in
computing the performance data, and that, if reflected, the maximum sales charge
would reduce the performance quoted. See the Statement of Additional Information
for further details concerning performance comparisons used in advertisements by
each Series. Performance information regarding each Series is found on pages 28,
29, and 30. An investor should keep in mind when reviewing performance that past
performance of a fund is not indicative of future results, but is an indication
of the return to the investor only for the limited historical period.

Standardized total return for shares of a Series reflects the deduction of the
maximum initial sales charge at the time of purchase. A Series' total return
shows its overall change in value, including changes in share price and assuming
all the Series' dividends and capital gain distributions are reinvested and that
all charges and expenses are deducted. A cumulative total return reflects a
Series performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Series performance had been constant
over the entire period. Because average annual returns tend to even out
variations in a Series' return, investors should recognize that such returns are
not the same as actual year-by-year results. To illustrate the components of
overall performance, a Series may separate its cumulative and average annual
returns into income results and capital gain or loss.

A Series' performance is a function of its portfolio management in selecting
the type and quality of portfolio securities and is affected by operating
expenses of the Series and market conditions. A shareholder's investment in a
Series is not insured or guaranteed. These factors should be carefully
considered by the investor before making any investment in any Series.

INVESTMENT OBJECTIVES AND POLICIES

Each Series of the Fund pursues its own investment objective through the
investment policies and techniques, described below. These policies and
techniques are not fundamental and may be changed by the Board of Directors of
the Fund without the approval of the shareholders. In addition, the Fund has
adopted certain restrictions as fundamental policies for each Series of the
Fund, which may not be changed without shareholder approval. (See the Fund's
Statement of Additional Information for a description of the investment
restrictions adopted as fundamental policies). Since each Series has a different
investment objective, each can be expected to have different investment results
and incur different market and financial risks. The Fund may in the future
establish other series with different investment objectives.

Because of the market risks inherent in any investment, attainment of each
Series' investment objective cannot be assured. In addition, effective
management of each Series is subject to general economic conditions and to the
ability and investment techniques of management. The net asset value of each
Series' shares will vary and the redemption value of shares owned may be either
higher or lower than the shareholder's cost.

GOVERNMENT INCOME SERIES

The Government Income Series seeks to achieve its objectives through
investment of 65% or more of its total assets in securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities ("U.S. Government
Obligations") which include, but are not limited to, U.S. Treasury Bonds, Notes
and Bills and securities issued by instrumentalities of the U.S. Government.

There are two broad categories of U.S. Government Obligations: (1) direct
obligations of the U.S. Treasury and (2) obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government. Some obligations issued or
guaranteed by

8
<PAGE>
agencies or instrumentalities of the U.S. Government are backed by the full
faith and credit of the United States (such as Government National Mortgage
Association Certificates) and others are backed exclusively by the agency or
instrumentality with limited rights of the issuer to borrow from the U.S.
Treasury (such as Federal National Mortgage Association Bonds). No assurance can
be given that the U.S. Government would lend money to or otherwise provide
financial support to U.S. Government sponsored instrumentalities as it is not
obligated by law to do so.

MORTGAGE-BACKED SECURITIES--It is anticipated that a substantial portion of the
Government Income Series' portfolio will consist of mortgage-backed securities
("Mortgage-Backed Securities") issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. These securities represent part ownership of
pools of mortgage loans secured by real property, such as certificates issued by
the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the
Federal National Mortgage Association ("FNMA" or "Fannie Mae") and the Federal
Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"). Mortgage-Backed
Securities also include mortgage pass-through certificates representing
participation interests in pools of mortgage loans originated by the U.S.
Government and guaranteed by U.S. Government agencies such as GNMA, FNMA or
FHLMC. Such certificates, which are ownership interests in the underlying
mortgage loans, differ from conventional debt securities which provide for
periodic payment of interest in fixed amounts and principal payments at maturity
or on specified dates. With pass-through certificates, both principal and
interest payments, including prepayments, are passed through to the holder of
the certificate and provide for monthly payments of interest and principal.
GNMA, a federal agency, issues pass-through certificates that are guaranteed as
to timely payment of principal and interest. FNMA, a federally chartered and
privately owned corporation, issues mortgage pass-through securities and
guarantees them as to timely payment of principal and interest. FHLMC, a
corporate instrumentality of the United States, issues participation
certificates that represent an interest in mortgages from FHLMC's portfolio.
FHLMC guarantees the timely payment of interest and the ultimate collection of
principal. FNMA and FHLMC are not backed by the full faith and credit of the
United States, although FNMA and FHLMC are authorized to borrow from the U.S.
Treasury to meet their obligations. Those mentioned are but a few of the
Mortgage-Backed Securities currently available. The Government Income Series
will not purchase interest-only or principal-only mortgage-backed securities.

The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans generally may
be prepaid at any time. The average mortgage in a pool may be expected to be
repaid within about twelve (12) years. If mortgage interest rates decrease, the
value of the Fund's securities will generally increase, however, it is
anticipated that the average life of the mortgages in the pool will decrease as
borrowers refinance and prepay mortgages to take advantage of lower interest
rates. The proceeds to the Fund from such prepayments will have to be invested
at the then prevailing lower interest rates. On the other hand, if interest
rates increase, the value of the Fund's securities generally will decrease while
it is anticipated that borrowers will not refinance and, therefore, the average
life of the mortgages in the pool will be longer. In addition, if the Government
Income Series purchases such a security at a premium, a prepayment rate faster
than expected will reduce yield to maturity, while a prepayment rate slower than
expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Government Income Series purchases these securities at a
discount, faster than expected prepayments will increase yield to maturity,
while slower than expected prepayments will reduce yield to maturity.

COLLATERALIZED MORTGAGE OBLIGATIONS--The Government Income Series may invest a
portion of its assets in collateralized mortgage obligations or

9
<PAGE>
"CMOs", which are debt obligations collateralized by a portfolio or pool of
mortgages, mortgage-backed securities or U.S. Government securities.
Collateralized obligations in which the Government Income Series may invest are
issued or guaranteed by a U.S. Government agency or instrumentality, such as the
FHLMC. A variety of types of collateralized obligations are currently available
and others may become available in the future. One should keep in mind that
during periods of rapid interest rate fluctuation, the price of a security, such
as a CMO, could either increase or decrease based on inherent interest rate
risk. Additionally, the risk of maturities shortening or lengthening in
conjunction with interest rate movement, could magnify the overall effect of the
price fluctuation.

A CMO is often issued in multiple classes with varying maturities and interest
rates. As a result the investor may obtain greater predictability of maturity
than with direct investments in mortgage-backed securities. Thus, classes with
shorter maturities may have lower volatility and lower yield while those with
longer maturities may have higher volatility and higher yields. This provides
the investor with greater control over the characteristics of the investment in
a changing interest rate environment. A more complete description of CMOs is
contained in the Statement of Additional Information.

The Government Income Series may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes.

ZERO COUPON BONDS--The Government Income Series may invest in zero coupon bonds,
which are debt obligations issued or purchased at a significant discount from
face value. The Government Income Series will only purchase zero coupon bonds
which are U.S. Government Obligations. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon bonds do not
entitle the holder to any periodic payments of interest prior to maturity. Its
value as an investment consists of the difference between its face value at the
time of maturity and the price for which it was acquired which is generally an
amount significantly less than face value (sometimes referred to as a "deep
discount" price). Zero coupon bonds require a higher rate of return to attract
investors who are willing to defer receipt of cash. Accordingly, although not
providing current income, SM&R believes that zero coupon bonds can be
effectively used to lock in a higher rate of return in a declining interest
environment. Such investments may experience greater volatility in market value
than debt obligations which make regular payments of interest. The Series will
accrue income on such investments for tax and accounting purposes, as required,
which is distributable to shareholders and which, because no cash is received at
the time of accrual, may require the liquidation of other portfolio securities
to satisfy the Series' distribution obligations.

OTHER INVESTMENTS--The Government Income Series shall also invest in commercial
paper, certificates of deposit and repurchase agreements of the same type and
rating as the Primary Series may invest (See "PRIMARY SERIES").

PRIMARY SERIES

The Primary Series seeks to achieve its objective by investing primarily in
commercial paper. Commercial paper is short-term unsecured promissory notes
issued by corporations to finance short-term credit needs. Commercial paper is
usually sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. The Primary Series will invest only in commercial paper
which, at the date of such investment, is rated in one of the two top categories
by one or more of the nationally recognized statistical rating organizations
("NRSROs")(See the "Appendix" hereto for information about such ratings and such
rating organizations).

OTHER INVESTMENTS--The Primary Series may invest in (i) U.S. Government
Obligations (Refer to the "GOVERNMENT INCOME SERIES" above for an

10
<PAGE>
explanation of U.S. Government Obligations); (ii) other corporate obligations,
such as bonds, debentures or notes maturing in five (5) years or less at the
time of purchase which at the date of the investment are rated "A" or higher by
an NRSRO; and (iii) negotiable certificates of deposit of banks (including U.S.
dollar denominated obligations of foreign branches of U.S. banks and U.S.
branches of foreign banks and savings and loan associations and banker's
acceptances of U.S. banks which banks and savings and loan associations have
total assets at the date of investment (as of the date of their most recent
published financial statements) of at least $1 billion (See "INVESTMENT
OBJECTIVES AND POLICIES", "Certificates of Deposit" in the Statement of
Additional Information for a description of the securities) and (iv) repurchase
agreements with respect to any type of instrument in which the Primary Series is
authorized to invest even though the underlying instrument may mature in more
than two (2) years. (See "Repurchase Agreements" on page 13.) Obligations of
foreign branches of U.S. banks are subject to somewhat different risk than those
of domestic banks. These risks include foreign economic and political
developments, foreign governmental restrictions which may adversely effect
payment of principal and interest on the obligations, foreign withholding and
other taxes on interest income, and difficulties in obtaining and enforcing a
judgement against a foreign branch of a domestic bank. In addition, different
risks may result from the fact that foreign branches of U.S. banks and U.S.
branches of foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks. For instance, such
branches may not be subject to the types of requirements imposed on domestic
banks with respect to mandatory reserves, loan limitations, examinations,
accounting, auditing, record keeping and the public availability of information.
Such obligations are not traded on any national securities exchange. While the
Primary Series does not presently invest in obligations of foreign branches of
U.S. banks, it may do so in the future. Investments in such obligations will not
be made in excess of 5% of the Primary Series' total assets and will be made
only when SM&R believes the risks described above are minimal.

TAX FREE SERIES

The Tax Free Series, as a matter of fundamental policy, will seek to achieve
its objective by investing at least 80% of the value of its net assets in
municipal securities the interest on which is exempt from federal income taxes.

The Tax Free Series has no restrictions on the maturity of municipal
securities in which it may invest. Accordingly, it will seek to invest in
municipal securities of such maturities which, in the judgement of SM&R, the
adviser, will provide a high level of current income consistent with prudent
investment, with consideration given to market conditions.

The Tax Free Series will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P") or Fitch Investors Service in securities which are not
rated, provided that, in the opinion of the adviser, such securities are
comparably in quality to those within the four highest ratings. The rating
agencies consider that bonds rated in the fourth highest category may have some
speculative characteristics and that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. SM&R will only
purchase bonds rated in such fourth category if it is of the opinion that the
purchase of such bonds is consistent with the Tax Free Series' investment
objective. In the event the rating of an issue held by the Tax Free Series is
changed by the rating service, such change will be considered by the Tax Free
Series in its evaluation of the overall investment merits of that security but
such change will not necessarily result in an automatic sale of the security.
Any security held which is subsequently downgraded below BB by S&P or Ba by
Moody's will be sold as soon as it is advantageous to do so after the downgrade.
A description of the ratings may be found in the Appendix to this Prospectus.

Purchasing unrated municipal securities, which may be less liquid than
comparable rated municipal

11
<PAGE>
securities, involves somewhat greater risk and consequently the Tax Free Series
may not invest more than 20% of its net assets in unrated municipal securities.
To attempt to minimize the risk of such investments SM&R will, prior to
acquiring unrated securities, consider the terms of the offering and various
other factors to determine the issuers comparative credit rating and whether the
securities are consistent with the Tax Free Series' investment objective and
policies. In making such determinations SM&R will typically (a) interview
representatives of the issuer at the issuer's offices, conduct a tour and
inspection of the physical facilities of the issuer in an effort to evaluate the
issuer and its operations, (b) perform an analysis of the issuer's financial and
credit position, including comparisons of all appropriate ratios, and (c)
compare other similar securities offerings to the issuer's proposed offering.

During normal market conditions, the Tax Free Series will have at least 80% of
its net assets invested in municipal securities the income of which is fully
exempt from federal income taxation. Furthermore, under normal market conditions
up to 20% of the Tax Free Series' net assets, and up to 50% of its net assets as
a temporary defensive measure during abnormal market conditions, may be invested
in the following types of taxable fixed income obligations: (1) obligations
issued or guaranteed by the U.S. government, its agencies, instrumentalities or
authorities (Refer to "GOVERNMENT INCOME SERIES" above for an explanation of
U.S. government obligations); (2) corporate debt securities which at the date of
the investment are rated A or higher by Moody's or by S&P; (3) commercial paper
which at the date of the investment is rated in one of the two top categories by
Moody's or by S&P or if not rated, is issued by a company which at the date of
the investment has an outstanding debt issue rated A or higher by Moody's or A
or higher by S&P; (4) certificates of deposit issued by U.S. banks which at the
date of the investment have capital surplus and undivided profits of $1 billion
as of the date of their most recently published financial statements; and (5)
repurchase agreements secured by U.S. government securities, provided that no
more than 15% of the Series' net assets will be invested in illiquid securities
including repurchase agreements with maturities in excess of seven days. To the
extent income dividends include income from taxable sources, a portion of a
shareholder's dividend income may be taxable. (See "DIVIDENDS AND
DISTRIBUTIONS").

MUNICIPAL SECURITIES--The term "municipal securities," as used in this
Prospectus means obligations issued by or on behalf of states, territories and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, the interest on which is exempt
from federal income tax. An opinion as to the tax-exempt status of a municipal
security generally is rendered to the issuer by the issuer's counsel at the time
of issuance of the security.

Municipal securities are used to raise money for various public purposes such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the Statement of
Additional Information.

Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Like other interest-bearing
securities, the value of municipal securities changes as interest rates
fluctuate. For example, if interest rates increase from the time a security is
purchased, if sold, the security may be at a price less than its purchase cost.
Conversely, if interest rates decline from the time a security is purchased, if
sold, the security may be sold at a price greater than its purchase cost.
Generally, municipal securities of longer maturities produce higher current
yields than municipal securities with shorter maturities but are subject to
greater price fluctuation due to changes in interest rates, tax laws and other
general market factors. Lower-rated municipal securities generally produce a
higher yield with shorter maturities than higher-

12
<PAGE>
rated municipal securities due to the perception of a greater degree of risk as
to the ability of the issuer to pay principal and interest.

The Tax Free Series may purchase municipal bonds for which the payments of
principal and interest are secured by an escrow account of securities backed by
the full faith and credit of the U.S. government ("defeased") and municipal
securities whose principal and interest payments are insured by a commercial
insurance company as long as the underlying credit is investment grade (BBB or
better by S&P and Fitch and Baa or better by Moody's) ("insured"). The Tax Free
Series may also purchase unrated securities of issuers which the adviser
believes would have been rated BBB or Baa had the issuer requested a rating from
S&P, Fitch or Moody's. Such implied investment grade rating will be determined
by the adviser upon its performance of a credit analysis of the issue and the
issuer. Such credit analysis may consist of a review of such items as the
issuer's debt characteristics, financial information, structure of the issue,
liquidity of the issue, quality of the issuer, current economic climate,
financial adviser and underwriter. Insured and defeased bonds are further
described in the Statement of Additional Information. In general, these types of
municipal securities will not be treated as an obligation of the original
municipality for purposes of determining industry concentration.

OTHER INVESTMENTS--The Tax Free Series may purchase "floating rate" and
"variable rate" obligations. These obligations bear interest at rates that are
not fixed, but vary with changes in specified market rates or indices on
pre-designated dates. See the Statement of Additional Information for details of
these types of investments.

The Series may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis (See "ADDITIONAL INVESTMENT POLICIES AND
TECHNIQUES--When Issued and Delayed Delivery Purchases" below). Zero coupon
bonds may also be purchased as part of the Tax Free Series portfolio and are
explained above under the Government Income Series.

ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES

The following policies and techniques are available to one or more of the
Series:

LENDING OF SECURITIES. In order to increase the return on its investment, the
Government Income Series may lend portfolio securities to broker-dealers and
other financial institutions in amounts up to 10% of the value of the net assets
of such series. Loans of portfolio securities will always be collateralized by
cash to at least 102% of the market value of the securities loaned including
accrued interest and will be made to borrowers deemed by the adviser to be
creditworthy. Lending portfolio securities involves risk of delay in the
recovery of the loaned securities and in some cases the loss of rights in the
collateral should the borrower fail financially (See the Statement of Additional
Information).

WHEN-ISSUED AND DELAYED DELIVERY PURCHASES. The Government Income Series and Tax
Free Series may purchase and sell portfolio securities on a "when-issued" and
"delayed delivery" basis. No income accrues in connection with such transactions
prior to actual delivery of such securities. These transactions are subject to
market fluctuation; the value of the securities at delivery may be more or less
than their purchase price, and yields generally available on comparable
securities when delivery occurs may be higher than yields on the securities
obtained pursuant to such transactions. While awaiting delivery of the
securities purchased on a when-issued and delayed delivery basis, the Series
will hold in a segregated account cash, short-term money market instruments,
high quality debt securities or portfolio securities sufficient to cover any
commitment or limit any potential risk. (See "When Issued and Delayed Delivery
Transactions" in the Statement of Additional Information).

REPURCHASE AGREEMENTS. Each Series may occasionally enter into repurchase
agreements. Under a repurchase agreement, a series will acquire and hold an
obligation (government security, certificate of deposit, or banker's acceptance)
for not more than seven days, subject to the agreement by the seller (a Federal
Reserve System member bank or a

13
<PAGE>
registered securities dealer) to repurchase the obligation at an agreed upon
repurchase price and date, thereby determining the yield during the Series'
holding period. During the holding period, the seller must provide additional
collateral if the market value of the obligation falls below the repurchase
price. Refer to the Statement of Additional Information for a further
explanation.

ILLIQUID SECURITIES. Each of the Series may invest up to 15% of its net assets
in illiquid securities, including foreign securities not listed on foreign or
domestic exchanges and repurchase agreements maturing in excess of seven days.

RISK FACTORS. The risk inherent in investing in any series of the Fund is that
common to any security, that the value of its shares will fluctuate in response
to changes in economic conditions, interest rates and the market's perception of
the underlying portfolio securities held by each series of the Fund. Market
prices of the securities in which a Series invests will fluctuate and will tend
to vary inversely with changes in prevailing interest rates. If interest rates
increase from the time a security is purchased, such security, if sold, might be
sold at a price less than its purchase cost. Conversely, if interest rates
decline from the time a security is purchased, such security, if sold, might be
sold at a price greater than its purchase cost. Substantial redemptions could
require a Series to sell portfolio securities at a time when a sale might not be
favorable.

Investments in U.S. Government obligations are not all backed by the "full
faith and credit" of the United States Government. Some are backed only by the
rights of the issuer to borrow from the U.S. Treasury and others are supported
only by the credit of the issuing instrumentality. No assurance can be given
that the U.S. Government would lend money to or otherwise provide financial
support to U.S. Government sponsored instrumentalities as it is not obligated by
law to do so. The Fund's adviser will invest in U.S. obligations not backed by
the "full faith and credit" of the U.S. Government only when it is satisfied
that the credit risk with respect thereto is minimal.

The Primary Series, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Series' ability to
correctly time and execute such transactions. Although the Primary Series'
assets will be invested in securities with short maturities, the Primary Series
will manage its portfolio as described above. (See "PORTFOLIO TRANSACTIONS AND
BROKERAGE ALLOCATION" in the Statement of Additional Information.)

The Tax Free Series' ability to achieve its objective depends partially on the
prompt payment by issuers of the interest on and principal of the municipal
securities held. A moratorium, default or other non-payment of interest or
principal when due could, in addition to affecting the market value and
liquidity of the particular security, affect the market value and liquidity of
the other municipal securities held. Additionally, the market for municipal
securities is often thin and can be temporarily affected by large purchases and
sales. As a result, the Tax Free Series will attempt to minimize risk by
diversifying its investments by investing no more than 5% of its net assets in
the securities of any one issuer (limitation does not apply to investments
issued or guaranteed by the U.S. Government or its instrumentalities) and by
investing no more than 25% of its net assets in municipal securities issued in
any one state or territory. Each political subdivision, agency, instrumentality
and each multi-state agency of which a state is a member will be regarded as a
separate issuer for the purpose of determining diversification.

THE FUND AND ITS MANAGEMENT

A Board consisting of nine directors has overall responsibility for overseeing
the affairs of the Fund in a manner reasonably believed to be in the best
interest of the Fund. The Board has delegated to SM&R, the adviser, the
management of the Fund's day-to-day business and affairs. In addition, SM&R
invests the Fund's assets, provides administrative services and serves as
transfer agent, dividend paying agent and underwriter.

14
<PAGE>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). The Moody Foundation, a private foundation, owns
approximately 23.7% of American National's common stock and the Libbie Shearn
Moody Trust, a private trust, owns approximately 37.6% of such shares. SM&R was
incorporated in 1964 and has managed investment companies since 1966. SM&R is
also investment adviser to three other registered investment companies, the
American National Growth Fund, Inc., American National Income Fund, Inc., and
the Triflex Fund, Inc. (collectively, the "American National Funds Group"). SM&R
also serves as investment adviser to the American National Investment Accounts,
Inc., an investment company used to fund benefits under contracts issued by
American National and for The Moody National Bank of Galveston (the "Bank"), a
national bank. SM&R may, from time to time, serve as investment adviser to other
clients including employee benefit plans, other investment companies, banks,
foundations and endowment funds.

The following persons are officers of both SM&R and the Fund: Michael W.
McCroskey, Vera M. Young, Emerson V. Unger, Teresa E. Axelson and Brenda T.
Koelemay.

PORTFOLIO MANAGEMENT

While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective Series, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment polices.

Vera M. Young, Vice President of Securities Management and Research, Inc.,
Vice President, Portfolio Manager of the Primary Series. Ms. Young has served as
Portfolio Manager of the Primary Series since its inception. She also serves as
Portfolio Manager of the American National Investment Accounts, Inc.--Money
Market Portfolio, a series mutual fund used exclusively for variable contracts
issued by American National. She also serves as Assistant Vice President,
Securities for American National. Ms. Young has been managing fixed income
investments for American National since 1964 and has served as portfolio manager
for various funds for over ten years.

Terry E. Frank, Vice President, Portfolio Manager of the Government Income
Series and Tax Free Series. Ms. Frank has served as Portfolio Manager of the
Government Income Series since 1993 and the Tax Free Series since its inception.
She joined SM&R's investment staff in 1991 and prior to that time she held
positions with American Capital Asset Management and Gibraltar Savings
Association as a securities analyst and Equitable Investment Services as a
research analyst.

ADVISORY AGREEMENT

Under its Advisory Agreement with the Fund, SM&R is paid an investment
advisory fee, which is calculated separately for each Series, as compensation
for its services. The agreement contains the following fee schedule:

GOVERNMENT INCOME SERIES AND TAX FREE SERIES-- A monthly investment advisory fee
computed by applying to the average daily net asset value of each Series each
month one-twelfth (1/12th) of the annual rate as follows:

<TABLE>
<CAPTION>
On the Portion of Each Series Investment Advisory
Average Daily Net Assets Fee Annual Rate
<S> <C>
Not exceeding $100,000,000 .50 of 1%
Exceeding $100,000,000 but not
exceeding $300,000,000 .45 of 1%
Exceeding $300,000,000 .40 of 1%
</TABLE>

PRIMARY SERIES--An investment advisory fee, computed and paid monthly, at the
annual rate of .50 of 1% of the Primary Series' average daily net asset value.

SM&R received total advisory fees from the Government Income Series, Primary
Series and Tax Free Series for the fiscal year ended August 31, 1996 which
represented 0.30%, 0.16% and 0.00%, respectively, of each Series average daily
net assets. The ratio of total expenses to average net assets for each Series
can be found on pages 5, 6 and 7.

15
<PAGE>
ADMINISTRATIVE SERVICE AGREEMENT

Under its Administrative Service Agreement with the Fund, SM&R receives a
management and administrative service fee from each Series which is computed by
applying to the aggregate average daily net asset value of each Series of the
Fund each month one-twelfth (1/12th) of the annual rate as follows:

<TABLE>
<CAPTION>
Administrative Service
On the Portion of the Series's Fee
Average Daily Net Assets Annual Rate
<S> <C>
Not exceeding $100,000,000 .25 of 1%
Exceeding $100,000,000 but not
exceeding $200,000,000 .20 of 1%
Exceeding $200,000,000 but not
exceeding $300,000,000 .15 of 1%
Exceeding $300,000,000 .10 of 1%
</TABLE>

SM&R has agreed to pay (or to reimburse each Series for) each Series' expenses
(including the advisory fee and administrative service fee, if any, paid to
SM&R, but exclusive of interest, taxes, commissions and other expenses
incidental to portfolio transactions) in excess of 1.25% per year of such
Series' average daily net assets. SM&R received service fees of 0.25% for the
Government Income Series; 0.25% for the Primary Series and 0.00% for the Tax
Free Series for the fiscal year ended August 31, 1996 of each Series average
daily net assets.

FEE WAIVERS

In order to improve the yield and total return of any Series of the Fund, SM&R
may, from time to time, voluntarily waive or reduce all or any portion of its
advisory fee, administrative fee and/or assume certain or all expenses of any
Series of the Fund while retaining its ability to be reimbursed for such fees
prior to the end of the fiscal year. Fee waivers and/or reductions, other than
those stated in the Administrative Service Agreement, may be rescinded by SM&R
at any time without notice to investors. SM&R has agreed to continue to waive
the advisory fee for the Tax Free Series and reimburse expenses incurred by the
Fund's Series to the extent that total expenses exceed average daily net assets
as follows: Primary Series--.80% and Government Income Series--1.00%.

For additional information about the expenses of the Fund, see the Statement
of Additional Information.

HOW TO PURCHASE SHARES

Shares of each Series of the Fund may be purchased from registered
representatives of SM&R, from authorized broker-dealers or directly from SM&R.
Such purchases will be at the offering price (the "Offering Price") for such
shares determined as and when provided below. (See "DETERMINATION OF OFFERING
PRICE" page 18). A monthly confirmation will be sent on each account that has
activity during the month. Carefully review the monthly confirmation and
promptly report any discrepancies to SM&R. Initial and subsequent purchases are
to be sent directly to SM&R at the following address:

Securities Management and Research, Inc.
One Moody Plaza, 14th Floor
Galveston, Texas 77550

Certificates are not normally issued for shares of each Series in an effort to
minimize the risk of loss or theft. However, purchases are confirmed to
investors and credited to their accounts on the books maintained by SM&R and an
investor has the same rights of share ownership as if certificates had been
issued.

OPENING AN ACCOUNT: To purchase shares an investor must submit a fully
completed American National Family of Funds Application (the "Account
Application") which includes the Purchaser Suitability Form & Arbitration
Agreement (the "Suitability Form"). If you would like to take advantage of the
electronic services available, please complete the American National Family of
Funds Application Supplement - Electronic Transfer Options (the "Application
Supplement") and return it with your new Account Application. Special forms are
required when establishing an IRA/SEP or 403(b) plan. Please call Investor
Services at (800) 231-4639 and request the special forms when establishing
retirement plans. Keep in mind when opening an account that transactions by
telephone will only be permitted if all of your account(s) are registered in the
identical name.

16
<PAGE>
PURCHASE AMOUNTS: The initial purchase amounts for the Government Income Series
and the Tax Free Series is $100 while the initial purchase amount for the
Primary Series is $1,000. Subsequent purchase amounts for the Government Income
Series and the Tax Free Series is $20 and the subsequent purchase amount for the
Primary Series is $100. These initial investment minimums are waived when
purchases are part of certain systematic investment programs see "SPECIAL
PURCHASE PLANS AND SERVICES" for additional information on reduction of the
minimums). The Fund reserves the right to reject any purchase.

PURCHASES BY MAIL: Investors are to make their check(s) payable to SM&R and
send the check(s) to the address indicated above. Please note that third party
checks will not be accepted to open a new account, except for IRA Rollover
checks that are properly endorsed. Investors making subsequent investments by
mail must indicate their name, the account number and the name of the Series
being purchased. The investor can use the remittance slip attached to the
confirmation statement.

PURCHASES BY WIRE: To ensure proper crediting of a wire investment, an investor
must have an executed Account Application, Suitability Form and Application
Supplement on file with the transfer agent. The investor may then wire his
investment by providing the following instructions to his bank:

The Moody National Bank of Galveston
ABA #133100091
Securities Management and Research, Inc.
#035 868 9
Name of Fund (eg. Government Income
Series)
Fund Account Number (number appears on
your confirmation statement)
Investor's Name (eg. Mary Smith, IRA)

If wires are received after 3:00 p.m. Central Time or during a bank holiday or
SM&R business holiday, purchases will be made at the price determined on the
next business day. A wire fee in the amount $8.00 will be charged the investor
for wires under $5,000.

PURCHASES BY EXCHANGE: Call Investor Services if you have established telephone
exchange privileges on your account. See SPECIAL PURCHASE PLANS and SERVICES
"Exchange Privilege" for procedures and additional information relating to
telephone exchanges. For limitations on exchanges refer to "Excessive Trading"
also under SPECIAL PURCHASE PLANS and SERVICES.

WHEN ARE PURCHASES EFFECTIVE?

Purchases received in proper form by SM&R prior to the close of the New York
Stock Exchange (currently 3:00 p.m., Central Time) (the "Exchange") on any SM&R
business day, or received prior thereto on any SM&R business day by a securities
dealer having a dealer contract with SM&R and reported to SM&R prior to SM&R's
close of business (currently 4:30 p.m., Central Time) on the same day, will be
effective and executed at the applicable Offering Price determined at the close
of the Exchange on that day. It is the responsibility of any such dealer and not
SM&R to establish procedures to assure that purchases received before the close
of the Exchange on an SM&R business day will be reported to SM&R before SM&R's
close of business on that same day. Purchases received after the close of the
Exchange, on customary national business holidays, or on an SM&R holiday will be
effective upon and made at the Offering Price determined as of the close of the
Exchange on SM&R's next business day that such Exchange is open for trading.

If payments for purchases are transmitted by bank wire to the Bank and
reported to SM&R prior to the close of the Exchange on any SM&R business day,
the investor will purchase at the Offering Price determined and become a
shareholder as of the close of the Exchange on that same day. Purchases by wire
payments reported by the Bank to SM&R after the close of the Exchange, on
customary national business holidays, or on an SM&R holiday, will be effective
on and made at the Offering Price determined on SM&R's next business day.
Procedures for transmitting Federal Funds by wires are available at any national
bank, or any state bank which is a member of the Federal Reserve System.

SM&R's business holidays are Good Friday, Independence Day, Labor Day,
Thanksgiving Day, the

17
<PAGE>
Friday following Thanksgiving Day and New Years Day. For calendar year 1997,
SM&R's and the Fund's Christmas holidays will be observed on December 24, 25 and
26.

DETERMINATION OF OFFERING PRICE

The Government Income Series and the Tax Free Series offering price is
determined once each day and is comprised of that Series' net asset value plus
the sales charge computed at the rates set forth in the applicable tables below.

Net asset value per share is determined by dividing the market value of the
securities owned by the Series, plus any cash or other assets (including
dividends accrued but not collected), less all liabilities of such Series
(including accrued expenses but excluding capital and surplus), by the number of
shares of the Series outstanding. Net asset value is currently determined as of
3:00 p.m., Central Time on each business day and on any other day in which there
is a sufficient degree of trading in such Series' investment securities that the
current net asset value of such Series' shares might be materially affected by
changes in the value of its portfolio of investment securities. Each Series of
the Fund reserves the right to compute such Series' net asset value at a
different time, or to compute such value more often than once daily as provided
in the Fund's current prospectus.

Shares of the Primary Series may be purchased without a sales charge.
Accordingly, the offering price for shares of the Primary Series is that Series'
net asset value. During such times that the Primary Series is invested primarily
in commercial paper having maturities of less than sixty (60) days, the offering
price for such series will be relatively stable. However, even during such
times, the Primary Series cannot assure a dollar for dollar return on the amount
invested.

For a more complete description of the procedures involved in valuing various
fund assets, see "Offering Price" in the Fund's Statement of Additional
Information.

18
<PAGE>
GOVERNMENT INCOME SERIES AND TAX FREE SERIES

<TABLE>
<CAPTION>
(3)
Discount to
(1) (2) Selected
Sales Charge as a Sales Charge as a Dealers as a
Percentage of Percentage of Net Percentage of
Amount of Investment Offering Price Amount Invested Offering Price

*In connection with purchases of $500,000 or more, SM&R may pay its
representatives and broker-dealers from its own profits and resources, a per
annum percent of the amount invested as follows: Year 1-- Government Income and
Tax Free Series 0.35% and Year 2--0.25%, respectively. The Primary Series 0.10%
for Years 1 and 2. In the third and subsequent years, SM&R may pay 0.075% per
annum, in quarterly installments, to those representatives and broker-dealers
with accounts totaling assets of $1 million or more.

The reduced sales charge rates set forth above apply to purchases of the
Government Income Series and Tax Free Series, either singly or in combination
with purchases of shares of the American National Funds Group at the respective
sales charges applicable to each, made at one time by:

(1) Any individual;

(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;

(3) A trustee or fiduciary of a single trust estate or single fiduciary
account.

(1) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; and

(2) Employees or employers on behalf of employees under any employee benefit
plan not qualified under Section 401 of the Internal Revenue Code.

Furthermore, purchases by any "company" or employee benefit plans not
qualified under Section 401 of the Internal Revenue Code will qualify for the
above quantity discounts only if the Government Income Series or Tax Free Series
will realize economies of scale in sales effort and sales related expenses as a
result of the employer's or the plan's bearing the expense of any payroll
deduction plan, making the Fund prospectus available to individual investors or

employees, forwarding investments by such employees to the Fund, and the like.

All direct sales expenses, including the cost of prospectuses for prospective
shareholders, are paid by SM&R, and no sales expense is borne by the Fund.

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SPECIAL PURCHASE PLANS AND SERVICES

The Fund offers the following services to its shareholders to facilitate
investment in the Fund. At this time, there is no charge to the shareholder for
these services. For additional information contact your registered
representative or SM&R.

ELECTRONIC TRANSFERS (ACH)--The electronic transfer option allows you to move
money between your Fund account(s) and your bank, savings and loan, or credit
union account using the Automated Clearing House (ACH) network. To arrange for
electronic transfers, complete the Application Supplement, at the time you open
your account and specify the type of service or services desired. Attach a
voided, preprinted check or deposit slip from your checking, savings and loan or
credit union account. PASSBOOK SAVINGS ACCOUNTS ARE NOT ELIGIBLE FOR THE
ELECTRONIC TRANSFER OPTION. ADDITIONALLY, YOUR BANK MUST BE A MEMBER OF THE
AUTOMATED CLEARING HOUSE (ACH) NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS
SERVICE. You will receive a confirmation verifying initialization of the
electronic transfer option and may begin conducting transactions in your
account(s) under this option three (3) weeks after receipt of the verification
notice from SM&R. If this option is elected after your account is established,
it may be necessary for you to obtain a signature guarantee for all individuals
named on the account(s).

TELEPHONE SERVICES--You can take advantage of this service by completing the
appropriate sections of the Application Supplement when opening your account.
Through this service, you will be able to purchase by ACH, redeem and exchange
shares on those accounts for which you have an executed Application Supplement
on file and have received written verification from SM&R that the service has
been initialized as explained under Electronic Transfers above. If this option
is elected after your account is established, it may be necessary for you to
obtain a signature guarantee for all individuals named on the account(s). PLEASE
NOTE THAT THE TELEPHONE REDEMPTION OPTION IS NOT AVAILABLE TO RETIREMENT PLANS.

The Funds have implemented the following security procedures intended to
protect your account from losses resulting from unauthorized or fraudulent
telephone instructions: The caller will be required to know (i) the name of the
Fund or Funds; (ii) all digits of the account number; (iii) the exact name and
address used in the registration(s); and (iv) the Social Security or Employer
Identification Number listed on the account(s). Additionally, all telephone
transactions will be recorded for your protection.

Neither the Funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, you should
bear the risk of any losses resulting from unauthorized or fraudulent telephone
transactions on your account(s).

AUTOMATIC INVESTMENT PLAN--Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.

DISCOUNTS THROUGH A RIGHT OF ACCUMULATION--If you already own shares of the
Government Income Series , Tax Free Series and/or any of the funds in the
American National Funds Group (collectively these Series and funds shall
hereinafter be referred to as the "Group"), you may be able to receive a
discount when you buy additional shares. The offering value of the shares you
already own may be "accumulated" - i.e. combined together with the offering
value of the new shares you plan to buy - to achieve quantities eligible for
discount. See "SPECIAL PURCHASE PLANS" in the Statement of Additional
Information for further information about certain rules that apply when taking
advantage of the right of accumulation.

LETTER OF INTENT--An investor may immediately qualify for a reduced sales charge
on purchases of shares of the Group by completing the Letter of Intent section
of the application. Under a Letter of Intent an investor expresses an intention
to invest during the next 13 months a specified amount in the Group which, if
made at one time, would qualify for a reduced sales charge. A minimum initial
investment equal to ten percent (10%) of the amount necessary for the applicable
reduced sales charge is required when a Letter of Intent is executed. Five
percent (5%) of the total intended purchase amount will be held in escrow in
shares of the Group registered in the investor's name to assure that the full
applicable sales charge will be paid if the intended purchase is

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<PAGE>
not completed. Shares held in escrow under a Letter of Intent are not subject to
the exchange privilege until the Letter of Intent is completed or canceled. A
Letter of Intent does not represent a binding obligation on the part of the
investor to purchase or the Group to sell the full amount of shares specified.
(See the Investor's Letter of Intent on the Application and "SPECIAL PURCHASE
PLANS" in the Statement of Additional Information.)

GROUP SYSTEMATIC INVESTMENT PLAN--SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. The Minimum Initial Investment amount requirement
per account is waived for such plans. However, all other investment amount
minimums apply. Contact SM&R for further information regarding such plans.

PURCHASES AT NET ASSET VALUE--After receipt of written request by SM&R, shares
of the Government Income Series and the Tax Free Series may be purchased at net
asset value per share without a sales charge by: (a) present and retired
directors, officers and full-time employees of the Fund; (b) present and retired
directors, officers, registered representatives and full-time employees of SM&R
and their spouses; (c) present and retired officers, directors, insurance agents
and full-time employees and their spouses of American National and its
subsidiaries and its "affiliated persons," as defined in the Investment Company
Act of 1940, and of any corporation or partnership for which any of American
National's present directors serve as a director or partner, and their spouses;
(d) present and retired partners and full-time employees of legal counsel to
SM&R and officers and directors of any professional corporations which are
partners of such legal counsel and their spouses; (e) any child, step-child,
grandchild, parent, grandparent, brother or sister of any person named in (a),
(b), (c), or (d) above and their spouses; (f) any trust, pension,
profit-sharing, IRA or other benefit plan for any of such persons mentioned in
(a), (b), (c), (d) or (e); (g) custodial accounts for minor children of such
persons mentioned in (a), (b), (c), (d) or (e) pursuant to the Uniform Gifts to
Minors or Uniform Transfers to Minors Acts; (h) persons who have received a
distribution from a pension, profit-sharing or other benefit plan, to the extent
such distribution represents the proceeds of a redemption of shares of the
Government Income Series and/or any fund in the Group; (i) persons receiving
rebated amounts through American National Property and Casualty's (ANPAC) "Cash
Back Program" to the extent the proceeds represent the amount of the rebate, (j)
trust companies and bank trust departments for funds over which they exercise
exclusive discretionary investment authority or they serve as a directed trustee
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity; (k) accounts managed by SM&R; (l) stockholders of American National
Insurance Company; (m) policyholders of American National subsidiaries who have
entered into an NAV agreement with SM&R; (n) registered representatives and
employees of securities dealers with whom SM&R has a selling agreement; and (o)
officers, directors, trustees, employees and members of any business, trade,
professional charitable, civic or similar associations and clubs with an active
membership of at least 100 persons who have entered into an NAV agreement with
SM&R. However, shares of the Tax Free Series should not be purchased by those
individuals mentioned in (f) and (g) above.

Neither the Funds nor SM&R are responsible for determining whether or not a
prospective investor qualifies under any of the above categories for receipt of
net asset value. This determination is the sole responsibility of the
prospective investor.

WEALTH ACCUMULATION ACCOUNT--Shareholders having account balances of at least
$2,500 in the Primary Series may open a Wealth Accumulation Account, which will
provide them with an automatic dollar cost averaging plan. Automatic monthly
purchases of the shares of other funds in the Group may be made by exchanges
from the shareholder's Primary Series Wealth Accumulation Account. Purchases of
the other funds must be at least $50 and, unless terminated by the shareholder,
will continue as long as the balance of the Primary Series Wealth Accumulation
Account is sufficient. Additional investments may be made to a Primary Series
account designated as a Wealth Accumulation Account to extend the purchase
period under the plan. However, if additional investments are received by SM&R
less than ten (10) days prior to the 20th of the month, such investments will
not be available for use under the Wealth Accumulation Account until the 20th of
the following month. If the 20th of the month is an SM&R holiday, the purchase
will be processed on the next business day.

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<PAGE>
Purchases made will be subject to the applicable sales charge of the fund
whose shares are being purchased. Changes in amounts to be purchased, the funds
being purchased, and termination of a Wealth Accumulation Account will be made
within five (5) business days after written instructions are received by SM&R in
proper form (ie: signed by the owner(s) of record exactly as registered).

Shareholders' rights to make additional investments, to exchange shares and to
redeem shares in the Primary Series and any of the funds in the Group are not
affected by a shareholder's participation in a Wealth Accumulation Account.
However, check writing privileges and expedited redemption by telephone are not
available for the Primary Series accounts designated as a part of the Wealth
Accumulation Account.

EXCHANGE PRIVILEGE--SM&R desires to make it convenient for all shareholders to
make exchanges without the payment of an exchange fee. However, some Series and
some members of the American National Funds Group have no sales charges and/ or
variable sales charges which complicates the exchange process. In an effort to
simplify the procedure, but at the same time consistently treat all investors
the same, the following rules and procedures have been adopted.

Shares held in accounts opened for more than one (1) year may be exchanged on
the basis of their respective net asset values, without a sales charge. THIS
PRIVILEGE IS ONLY AVAILABLE IN STATES WHERE THE FUND AND THE AMERICAN NATIONAL
FUNDS GROUP ARE REGISTERED AND THE EXCHANGE MAY BE LEGALLY MADE. Such net asset
value exchanges do not apply to shares purchased by an exchange of Primary
Series shares, except through re-exchange of certain Primary Series shares as
described below.

Shares of any Series or fund held in escrow under a Letter of Intent are not
eligible for the exchange privilege and will not be released unless the Letter
of Intent balance invested during the period equals or exceeds the Letter of
Intent amount or the shareholder requests, in writing, that the Letter of Intent
be canceled and adjustments made prior to the exchange.

Shares of the Primary Series acquired through an exchange from one of the
members of the Group and all additional shares acquired through reinvested
dividends on such exchanged shares may be RE-EXCHANGED for shares of the members
of the Group. RE-EXCHANGES may not be effected through the use of the Primary
Series check writing option. (See "Check Writing Option") The RE-EXCHANGE
privilege may not be used to avoid payment of a differential in sales charge
between the members of the Group.

A telephone exchange request or a written request for exchange of shares of
the Fund or the American National Funds Group is permitted only in the following
circumstances: (a) the exchange must be made between accounts having identical
registrations and addresses; (b) the shares of the fund acquired through
exchange must be qualified for sale in the state in which the shareholder
resides; (c) the dollar amount of the exchange must be at least equal to the
minimum investment applicable to the shares of the fund acquired through such
exchange; (d) full payment for the shares being exchanged must have been
received by SM&R; (e) the account from which shares have been exchanged must be
coded as having a certified taxpayer identification number on file or, in the
alternative, an appropriate Internal Revenue Service Form W-8 (certificate of
foreign status) or Form W-9 (certifying exempt status); (f) newly acquired
shares (through either an initial or subsequent investment) are held in an
account for at least ten (10) business days, and all other shares are held in an
account for at least one business day, prior to the exchange; (g) certificates
representing shares must be returned before such shares can be exchanged; and
(h) a prospectus for the shares being received in the exchange must have been
obtained.

The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.

EXCESSIVE TRADING--Frequent trades, involving either substantial fund assets or
a substantial portion of your account or accounts controlled by you, can disrupt
management of the Fund and raise the

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<PAGE>
Fund's expenses. We define "excessive trading" as exceeding one purchase and
sale involving the same fund within any 120-day period.

For example, you are in Fund A. You can move substantial assets from Fund A to
Fund B and, within the next 120 days, sell your shares in Fund B to return to
Fund A or move to Fund C. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.

There are two types of transactions exempted from the excessive trading
guidelines. They are, redemptions that are not part of exchanges and systematic
purchases or redemptions.

Any gain or loss realized on such an exchange may be recognized for federal
and state income tax purposes. The investor should consult its own tax adviser
for the treatment of exchanges for tax purposes.

RETIREMENT PLANS

The following retirement plans may be funded with shares of the Government
Income Series or the Primary Series: Individual Retirement Accounts (IRAs);
Simplified Employee Pension Plans (SEPs); 403(b) Custodial Accounts (TSAs) and
corporate retirement plans. Information concerning IRAs and TSAs and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular Fund application should be used when
establishing a corporate retirement plan. The minimum initial purchase for each
Series is $100. The minimum subsequent purchase is $20 for the Government Income
Series and $100 for the Primary Series. SM&R acts as trustee or custodian for
IRAs, SEPs and TSAs for the Fund. An annual custodial fee of $7.50 will be
charged for any part of a calendar year in which an investor has an IRA, SEP or
TSA in the Fund and will be automatically deducted from each account. Documents
and forms containing detailed information regarding these plans are available
from your representative or SM&R. An individual considering a retirement plan
may wish to consult with an attorney or tax adviser.

Because IRAs, SEPs, TSAs, other tax exempt persons and other qualified plans
are exempt from federal income tax, they will be unable to benefit from the
general tax-exempt nature of the Tax Free Series. Accordingly, the Tax Free
Series is not generally considered to be suited for such plans or persons.

DIVIDENDS AND DISTRIBUTIONS

The Government Income Series and Tax Free Series will declare and pay
dividends from net investment income monthly and net realized short-term or
long-term capital gains, if any, annually.

At 3:00 p.m., Central Time, on each day that the Exchange is open for trading
other than SM&R's business holidays described above, the Primary Series will
declare a dividend of all of its net investment income to shareholders already
of record. Such dividends will be paid monthly.

Dividends and capital gains will be automatically reinvested at net asset
value in additional shares of the Series making such distribution unless SM&R is
instructed otherwise in writing. Distributions not reinvested are paid by check
or transmitted to your bank account through an ACH transaction, if elected. If
the Postal Service cannot deliver your check, or if your check remains uncashed
for six months, the Fund reserves the right to reinvest your distribution check
in your account at the net asset value on the business day of the reinvestment
and to reinvest all future distributions in shares of the Fund. Dividends and
capital gains declared in December to shareholders of record in December and
paid the following January will be taxable to shareholders as if received in
December. This is a convenient way to accumulate additional shares and maintain
or increase the shareholder's earning base. Of course, any shares so acquired
remain at market risk.

Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change will
be effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.

In order to be entitled to a dividend, an investor must have acquired shares
of a series prior to the close of business on the record date. A shareholder
should be cautioned, however, before purchasing shares of a series immediately
prior to a distribution. Dividends and distributions paid by the Fund have the
effect of reducing net asset value per share on the record date by the amount of
the payment.

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<PAGE>
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents in substance, a return of capital.

TAXES

Each Series of the Fund is treated as a separate entity for federal income tax
purposes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code. The Fund intends to distribute
all of its net investment income and net realized capital gains to shareholders
in a timely manner, therefore, it is not expected that the Fund will be required
to pay federal income taxes.

For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from such Series of the Fund, as well
as any distributions derived from net short-term capital gain are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares. Distributions derived from net long-term capital gain will
be taxable as long-term capital gains regardless of the length of time the
shareholder has owned such Series' shares and regardless of whether such
distributions are received in cash or in additional shares. In determining the
amount of capital gains, if any, available for distribution, net capital gains
are offset against available net capital losses, if any, carried forward from
previous years.

The Tax Free Series expects the dividends it pays to shareholders from
interest on municipal securities generally to be exempt from federal income tax
because the Series intends to satisfy certain requirements of the Internal
Revenue Code, as amended. Such exempt-interest dividends are derived from
interest income exempt from regular federal income tax, and not subject to
regular federal income tax for the Series' shareholders. Shareholders will,
however, be required to disclose on their federal income tax return the amount
of tax-exempt interest earned during the year, including exempt-interest
dividends received.

Current federal tax law limits the types and volume of securities qualifying
for the federal income tax exemption of interest and makes interest on certain
tax-exempt securities and distributions by the Tax Free Series of such interest
a tax preference item for purposes of the individual and corporate alternative
minimum tax. All exempt-interest dividends may affect a corporate shareholder's
alternative minimum tax liability. Current federal tax law may also affect the
availability of municipal obligations for investment by the Series and the value
of the Series' portfolio.

Redemptions and exchanges of shares in each Series of the Fund are taxable
events on which a shareholder may realize a gain or loss. Shareholders of the
Tax Free Series should be careful about redeeming shares immediately prior to
the record date of an "exempt-interest dividend" because the redemption may
cause the shareholder to realize a taxable gain even though a portion of the
redemption proceeds may represent a pro rata share of tax exempt interest earned
by the Series. Shareholders should consult with their tax advisers concerning
the tax reporting requirements in effect on the redemption or exchange of such
shares.

The Fund may be required to report to the Internal Revenue Service ("IRS") any
taxable dividends or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number and made certain required certifications that appear in the Application.
A shareholder may also be subject to backup withholding if the IRS or a broker
notifies the Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.

Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding taxes to distributions received by them from the Fund.

Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the fund from direct obligations of the
U.S. Government, subject in some states to minimum investment requirements that
must be met within the fund.

At the end of each calendar year, the Fund will advise its shareholders
regarding the tax status of all distributions made during each taxable year,
including the portion of the dividends which comprise

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<PAGE>
taxable income, exempt income and interest income that is a tax preference item
under the alternative minimum tax. Shareholders should consult their own tax
advisers with respect to the application of their state and their local tax laws
to these distributions and redemption proceeds received from the Fund.
Additional information regarding taxation is included in the Statement of
Additional Information.

IMPORTANT: The Fund reserves the right to (1) refuse to open an account for any
person failing to provide a taxpayer identification number, certified as correct
and (2) close an account by redeeming its shares in full, at the then current
net asset value, upon receipt of notice from the IRS that the taxpayer
identification number certified as correct by the shareholder is in fact
incorrect.

HOW TO REDEEM

Shares of the Fund will be redeemed at the net asset value determined on the
date the request is received by SM&R in "Proper Form", as defined in "PROPER
FORM" below, at no charge. A redemption request must be addressed to Securities
Management and Research, Inc., One Moody Plaza, 14th Floor, Galveston, Texas
77550.

If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in Proper Form.

If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.

TELEPHONE REDEMPTIONS--You may request redemptions by telephone if you have
completed the Application Supplement and requested this option. This redemption
feature can only be used if: (a) the redemption proceeds are to be mailed to the
address of record or wired to the pre-authorized bank account indicated on the
Application Supplement; (b) there has been no change of address of record or
pre-authorized bank account within the preceding 30 business days; (c) the
shares to be redeemed are not in certificate form; (d) the security procedures
discussed under the EXCHANGE PRIVILEGE have been met; and (e) the proceeds of
the redemption do not exceed $25,000.

SYSTEMATIC WITHDRAWAL PLAN--The Fund has a Systematic Withdrawal Plan,
("Withdrawal Account") which permits shareholders having an account value of
$5,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing an Application Supplement and
returning it to SM&R. Refer to SPECIAL PURCHASE PLANS and SERVICES--Electronic
Transfers for additional information. The Fund and SM&R discourage shareholders
from maintaining a Withdrawal Account while concurrently purchasing shares of
the Government Income Series or the Tax Free Series because of the sales charge
involved in additional purchases. Dividends and capital gains distributions will
automatically be reinvested in additional shares at net asset value. As with
other redemptions, a withdrawal payment is a sale for federal income tax
purposes. The Systematic Withdrawal Plan will automatically terminate if all
shares are liquidated or withdrawn from the account. Certificates are not issued
for shares held in a Withdrawal Account and certificates held, if any, must be
surrendered when shares are transferred to a Withdrawal Account. No account
covered by a Letter of Intent can be changed to a Systematic Withdrawal Plan
until such time as the Letter of Intent is fulfilled or terminated, nor can an
account under a Systematic Withdrawal Plan be placed under a Letter of Intent.

REINVESTMENT PRIVILEGE--Within ninety (90) days of a redemption (sixty (60) days
for qualified plans), a shareholder may invest all or part of the redemption
proceeds in shares of the Primary Series and any of the funds in the Group at
the net asset value next computed after receipt of the proceeds to be reinvested
by SM&R. The shareholder must ask SM&R for this one-time privilege at the time
of reinvestment. Prior to reinvestment of redemption proceeds, a shareholder is
encouraged to consult with his accountant or tax advisor to determine any
possible tax ramifications of such a transaction. Each fund managed by SM&R may
amend, suspend or cease offering this privilege at any time as to shares
redeemed after the date of the amendment, suspension or cessation.

For further information about the "Systematic Withdrawal Plan" and
"Reinvestment Privilege", contact a registered representative or SM&R.

"PROPER FORM"--means the request for redemption must include: (1) your share
certificates, if issued;

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<PAGE>
(2) your letter of instruction or a stock assignment specifying the Fund,
account number, and number of shares or dollar amount to be redeemed. Both share
certificates and stock powers, if any, must be endorsed and executed exactly as
the Fund shares are registered. It is suggested that certificates be returned by
certified mail for your protection; (3) any required signature guarantees (see
"Signature Guarantees" below); and (4) other supporting legal documents, if
required in the case of estates, trusts, guardianships, divorce, custodianships,
corporations, partnerships, pension or profit sharing plans, retirement plans
and other organizations.

Please keep in mind that as a shareholder, it is your responsibility to ensure
that all requests are submitted to the Fund's transfer agent in Proper Form for
processing.

SIGNATURE GUARANTEES--This guarantee carries with it certain statutory
warranties relied upon by the transfer agent. This guarantee is designed to
protect the investor, the Fund, SM&R and its representatives through the
signature verification of each investor wishing to redeem or exchange shares.
Signature guarantees are required when: (1) the proceeds of the redemption
exceed $25,000; (2) the proceeds (in any amount) are to be paid to someone OTHER
THAN the registered owner(s) of the account; (3) the proceeds (in any amount)
are to be sent to any address OTHER THAN the shareholder's address of record,
pre-authorized bank account or exchanged to one of the other funds managed by
SM&R; (4) in transactions involving share certificates, if the redemption
proceeds are in excess of $25,000; or (5) the Fund or its transfer agent
believes a signature guarantee would protect against potential claims based on
the transfer instructions, including, when (a) the current address of one or
more joint owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions, (c) the Fund or transfer agent have
been notified of an adverse claim, (d) the instructions received by the Fund or
transfer agent are given by an agent, not the actual registered owner, (e) it is
determined that joint owners who are married to each other are separated or may
be subject to divorce proceedings, or (f) the authority of a representative of a
corporation, partnership, association or other entity has not been established
to the satisfaction of the Fund or transfer agent.

Acceptable guarantees can be obtained from an "eligible guarantor institution"
as defined in rules adopted by the Securities and Exchange Commission. Eligible
guarantor institutions include banks, brokers, dealers, municipal securities
dealers or brokers, government securities dealers or broker, credit unions (if
authorized under state law), national securities exchanges, registered
securities associations and institutions that participate in the Securities
Transfer Agent Medallion Program ("STAMP") or other recognized signature
guarantee medallion program or an SM&R representative who has executed an
agreement and received authorization from SM&R. IMPORTANT: Witnessing or
notarization is not sufficient.

TEXAS OPTIONAL RETIREMENT PROGRAM GOVERNMENT INCOME SERIES AND PRIMARY SERIES
ONLY--Primary Series and Government Income Series shares in any account
established under the Texas Optional Retirement Program may not be redeemed
unless satisfactory evidence is received by SM&R from the state that one of the
following conditions exist: (1) death of the employee; (2) termination of
service with the employer; or (3) retirement of employee.

CHECK WRITING OPTION PRIMARY SERIES ONLY-- Check writing is available in the
Primary Series to investors having an account value of $1,000 or more. $250 is
the minimum check amount under the check writing option. This option is not
available on IRA's, SEP's or TSA's. Shareholders wishing to avail themselves of
this option must complete the check writing option signature card in the
prospectus. After obtaining specimen signatures and the fully executed card,
SM&R will order checks and arrange for the shareholder's checks to be honored by
a bank. Investments made by personal check or third party check will be held for
fifteen (15) business days following the investment during which time checks may
not be drawn on the amount of such investment. This service may be terminated or
suspended or additional charges may be imposed for this service. Shareholders
will be provided the initial checkbook free of charge. There will be a $5 fee
for re-orders. Shareholders will be allowed to write ten (10) checks free each
calendar quarter.

When a check is presented for payment, SM&R, as the shareholder's agent, will
cause the Fund to redeem a sufficient number of full and fractional shares to
cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of the shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will be returned to the payee
as not being covered by sufficient funds, and the shareholder will be subject to
extra charges as a result.

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REDEMPTION OF SMALL ACCOUNTS.--The Fund reserves the right to redeem shares in
any account (which will be promptly paid to the shareholder) if, due to your
redemptions, the value of your account falls below $100 in the case of the
Government Income Series and Tax Free Series or $1,000 in the Primary Series.
You will be notified that the value of your account is less than the required
minimum indicated above and allowed at least 60 days to make an additional
investment to increase the value of your account above the required minimum. The
Board of Directors may, from time to time, change such required minimum
investment.

RIGHTS RESERVED BY THE FUND--The Fund, acting through its transfer agent,
reserves the right to waive or lower investment minimums; to accept initial
purchases by telephone from a registered representative; to refuse any purchase
order; to cancel or rescind any purchase or exchange at any time prior to
receipt by the shareholder of written confirmation or, if later, within five (5)
business days of the transaction; to freeze an account and suspend account
services when notice has been received of a dispute involving the account owners
or other parties or there is reason to believe a fraudulent transaction may
occur; to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not been
received; to otherwise modify the conditions of purchase and any services at any
time; or to act on instructions not believed to be genuine.

OTHER INFORMATION CONCERNING THE FUND

SHARING OF FUND EXPENSES.--Each Series bears its proportionate share of the
Fund's general expenses not susceptible of direct allocation. Such general
expenses include the Fund's organizational expenses, directors' fees and joint
fidelity bonds, which are pro-rated based on the relative amount of each Series'
assets, and prospectus and shareholder report expenses, which are pro-rated
based on the relative number of each Series' shareholders. Organizational
expenses for the Tax-Free Series were paid by the adviser.

AUTHORIZED STOCK.--The authorized capital stock of the Fund consists of Two
Hundred Million (200,000,000) shares, par value $.01 per share. The shares of
capital stock are divided into three Series: the Government Income Series
(50,000,000 shares), the Primary Series (100,000,000 shares) and the Tax Free
Series (50,000,000 shares). On November 12, 1996, the Fund's Board of Directors
unanimously approved the reallocation of capital shares from the Government
Income Series and the Tax Free Series to the Primary Series. Articles
Supplementary were filed with the State of Maryland. After such reallocation,
the Government Income Series and the Tax Free Series consists of 30,000,000
shares each and the Primary Series consists of 140,000,000 shares. The shares of
each Series, when issued, will be fully paid and non-assessable, will have no
conversion or similar rights, and will be freely transferable.

Each share of stock will have a pro-rata interest in the assets of the Series
to which the stock of that class relates and will have no interest in the assets
of any other Series. Holders of shares of any Series are entitled to redeem
their shares as set forth under HOW TO REDEEM.

VOTING RIGHTS.--Within the respective Series, all shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive,
conversion or cumulative voting rights.

On certain matters, such as the election of directors, all shares of each
Series vote together, with each share having one vote. On other matters
affecting a particular Series, such as the Investment Advisory Contract or
fundamental investment policies, only shares of that Series are entitled to
vote, and a majority of the shares of that Series are required for approval of
the proposal.

ADDITIONAL INFORMATION.--This Prospectus and the Statement of Additional
Information referred to on the cover page do not contain all the information set
forth in the registration statement, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The omitted information may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.

For further information, shareholders may also contact SM&R, whose address and
phone number are set forth on the cover of this Prospectus.

27
<PAGE>
PORTFOLIO MANAGERS' DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GOVERNMENT INCOME SERIES

The year ended 1995 was one of the best years for the fixed income market in
well over a decade. A combination of slowing of the economic growth rate and low
inflation created an excellent environment for all fixed income sectors.
Starting the year yielding 7.90%, the 30-year US Treasury Bond yield declined to
5.95% by year end, for a total return of over 32% in 1995. This nears the record
return of 40% the Long Bond had in 1983.

Late in 1994, we repositioned the Government Income Series portfolio by
lengthening maturities and increasing the duration, thereby bringing it more in
line with its respective index. This repositioning enabled the fund to fully
participate in the bond market rally of 1995.

However, 1996 has been a difficult year for the fixed income investor. Since
February, yields have trended upward as bond prices have sunk. The yield on the
30-year U.S. Treasury Bond climbed from a low of 5.94% on January 4, to a
12-month high of 7.19% on July 5, 1996. The total return for the Long Bond was
- -9.07% through the end of June, 1996. Pass-through securities (bonds which pass
through principal and interest on a monthly basis to the investor) experienced
positive, albeit small, gains for the first six months of 1996. Maintaining a
30% weighting in collateralized mortgage obligations or CMOs (which contain
features similar to pass through securities), as well as some high coupon,
callable agencies provided the portfolio with some protection during the recent
downdraft in bond prices.

During the recent sell-off in the bond market, we have taken the opportunity
to increase the final maturities and duration of the portfolio. We purchased the
Long Bond (30 year U.S. Treasury) when the yield was above 7%. In addition, we
have taken advantage of the opportunity to swap out of some issues which have
calls within a year and extend our call protection. These adjustments have
enabled us to keep the Fund structure similar to its respective index.

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN GOVERNMENT INCOME SERIES
AND LEHMAN BROTHERS GOVERNMENT/MORTGAGE-BACKED SECURITIES INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
MAR. 31, 1992 AUG. 31, 1992 AUG. 31, 1993 AUG. 31, 1994
<S> <C> <C> <C> <C>
Government Income Series 10000 10321 11377 11103
Lehman Brothers Government/ 10000 10711 11832 11670
Mortgage-Backed Securities
Index
Past performance is not predictive of future performance.

<CAPTION>
AUG. 31, 1995 AUG. 31, 1996
<S> <C> <C>
Government Income Series 12417 12744
Lehman Brothers Government/ 12943 13483
Mortgage-Backed Securities
Index
Past performance is not predictive of future performance.
</TABLE>

The Government Income Series' performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions, changes in net
asset value and consider the effect of the Fund's 4.50% maximum sales charge.
The Fund's operations began March 16, 1992. The Government Income Series'
average annual total return was -2.03% for the twelve months ended August 31,
1996, and 5.92% from inception to August 31, 1996.

28
<PAGE>
PORTFOLIO MANAGERS' DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
PRIMARY SERIES

The American National Primary Fund Series (the "Primary Series") continued the
conservative strategy of utilizing short-term commercial paper maturing in one
to forty days (90% of the portfolio) and Agency Notes of the Federal Government
with approximately a one-year maturity (9% of the portfolio) when appropriate.
We expect a slight increase in inflation in 1997, perhaps to 3.2%, after an
expected 2.6% increase in 1996. The slight increase will flow from a pick-up in
labor-cost increases and from a faster growing foreign sector, which will pull
up prices for commodities and industrial goods. Food prices may also continue to
rise given low agricultural stockpiles and the probable upturn in meat prices.
We do not think short-term interest rates will change sharply under this
scenario. However, a continuing tight labor market and further increases in
wages and compensation may lead the Federal Reserve to increase short-term
interest rates by our forecasted 25 basis points (1/4 of 1%). We will continue
our strategy of seeking to lengthen maturities and "lock in" the higher
short-term interest rates to the greatest extent possible while maintaining our
policy of managing a conservative fund with respect to the Fund's overall
maturity.

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
PRIMARY SERIES AND LEHMAN BROTHERS GOVERNMENT CORPORATE INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
MAR. 31, 1992 AUG. 31, 1992 AUG. 31, 1993 AUG. 31, 1994
<S> <C> <C> <C> <C>
Primary Series-Comprised of 10000 10150 10413 10716
commercial paper with
maturities under 60 days and agencies
with maturities of less than one
year to three years.
Lehman Government/Corporate 10000 10495 11094 11292
Index-Comprised of corporate
notes and bonds and agencies
with one to three year maturities.
Past performance is not predictive of future performance.

<CAPTION>
AUG. 31, 1995 AUG. 31, 1996
<S> <C> <C>
Primary Series-Comprised of 11252 11822
commercial paper with
maturities under 60 days and agencies
with maturities of less than one
year to three years.
Lehman Government/Corporate 12140 12781
Index-Comprised of corporate
notes and bonds and agencies
with one to three year maturities.
Past performance is not predictive of future performance.
</TABLE>

The Primary Series' performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. The Fund's operations began March 16, 1992. The Primary Series'
average annual total return, which reflects reinvestment of all dividends and
capital gain distributions, as well as changes in net asset value, was 5.04% for
the 12 months ended August 31, 1996, and 3.85% from inception to August 31,
1996.

29
<PAGE>
PORTFOLIO MANAGERS' DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TAX FREE SERIES

In September 1993, the inception date of the Tax Free Series, the 30-year U.S.
Treasury yield was near a twenty year low. At that time, we kept maturities
short and duration low. Then, late in 1994, we repositioned the Tax Free Series
portfolio by lengthening the maturities and increasing the duration, bringing it
more in line with its respective index. This repositioning enabled the fund to
fully participate in the bond market rally of 1995.

In late 1995 and early 1996, investors avoided municipal securities with
maturities of longer than ten years as rhetoric of a flat tax and elimination of
all tax avoidance investments started to heat up among potential presidential
candidates. Yields on municipal securities with maturities beyond ten years
remained at wide spreads to securities with shorter maturities and yield curve
remained steep. Occasionally, large municipal issuers, such as New York City,
NY, were forced to accept yields which were higher than U.S. Treasury
securities, a virtually unheard of occurrence for investment grade municipal
issuers. We took advantage of this dislocation in the market to swap out of
issues with maturities within ten years (those issues most desired by investors)
and bought issues which were shunned by investors (those with longer
maturities).

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
TAX FREE SERIES AND LEHMAN BROTHERS MUNICIPAL INDEX

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
SEP. 9, 1993 AUG. 31, 1994 AUG. 31, 1995 AUG. 31, 1996
<S> <C> <C> <C> <C>
Tax Free Series 10000 9398 10258 10790
Lehman Brothers 10000 9957 10840 11408
Municipal Index
Past performance is not predictive of future performance.
</TABLE>

The Tax Free Series' performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions, changes in net
asset value and consider the effect of the Fund's 4.50% maximum sales charge.
The Fund's operations began September 9, 1993. The Tax Free Series' average
annual total return was .44% for the twelve months ended September 1, 1996, and
2.95% from inception to August 31, 1996.

30
<PAGE>
- --------------------------------------------------------------------------------

APPENDIX
(Description of Ratings Used in Prospectus)
- --------------------------------------------------------------------------------

BOND RATINGS

Description of Standard & Poor's Corporation's bond rating:

AAA Bonds rated "AAA" have the highest rating assigned by Standard & Poor's to
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A Bonds rated "A" have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circum-
stances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
BB,B Bonds rated BB, B are regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in accordance
with the terms of the obligation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

Description of Moody's Investor's Service, Inc.'s bond ratings:

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 comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds be-
cause margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat greater 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 sometime 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

31
<PAGE>
<TABLE>
<S> <C>
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times 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.
</TABLE>

Description of Fitch Investors Service bond ratings:

AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and cir-
cumstance, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than bonds with
higher ratings.

MUNICIPAL NOTE RATINGS

Description of Moody's Investor Service Inc.'s municipal note ratings:

MIG-1/VMG1 Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from
established and broad- based access to the market for refinancing,
or both.

MIG-2/VMG2 Notes are of high quality, with margins of protection ample,
although not so large as in the preceding group.

MIG-3/VMG3 Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades.
Market access for refinancing, in particular, is likely to be less
well established.

MIG-4/VMG3 Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.

Description of Standard and Poor's municipal note ratings:

Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or less
the ratings below usually will be assigned. Notes maturing beyond three years
will most likely receive a bond rating of the type recited above.

SP-1 Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.

32
<PAGE>
<TABLE>
<S> <C>
SP-2 Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
</TABLE>

COMMERCIAL PAPER RATINGS

Description of Standard & Poor's Corporation's three highest commercial paper
ratings:

Commercial paper rated "A" by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is generally rated "A" or better. The issuer has access to
at least two additional channels of borrowing. Basic earnings and cash flow have
an upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1, A-2 or A-3. A-1 is the highest
commercial paper rating assigned by Standard & Poor's Corporation. A-2 is the
second highest of such ratings.

Description of Moody's Investors Service, Inc.'s three highest commercial
paper ratings:

Among the factors considered by Moody's Investors Service, Inc. is assigning
commercial paper ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of the risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition of the management
of obligations which may be present or may arise as a result of public interest
questions and proportions to meet such obligations. Relative differences in
strength and weakness in respect to these criteria would establish a rating in
one of three classifications; P-1, P-2 or P-3. P-1 is the highest commercial
paper rating assigned by Moody's Investors Service, Inc. P-2 is the second
highest of such ratings.

Description of Fitch Investors Service commercial paper, medium-term notes,
and municipal and investment notes.

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 of timely payment only slightly less in degree than issues rated
F-1+.

F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned "F-1+" 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-5 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.

Description of Duff & Phelp's two highest commercial ratings:

Duff & Phelp's commercial paper ratings place emphasis on liquidity,
considering not only cash from operations, but access to alternative sources of
funds, including trade credit, bank lines and capital markets. Relative
differences in strength and weakness is rated by Duff & Phelp's as Duff-1 or
Duff-2; Duff-1 being the highest commercial paper rating and Duff-2 being the
second highest rating.

Description of Thompson Bankwatch, Inc.'s two highest commercial ratings:

Thompson Bankwatch, Inc.'s ratings of United States commercial banks, thrifts,
and non-bank banks, non-United States banks, and broker-dealers are based upon
among other things, five years's

33
<PAGE>
financial information and the issuer's most recent regulatory filings. Relative
differences in strength and weakness are rated by Thompson Bankwatch, Inc. as
TBW-1 or TBW-2; TBW-1 being the highest commercial paper rating and TBW-2 being
the second highest rating.

FEDERAL FUNDS

As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.

34
<PAGE>
PROSPECTUS

[American National Logo]

Government
Income Fund
Series

Primary
Fund Series

Tax Free
Fund Series

December 15, 1996
As Revised and
Reprinted July 31,
1997

[SM&R CAPITAL FUNDS LOGO]

<PAGE>
Securities Management & Research, Inc.
One Moody Plaza
Galveston, TX 77550
<PAGE>
TO BE COMPLETED FOR
AMERICAN NATIONAL PRIMARY SERIES ACCOUNTS ONLY (4/96)

<TABLE>
<S> <C>
REDEMPTION BY Primary Series Account No.
TELEPHONE OR ------------------------------------
WIRE (Bank) / / I (we) hereby authorize American National Primary
Series (the "Series") and SM&R (the "Transfer Agent") to honor
any telephonic or telegraphic instructions for redemption,
without signature guarantee, of any or all shares
held in my (our) account, provided that the
proceeds are transmitted only to the bank account
designated below. If the procedure for telephone
redemption, as described in the Prospectus, have
been followed, neither the Series nor the Transfer
Agent shall have any liability to me (us) for
acting upon such instructions regardless of the
authority or absence thereof of the person giving
the instructions, and I (we) will indemnify and
hold harmless the Series and the Transfer Agent
from and against all losses, claims, expenses and
liabilities that may arise out of or be in any way
connected with a redemption of shares under the
telephone redemption procedure, as described in the
prospectus.
(Not Available for tax qualified plans)
--------------------------------------------------------------
Name of Account at Bank Bank
Account No.
ABA/Routing No.
--------------------------------------------------------------
Name of Bank (including name of branch and bank's routing
code)
--------------------------------------------------------------
Clearing Bank Information, if applicable (name of bank and ABA
No.)
--------------------------------------------------------------
Address of
Bank City State Zip
( )
--------------------------------------------------------------
Phone Number of Bank
TELEPHONE (SM&R) / / I (we) hereby authorize American National Primary
EXCHANGE Series (the "Series") and SM&R (the "Transfer Agent") to honor
BETWEEN any telephonic or telegraphic instructions for redemption,
FUNDS without signature guarantee of any or all shares
held in my (our) account, provided that the
proceeds are transmitted only to the account
designated below. Neither the Series nor the
Transfer Agent shall have any liability to me (us)
for acting upon such instructions regardless of the
authority or absence thereof of the person giving
the instructions, and I (we) will indemnify and
hold harmless the Series and the Transfer Agent
from and against all losses, claims, expenses and
liabilities that may arise out of or be in any way
connected with the redemption of shares under the
telephone redemption procedure, as described in the
Prospectus.
----------------------------------
Name of Fund Account
Number
(Registration on accounts must be identical)
-------------------- --------------------
Signature Owner Signature Joint Owner
CHECK WRITING / / I (we) hereby elect redemption by special check drawn
OPTION against my (our) American National Primary Series Account
Not Available (minimum check $250). NOTE: WHEN ELECTING CHECK
for WITHDRAWAL, SIGN THE SIGNATURE CARD ON THE APPROPRIATE
IRA, SEP, TSA SIGNATURE LINES ON THE SPECIAL CHECK WRITING OPTION
SIGNATURE CARD BELOW.
I (we) understand there is a fifteen (15) business day hold
on all monies invested and no check will be honored prior
to the proceeds being available.
</TABLE>

- ------------------------------------------------------------------------------
SPECIAL CHECK WRITING OPTION SIGNATURE CARD
AMERICAN NATIONAL PRIMARY SERIES ONLY
Account Number: __________________ Date: __________________
- ---------------------------------------------------------------------
Print or type name(s) of registered owner(s) of American Primary
Series Account
All registered owner(s) of the Account named above must sign below.
By signing this card, the signatory(s) agree(s) to all the terms and
conditions set forth on the reverse hereof.

<TABLE>
<S> <C>
SIGNATURES SOCIAL SECURITY OR TAX I.D. NUMBER
- ------------------------------------------------- -------------------------------------------------
- ------------------------------------------------- -------------------------------------------------
- ------------------------------------------------- -------------------------------------------------
- ------------------------------------------------- -------------------------------------------------
/ / Check here if both signatures are required on checks.
/ / Check here if only one signature is required on checks.
</TABLE>

IF NO BOX IS CHECKED, BOTH SIGNATURES WILL BE REQUIRED.
If a Pension or Corporate account, indicate below how checks are to be printed.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
Form 9354
<PAGE>
TERMS AND CONDITIONS
1. REDEMPTION AUTHORIZATION: The Signatory(s) whose signature(s) appear on
the reverse side, intending to be legally bound, hereby agree each with the
other and with SM&R ("Transfer Agent") that the Transfer Agent is appointed
agent for such person(s) and, as such agent, is directed to redeem shares of the
Primary Series (the "Series") registered in the name of such Signatory(s) upon
receipt of, and in the amount of, checks drawn upon the above numbered account
and to deposit the proceeds of such redemptions in said account or otherwise
arrange for application of such proceeds to payments of said checks. The
Transfer Agent is expressly authorized to commingle such proceeds in this
account with the proceeds of the redemption of the shares of other stockholders
of the Series.
The Transfer Agent is expressly authorized to honor checks as redemption
instructions hereunder without requiring signature guarantees, and shall not be
liable for any loss or liability resulting from the absence of any such
guarantee. The Transfer Agent will arrange for the shareholder's checks to be
honored by Moody National Bank (the "Bank") for this purpose.
2. CHECK PAYMENT: The Signatory(s) authorize and direct the Transfer Agent
to have the Bank pay each check presented hereunder, subject to all laws and
Bank rules and regulations pertaining to checking accounts. In addition the
Signatory(s) agree(s) that:
(a) No check shall be issued or honored, or any redemption effected, in an
amount less than $250.
(b) No check shall be issued or honored, or redemption effected, for any
amounts represented by shares for which certificates have been issued.
(c) No check shall be issued or honored, or redemption effected, for any
amounts represented by shares unless payment for such shares has been
made in full and any checks given in such payment have been collected
through normal banking channels.
(d) Checks issued hereunder cannot be cashed over the counter at any Bank;
and
(e) Checks shall be subject to any further limitations set forth in the
Prospectus issued by the Series, including without limitation any
additions, amendments and supplements thereto.
3. DUAL OWNERSHIP: If more than one person is indicated as a registered
owner of the shares of the Series, as by joint ownership, ownership in common,
or tenants by the entireties, then (a) each registered owner must sign this
signature card, (b) each registered owner must sign each check issued hereunder
unless the parties have indicated on the face of this card that only one need
sign, in which case the Transfer Agent is authorized to act upon such signature,
and (c) each Signatory guarantees to the Transfer Agent the genuineness and
accuracy of the signature of the other Signatory(s).
4. TERMINATION: The Transfer Agent or the Series may at any time terminate
this account, related share redemption service for the Signatory(s) hereto
without prior notice by the Transfer Agent to any of the Signatory(s).
5. HEIRS AND ASSIGNS: These terms and conditions shall bind the respective
heirs, executors, administrators, and assigns of the Signatory(s).
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
December 15, 1996 as Revised and Reprinted
July 31, 1997
- --------------------------------------------------------------------------------

SM&R CAPITAL FUNDS, INC.

Mailing and Street Address: Telephone Number: (409) 763-8272
One Moody Plaza, 14th Floor Toll Free 1-(800) 231-4639
Galveston, Texas 77550
- --------------------------------------------------------------------------------

This Statement of Additional Information is NOT a prospectus, but should
be read in conjunction with the Prospectus (the "Prospectus") dated December
15, 1996, as Revised and Reprinted July 31, 1997. A copy of the Prospectus
may be obtained from your registered representative or Securities Management
and Research, Inc. ("SM&R"), One Moody Plaza, 14th Floor, Galveston, Texas
77550 (Telephone No. (409)-763-8272 or Toll Free 1-(800)-231-4639).

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

No dealer, sales representative, or other person has been authorized to
give any information or to make any representations other than those contained
in this Statement of Additional Information (and/or the Prospectus referred to
above), and if given or made, such information or representations must not be
relied upon as having been authorized by the Fund or SM&R. Neither the
Prospectus nor this Statement of Additional Information constitutes an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation.

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

TABLE OF CONTENTS
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THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . 42
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
POLICY ON PERSONAL INVESTING . . . . . . . . . . . . . . . . . . . . . . . . 52
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . . 52
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. . . . . . . . . . . . . . . 55
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED . . . . . . . . 56
SPECIAL PURCHASE PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
THE UNDERWRITER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
AUDITORS AND FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 63
TRANSFER AGENT AND DIVIDEND PAYING AGENT . . . . . . . . . . . . . . . . . . 63
OTHER PERFORMANCE QUOTATIONS . . . . . . . . . . . . . . . . . . . . . . . . 63
COMPARISONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
FINANCIAL STATEMENTS OF THE FUND

THE FUND

SM&R Capital Funds, Inc. (the "Fund") is a diversified, open-end management
investment company incorporated under the laws of Maryland on November 6, 1991.

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The Fund consists of three (3) separate series: the American National
Government Income Fund Series (the "Government Income Series"), the American
National Primary Fund Series (the "Primary Series") and the American National
Tax Free Series (the "Tax Free Series"). Each Series is, for investment
purposes, in effect a separate investment fund, and a separate class of capital
stock is issued for each. In other respects, the Fund is treated as one entity.
Each share of capital stock issued with respect to a Series represents a
pro-rata interest in the assets of that Series and has no interest in the assets
of any other Series. Each Series bears its own liabilities and also its
proportionate shares of the general liabilities of the Fund.

The Fund is registered under the Investment Company Act of 1940 (the "1940
Act") as a diversified, open-end management investment company, commonly called
a "mutual fund". This registration does not imply any supervision by the
Securities and Exchange Commission (the "Commission") over the Fund's management
or its investment policies or practices.

INVESTMENT OBJECTIVES AND POLICIES

As noted in the Prospectus under "INVESTMENT OBJECTIVES AND POLICIES", each
Series has its own investment objective and follows policies and techniques
designed to achieve those objectives. In addition, the following restrictions
have been adopted as fundamental policies for all Series of the Fund, which
means that they may not be changed without the approval of shareholders.
Exceptions may become applicable as new series are added to the Fund.

The Fund does not:

1. Issue senior securities.
2. Make short sales of securities.
3. Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities).
4. Acquire, lease or hold real estate except such as may be
necessary or advisable for the maintenance of its offices.
5. Write or purchase from others, put and call options, or any
combination thereof.
6. Purchase or sell commodities or commodity contracts including futures
contracts.
7. Invest in companies for the purpose of exercising control or
management.
8. Invest in oil, gas or other mineral exploration or development
programs. However, any Series may invest in securities which are
secured by real estate or real estate mortgages; securities of issuers
which invest or deal in real estate mortgages and securities of
issuers which invest in or sponsor oil, gas, or other mineral
exploration, provided such securities meet the criterion set forth
under "INVESTMENT OBJECTIVES AND POLICIES" in the Prospectus.
9. Act as underwriter of securities issued by other persons except
insofar as the Fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of
portfolio securities.
10. Borrow money, except for such action by any Series for temporary or
emergency purposes in an amount not to exceed 10% of such Series' net
assets.
11. Lend any funds or other assets of any Series, except that the
Government Income Series may from time to time lend the securities it
holds to qualified broker-dealers or other institutional investors.
Such loans shall not exceed ten percent (10%) of the Government Income
Series' net assets at the time of the most recent loan and shall be
made pursuant to written agreements and shall be continuously secured
by collateral in the form of cash, U.S. Government securities, or
irrevocable standby letters of credit in an amount equal to at least
102% of the market value at all times of the loaned securities plus
the accrued interest and dividends. During the time securities are on
loan, the Government Income Series will continue to receive the
interest and dividends, or amounts equivalent thereto, on the loaned
securities while receiving a fee from the borrower or earning interest
on the investment of the cash collateral. The right to terminate the
loan will be given to either party subject to appropriate notice.
Upon termination of the loan, the borrower will return to the lender
securities identical to the loaned securities. The Government Income
Series will not have the right to vote securities on loan, but would
terminate the loan and retain the right to vote if that were
considered important with respect to the investment.

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12. Pledge or mortgage any of the assets of any Series, except for such
action by any Series for temporary or emergency purposes in an amount
not to exceed 10% of such Series' net assets.
13. Invest more than 5% of the value of the net assets of a Series, at
time of purchase in the securities of any one issuer, but this
limitation does not apply to investments in securities issued or
guaranteed by the U.S. government or its instrumentalities.
14. Purchase any security (other than United States Government
obligations) if, as a result, the Fund would hold more than (a) 10% of
the total value of any class of outstanding securities of an issuer or
(b) 10% of the outstanding voting securities of an issuer.
15. Concentrate more than 25% of the net assets of a Series in any one
industry or group of industries; provided however, there is no
limitation with respect to investments in obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities. For purposes of this restriction, telephone, gas
and electric public utilities are each regarded as separate
industries.
16. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the
operation of a predecessor.
17. Will not purchase or retain securities of any issuer if any officer or
director of the Fund or of its investment manager own individually
more than one-half of one percent ( 1/2 of 1%) of the securities of
that issuer, and collectively the officers and directors of the Fund
and investment manager together own more than 5% of the securities of
that issuer.
18. Purchase securities of other investment companies except pursuant to a
plan of merger, consolidation or acquisition of assets approved by the
Fund's shareholders.
19. Invest no more than 15% of its net assets in restricted securities for
which there are no readily available market quotations, or foreign
securities which are not listed on foreign or domestic exchanges,
including securities restricted as to disposition under the Federal
Securities Laws and repurchase agreements maturing more than seven
days from the date of acquisition.
20. Invest in foreign securities.
21. Purchase warrants.

If a percentage restriction on investment or utilization of assets as set
forth is adhered to at the time an investment is made, a later change in the
percentage resulting from a change in the value or cost of a Series' assets will
not be considered a violation of the restriction except as provided in 17.
above.

In order to change any of the foregoing restrictions, approval must be
obtained by stockholders of each Series that would be affected. Such approval
requires the affirmative vote of the lesser of (i) 67% or more of the voting
securities present at a meeting if the holders of more than 50% of voting
securities are represented at that meeting or (ii) more than 50% of the
outstanding voting securities.

LENDING OF PORTFOLIO SECURITIES - Consistent with applicable regulatory
requirements, the Government Income Series may lend its portfolio securities to
broker-dealers and other financial institutions, to a maximum of 10% of the
value of the net assets of such Series at the time of the most recent loan where
such loans are callable at any time and are continuously secured by cash
collateral, which collateral is equal at all times to at least 102% of the
market value of the securities loaned, including accrued interest. The market
value of the securities loaned shall be monitored daily. Such cash collateral
shall be invested in sufficiently liquid securities to provide for repayment to
the borrower upon demand. Such investments shall be segregated from other
short-term securities of the Government Income Series. The Government Income
Series will receive amounts equal to earned income for having made the loan.
Any cash collateral pursuant to these loans will be invested in short-term
instruments.

The Government Income Series will be the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Government Income Series and its shareholders. Thus, when the loan is
terminated, the value of the securities may be more or less than their value at
the beginning of the loan. In determining whether to lend its portfolio
securities to a broker-dealer or other financial institution, the Government
Income Series will take into account the creditworthiness of such borrower and
will monitor such creditworthiness on an ongoing basis inasmuch as default by
the other party may cause delays or other collection difficulties. The
Government Income Series may pay placing brokers' fees in connection with loans
of its portfolio securities.

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The primary risk in lending securities is that the borrower may become
insolvent on a day on which the loaned security is rapidly advancing in price.
In such event, if the borrower fails to return the loaned securities, the
existing collateral might be insufficient to purchase back the full amount of
the security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage; but the Government
Income Series would be unsecured creditors with respect to such shortage and
might not be able to recover all or any of it. However, this risk may be
minimized by a careful selection of borrowers and securities to be lent and by
monitoring collateral.

The Government Income Series will not lend securities to broker-dealers
affiliated with SM&R. This restriction will not affect the ability of either
Series to maximize its securities lending opportunities.

U.S. TREASURY SECURITIES - Any Series may invest in U.S. Treasury securities,
including bills, notes and bonds issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
full faith and credit of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.

OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES - Any Series may invest in direct or implied obligations of
the U.S. Government, its agencies or instrumentalities established or sponsored
by the U.S. Government ("U. S. Government Obligations"). These U. S. Government
Obligations, including those that are guaranteed by federal agencies or
instrumentalities, may or may not be backed by the full faith and credit of the
United States. Obligations of the Government National Mortgage Association
("GNMA" or "Ginnie Mae"), the Farmers Home Administration and the Export-Import
Bank are backed by the full faith and credit of the United States. Securities
in which the Fund may invest that are not backed by the full faith and credit of
the United States include, among others, obligations issued by the Tennessee
Valley Authority, the Resolution Trust Corporation, the Federal National
Mortgage Association ("FNMA" or "Fannie Mae"), the Federal Home Loan Mortgage
Corporation ("FHLMC" or "Freddie Mac") and the United States Postal Service,
each of which has the right to borrow from the United States Treasury to meet
its obligations, and obligations of the Federal Farm Credit Bank and the Federal
Home Loan Bank, the obligations of which may be satisfied only by the individual
credit of the issuing agency. Investments in Freddie Mac, and Fannie Mae and
other obligations may include collateralized mortgage obligations and real
estate mortgage investment conduits issued or guaranteed by such entities. In
the case of U. S. Government Obligations not backed by the full faith and credit
of the United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the U.S. if the agency or instrumentality does not meet its
commitments.

MORTGAGE-BACKED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
INSTRUMENTALITIES The Government Income Series may invest in mortgage-backed
securities issued or guaranteed by U.S. Government agencies such as GNMA, FNMA
or FHLMC and representing undivided ownership interests in pools of mortgages.
The mortgages backing these securities may include conventional 30-year fixed
rate mortgages, 15-year fixed rate mortgages, graduated payment mortgages and
adjusted rate mortgages. The U.S. Government or the issuing agency guarantees
the payment of the interest on and principal of these securities. However, the
guarantees do not extend to the securities' yield or value, which are likely to
vary inversely with fluctuations in interest rates, nor do the guarantees extend
to the yield or value of the Government Income Series' shares. These securities
are in most cases "pass-through" instruments, through which the holders receive
a share of all interest and principal payments from the mortgages underlying the
securities, net of certain fees. Because the principal amounts of such
underlying mortgages may generally be prepaid in whole or in part by the
mortgagees at any time without penalty and the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the average
life of a particular issue of pass-through securities. Mortgage-backed
securities are subject to more rapid repayment than their stated maturity date
would indicate as a result of the pass-through of prepayments on the underlying
mortgage obligations. The remaining maturity of a mortgage- backed security
will be deemed to be equal to the average maturity of the mortgages underlying
such security determined by SM&R on the basis of assumed prepayment rates with
respect to such mortgages. The remaining expected average life of a pool of
mortgages underlying a mortgage-backed security is a prediction of when the
mortgages will be repaid and is based upon a variety of factors such as the
demographic and geographic characteristics of the borrowers and the mortgaged
properties, the length of time that each of the mortgages has been outstanding,
the interest rates payable on the mortgages and the current interest rate
environment. While the timing of prepayments of graduated payment mortgages
differs somewhat from that of conventional mortgages, the prepayment experience
of graduated payment mortgages is basically the same as that of the conventional

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mortgages of the same maturity dates over the life of the pool. During periods
of declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Government Income Series reinvests the prepaid amounts in other
income producing securities, the yields of which reflect interest rates
prevailing at the time. Therefore, the Government Income Series' ability to
maintain a portfolio of high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid
mortgage-backed securities. Moreover, prepayments of mortgages which underlie
securities purchased by the Government Income Series at a premium would result
in capital losses.

COLLATERALIZED OBLIGATIONS - The Government Income Series may invest a portion
of its assets in collateralized mortgage obligations or "CMOs" issued or
guaranteed by a U.S. Government agency or instrumentality, such as the FHLMC. A
collateralized mortgage obligation is a debt security issued by a corporation,
trust or custodian or by a U.S. Government agency or instrumentality, that is
collateralized by a portfolio or pool of mortgages, mortgage-backed securities
or U.S. Government securities. The issuer's obligation to make interest and
principal payments is secured by the underlying pool or portfolio of securities.
A variety of types of collateralized obligations are available currently and
others may become available in the future.

The Government Income Series will currently INVEST ONLY IN COLLATERALIZED
OBLIGATIONS THAT ARE FULLY COLLATERALIZED. Fully collateralized means that the
collateral will generate cash flows sufficient to meet obligations to holders of
the collateralized obligations under even the most conservative prepayment and
interest rate projections. Thus, the collateralized obligations are structured
to anticipate a worst case prepayment condition and to minimize the reinvestment
rate risk for cash flows between coupon dates for the collateralized
obligations. A worst case prepayment condition generally assumes immediate
prepayment of all securities purchased at a premium and zero prepayment of all
securities purchased at a discount. Reinvestment rate risk may be minimized by
assuming very conservative reinvestment rates and by other means such as by
maintaining the flexibility to increase principal distributions in a low
interest rate environment. The requirements as to collateralization are
determined by the issuer or sponsor of the collateralized obligation in order to
satisfy the U.S. Government agency or instrumentality guaranteeing the
obligation.

Collateralized obligations are designed to be retired as the underlying
securities are repaid. In the event of prepayment on or call of such
securities, the class of collateralized obligations first to mature generally
will be paid down first. Therefore, although in most cases the issuer of
collateralized obligations will not supply additional collateral in the event of
such prepayment, there will be sufficient collateral to secure collateralized
obligations that remain outstanding.

MUNICIPAL SECURITIES - The Tax Free Series intends under normal market
conditions to invest at least 80% of its net assets in municipal securities.

As used in the Prospectus and this Statement of Additional Information, the
term "municipal securities" means obligations including municipal bonds and
notes and tax exempt commercial paper issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest from
which is, in the opinion of counsel to the issuers of such securities, exempt
from federal income tax. To the extent that an investment in municipal
securities does not run counter to any of the investment policies of the Tax
Free Series or any of the investment restrictions to which the Tax Free Series
is subject, the Series may invest in any combination of the various types of
municipal securities described below which, in the judgment of SM&R, the
adviser, will contribute to the attainment of the Series' investment objective.
Such combination of municipal securities may vary from time to time.

Discussed below are the major attributes of the various municipal and other
securities in which the Tax Free Series may invest.

MUNICIPAL BONDS, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.

General Obligation Bonds - Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects,

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including construction or improvement of schools, highways and roads and water
and sewer systems. The basic security behind general obligation bonds is the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.

Revenue Bonds - The principal security for a revenue bond is generally the
net revenues derived from a particular facility, group of facilities, or, in
some cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund whose money may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a state's ability (without obligation)
to make up deficiencies in the debt service reserve fund.

Industrial Development Bonds are, in most cases, revenue bonds and are
issued for or on behalf of public authorities to raise money to finance various
privately operated facilities for business and manufacturing, housing, sports
and pollution control. These bonds are also used to finance public facilities
such as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facilities user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment. The Tax
Free Series will purchase Industrial Revenue Development Bonds only to the
extent the interest paid is tax-exempt pursuant to the Tax Reform Act of 1986,
which limited the types of facilities that may be financed with tax-exempt
industrial development and private activity bonds.

MUNICIPAL NOTES generally are used to provide for short-term working capital
needs and generally have maturities of one year or less. Municipal notes
include:

Tax Anticipation Notes which are issued to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenue,
such as income, sales, use and business taxes, and are payable from these
specific future taxes.

Revenue Anticipation Notes which are issued in expectation of receipt of
other types of revenue, such as federal revenues available under federal revenue
sharing programs.

Bond Anticipation Notes which are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds then
provide the money for the repayment of the notes.

Construction Loan Notes which are sold to provide construction financing.
After successful completion and acceptance, many projects receive permanent
financing through the Federal Housing Administration under "Fannie Mae" (the
Federal National Mortgage Association) or "Ginnie Mae" (the Government National
Mortgage Association).

Tax-Exempt Commercial Paper (Short-Term Discount Notes) which is a
short-term obligation with a stated maturity of 365 days or less. It is issued
by state and local governments or their agencies to finance seasonal working
capital needs or as short-term financing in anticipation of longer-term
financing.

VARIABLE OR FLOATING RATE DEMAND NOTES ("VRDNS") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period (generally up to 30 days) prior
to specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily to up to six
months to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index. The Tax Free Series will decide
which variable or floating rate demand instruments it will purchase in
accordance with procedures prescribed by its Board of Directors to minimize

credit risks. Any VRDN must be of high quality as determined by the adviser and
subject to

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review by the Board with respect to both its long-term and short-term aspects,
except where credit support for the instrument is provided even in the event of
default on the underlying security, the Series may rely only on the high quality
character of the short-term aspect of the demand instrument.

DEFEASED BONDS OR ESCROW SECURED BONDS are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow secured bonds will often
receive a triple A rating from Moody's and S&P. The Tax Free Series will
purchase escrow secured bonds without additional insurance only when the escrow
is invested in U.S. government securities backed by the full faith and credit of
the U.S. government.

INSURED BONDS are bonds that, in addition to being secured by the issuer's
revenues, are also backed by insurance policies written by commercial insurance
companies. Issuers of municipal bonds enter into a contractual agreement with
an insurance company to pay the bondholder any principal and interest that is
due on a stated maturity date which has not been paid by the issuer. Once
issued, this default insurance usually extends for the term of the issue and
cannot be canceled by the insurance company. The bondholder who has not
received payments for principal or interest on the stated due dates for the
insured bond must notify the insurance company and surrender any unpaid bonds
and coupons for payment of the face amount of the insured principal and
interest. The commercial insurance companies represent some of the largest and
financially strongest insurance companies in the U.S.

Although insured municipal bonds sell at yields lower than they would
without the insurance, they tend to have yields higher than Aaa/AAA-rated
noninsured municipal bonds.

In addition, other types of municipal securities similar to the above
described municipal bonds and municipal notes are, or may become available. For
the purpose of the Fund's investment restrictions set forth in this Statement of
Additional Information, the identification of the "issuer" of a municipal
security which is not a general obligation bond is made by the adviser on the
basis of the characteristics of the obligation, the most significant of which is
the source of funds for the payment of principal and interest on such security.

RISKS RELATING TO MUNICIPAL SECURITIES - There can be no assurance that the Tax
Free Series will achieve its investment objective. Yields on municipal
securities are dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the size of a
particular offering, the maturity of the obligations and the rating of the
issue. Municipal securities with longer maturities tend to produce higher
yields and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of municipal securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the value of
portfolio investments, and a decline in interest rates will generally increase
the value of portfolio investments. The ability of the Series to achieve its
investment objective is also dependent on the continuing ability of the issuers
of municipal securities in which the Series invests to meet their obligations
for the payment of interest and principal when due. The ratings of Moody's and
Standard & Poor's represent their opinion as to the quality of municipal
securities which they undertake to rate. Ratings are not absolute standards of
quality; consequently, municipal securities with the same maturity, coupon and
rating may have different yields. There are variations in municipal securities,
both within a particular classification and between classifications, depending
on numerous factors. It should also be pointed out that, unlike other types of
investments, municipal securities have traditionally not been subject to
regulation by, or registration with, the Securities and Exchange Commission,
although there have been proposals which would provide for such regulation in
the future.

The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in the rights of
holders of their obligations.

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Lawsuits challenging the validity under state constitutions of present
systems of financing public education have been initiated or adjusted in a
number of states, and legislation has been introduced to effect changes in
public school financing in some states. In other instances there have been
lawsuits challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which could ultimately
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.

TAXABLE SECURITIES - The Government Income Series and Primary Series are
expected to invest primarily in securities the income from which (either in the
form of dividends or interest) is taxable as ordinary income. While the Tax
Free Series may also invest a portion of its net assets (up to 20% under normal
market conditions and more as a defensive measure under extraordinary
circumstances, as described in the Prospectus) in taxable securities.

Interest earned on investments in taxable securities may be taxable to
shareholders as ordinary income. Investors should be aware that investments in
taxable securities by the Tax Free Series are restricted to:

U.S. Government Securities which consist of obligations issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. Some of these securities are supported by the full faith and
credit of the U.S. Government; others are supported by the right of the issuer
to borrow from the U.S. Treasury; and the remainder are supported only by the
credit of the instrumentality.

Corporate Debt Securities which at the date of the investment are rated A
or higher by Moody's and Standard & Poor's.

Commercial Paper which at the date of the investment is rated P-1 by
Moody's or A-1 by S&P or, if not rated, is issued by a company which at the date
of the investment has an outstanding debt issue rated A or higher by Moody's and
Standard & Poor's.

Bank Obligations which include certificates of deposit, bankers'
acceptances, and other short-term obligations of U.S. banks which at the date of
the investment have a capital, surplus and undivided profits of $1 billion as of
the date of their most recently published financial statements (See Certificate
of Deposits below).

REPURCHASE AGREEMENTS - Any Series may enter into "repurchase agreements" with
banks or with government securities dealers, recognized by the Federal Reserve
Board and which have been approved by the Board of Directors, who agree to
repurchase the securities at a predetermined price within a specified time
(normally one day to one week). In these transactions, the securities purchased
shall have an initial total value in excess of the value of the repurchase
agreement.

The custodian for the Series purchasing such repurchase agreement will hold
the securities underlying such repurchase agreement or such securities may be
part of the Federal Reserve Book Entry System. If the seller defaults or
becomes insolvent, a Series could realize delays, costs or a loss in asserting
its rights to, or in liquidating, the collateral in satisfaction of the seller's
repurchase agreement. The Series will enter into repurchase agreements only
with sellers who are believed to present minimal credit risks and will monitor
the value of the collateral during the holding period. Credit risks are
evaluated pursuant to guidelines adopted and regularly reviewed by the Fund's
Board of Directors which set forth credit worthiness standards for the banks and
registered government security dealers with whom the Series may enter into such
repurchase agreements. Such arrangements permit a Series to keep all of its
assets at work while retaining flexibility in pursuit of investments of a
longer-term nature. No Series will purchase repurchase agreements maturing more
than seven (7) days after such purchase.

RATINGS - If the rating of a security purchased by a Series is subsequently
reduced below the minimum rating required for purchase or a security purchased
by the Series ceases to be rated, neither event will require the sale of the
security. However, the adviser will consider any such event in determining
whether the Series should continue to hold the security.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - The Government Income Series and
Tax Free Series may also purchase and sell portfolio securities on a "when
issued" and "delayed delivery" basis. No income

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accrues to the either Series on securities in connection with such transactions
prior to the date it actually takes delivery of such securities. These
transactions are subject to market fluctuations; the value of the securities at
delivery may be more or less than their purchase price, and yields generally
available on comparable securities when delivery occurs may be higher than
yields on the securities obtained pursuant to such transactions. Because the
Government Income Series and Tax Free Series rely on the buyer or seller, as the
case may be, to consummate the transactions, failure by the other party to
complete the transaction may result in it missing the opportunity of obtaining a
price or yield considered to be advantageous. When the Government Income Series
or Tax Free Series is the buyer in such transactions, however, it will maintain,
in a segregated account with its custodian, cash, short-term money market
instruments, high quality debt securities or portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Government Income Series or Tax Free Series will make commitments
to purchase securities on such basis only with the intention of actually
acquiring these securities, but it may sell such securities prior to the
settlement date if such sale is considered to be advisable. No specific
limitation exists as to the percentage of the Government Income Series' or Tax
Free Series' assets which may be used to acquire securities on a "when issued"
or "delayed delivery" basis. To the extent either Series engages in "when
issued" and "delayed delivery" transactions, it will do so for the purpose of
acquiring securities for it's portfolio consistent with the it's investment
objective and policies and not for the purpose of investment leverage.

CERTIFICATE OF DEPOSIT - A certificate of deposit is generally a short-term,
interest-bearing negotiable certificate issued by a commercial bank or savings
and loan association against funds deposited in the issuing institution. The
interest rate may be fixed for the stated term or may be periodically adjusted
prior to the instrument's stated maturity, based upon a specified market rate.
A bankers' acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction to finance
the import, export, transfer or storage of goods. The borrower is liable for
payment, as is the bank, which unconditionally guarantees to pay the draft at
its face amount on the maturity date. Most bankers' acceptances have maturities
of six months or less and are traded in secondary markets prior to maturity.

Savings and loan associations whose certificates of deposit may be
purchased by the Primary Series are subject to regulation and examination by the
Office of Thrift Supervision. Such certificates of deposit held by the Primary
Series do not benefit materially from insurance from the Federal Deposit
Insurance Corporation.

The Primary Series may not invest in any certificate of deposit or bankers'
acceptance of a commercial bank unless: the bank is organized and operating in
the United States, has total assets of at least $1 billion and is a member of
the Federal Deposit Insurance Corporation; or the bank is a foreign branch of a
United States bank or a United States branch of a foreign bank which bank has $1
billion of total assets.

RISK FACTORS - Obligations of foreign branches of United States banks are
subject to somewhat different risks than those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions which may adversely affect payment of principal and interest on the
obligations, foreign withholding and other taxes on interest income, and
difficulties in obtaining and enforcing a judgment against a foreign branch of a
domestic bank. In addition, different risks may result from the fact that
foreign branches of United States banks and United States branches of foreign
banks are not necessarily subject to the same or similar regulatory requirements
that apply to domestic banks. For instance, such branches may not be subject to
the types of requirements imposed on domestic banks with respect to mandatory
reserves, loan limitations, examinations, accounting, auditing, record keeping
and the public availability of information. Such obligations are not traded on
any national securities exchange. While the Primary Series does not presently
invest in obligations of foreign branches of United States banks, it may do so
in the future. Investments in such obligations will not be made in excess of
10% of the Primary Series' total assets and will be made only when SM&R believes
the risks described above are minimal.

OTHER POLICIES - There are no restrictions or limitations on investments in U.
S. Government Obligations. In the case of all Series, the underlying assets may
be retained in cash, including cash equivalents which are Treasury bills,
commercial paper and short-term bank obligations such as certificates of deposit
and

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bankers' acceptances. However, it is intended that only as much of the
underlying assets of each Series be retained in cash as is deemed desirable or
expedient under then-existing market conditions.

PORTFOLIO TURNOVER

Portfolio turnover is calculated by dividing the lesser of annual purchases
or sales of portfolio securities by the monthly average of the value of each
Series' portfolio securities, excluding securities whose maturities at the time
of purchase are one (1) year or less. It is intended that portfolio changes in
the Government Income Series and Tax Free Series be made as infrequently as
possible, consistent with market and economic factors generally, and special
considerations affecting any particular security such as the limitation of loss
or realization of price appreciation at a time believed to be opportune. (See
"ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES" in the Prospectus.)

MANAGEMENT OF THE FUND

The Board of Directors has the responsibility for the overall management of
the Fund, including general supervision and review of its investment activities.
The directors, in turn, elect the officers of the Fund who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested persons" of the
Fund, as defined in the Investment Company Act of 1940 ("1940 Act"), are
indicated by an asterisk(*).

BRENT ELLIS MASEL, M.D. - DIRECTOR(1)(2) (1528 POSTOFFICE, GALVESTON, TEXAS
77553) Doctor of Neurology; Clinical Assistant Professor in Neurology,
University of Texas Medical Branch ("UTMB"), 1978 to present; Staff Physician,
St. Mary's Hospital, Galveston, Texas, 1979 to 1996; Staff Physician, Mainland
Center Hospital, 1978 to present; Clinical Assistant Professor in Internal
Medicine, UTMB, Galveston, Texas, 1991 to present; Director, American National
Investment Accounts, Inc. (an affiliated mutual fund), One Moody Plaza,
Galveston, Texas, 1990 to present; President and Executive Administrator,
Transitional Learning Center, Galveston, Texas, July 1992 to Present.

ALLAN W. MATTHEWS - DIRECTOR*(1) (7114 YOUPON, GALVESTON, TEXAS 77551)
Program Officer, The Moody Foundation (a charitable foundation), April, 1991 to
present; Management Trainee, National Western Life Insurance Company, Austin,
Texas, October, 1988 to April, 1991; Program Coordinator, South Shore Fitness
Center, Gal-Tex Hotel Corporation (Hotel Management Company), March, 1988 to
October, 1988.

LEA MCLEOD MATTHEWS - DIRECTOR* (850 E. ANDERSON LANE, AUSTIN, TEXAS
78752-1602) Publications Editor, National Western Life Insurance Co., 1990 to
present; Director of American National Investment Accounts, Inc., (an affiliated
mutual fund) 1994 to present; Public Relations, Moody Gardens, Galveston, Texas,
1988 to 1990; Director of Garden State Life Insurance Company, 1993 to present.

MICHAEL W. MCCROSKEY - DIRECTOR AND PRESIDENT*(1) (ONE MOODY PLAZA, GALVESTON,
TEXAS 77550) President, Chief Executive Officer and member of the Executive
Committee of SM&R, June 1994 to present; President and Director of the Fund,
June 1994 to present; President and Director of the American National Growth
Fund, Inc., American National Income Fund, Inc., and Triflex Fund, Inc.
(hereinafter referred to as the "American National Funds Group"), June 1994 to
present; President and Director of the American National Investment Accounts,
Inc., June 1994 to present; Executive Vice President, American National, 1971 to
present; Vice President of Standard Life and Accident Insurance Company, 1988 to
present; Assistant Secretary of American National Life Insurance Company of
Texas, 1986 to present, life, health and accident insurance companies in the
American National Family of Companies; Vice President, Garden State Life
Insurance Company, 1994 to present; Director, ANREM Corporation, 1977 to
present; President and Director of ANTAC Corporation, 1994 to present.

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<PAGE>

SHANNON L. MOODY - DIRECTOR* (1501 WOOLRIDGE, AUSTIN, TEXAS 78703) Assistant
Special Events Director, Galveston Historical Foundation, March, 1989 to April,
1991.

ANDREW J. MYTELKA - DIRECTOR* (7746 BEAUDELAIRE, GALVESTON, TEXAS 77551)
Attorney, Greer, Herz & Adams, L.L.P, Galveston, Texas, 1986 to present.

EDWIN K. NOLAN - DIRECTOR(2) (#7 MT. LOOKOUT DRIVE, CANYON LAKE, TEXAS 78133)
Attorney, Law Offices, EDWIN K. NOLAN, P. C., Canyon Lake, Texas, 1977 to
present; Director, Director/Owner, Canyon Lake Aviation, Inc. (Aviation
Service), Canyon Lake, Texas, 1986 to present; Director/Owner, Canyon Lake
Airport, Inc. (Airport), Canyon Lake, Texas, 1985 to 1995; Director Hancock Mini
Mart, Inc., 1995 to present.

LOUIS E. PAULS, JR. - DIRECTOR (1413 TREMONT, SUITE 200, GALVESTON, TEXAS
77550) Owner of Louis Pauls & Co., a sole proprietorship, 1959 to present;
Director, National Western Life Insurance Co., Austin, Texas, 1971 to present;
Director American National Investment Accounts, Inc. (an affiliated mutual
fund), 1994 to present.

EMERSON V. UNGER, C.L.U. - VICE PRESIDENT (ONE MOODY PLAZA, GALVESTON, TEXAS)
Vice President SM&R, American National Growth Fund, Inc., American National
Income Fund, Inc., American National Investment Accounts, Inc. and Triflex Fund,
Inc., mutual funds.

BRENDA T. KOELEMAY - VICE PRESIDENT AND TREASURER (ONE MOODY PLAZA, GALVESTON,
TEXAS) Vice President and Treasurer SM&R, American National Growth Fund, Inc.,
American National Income Fund, Inc., American National Investment Accounts, Inc.
and Triflex Fund, Inc., mutual funds; Senior Manager, KPMG Peat Marwick LLP,
July 1980 to April, 1992.

TERESA E. AXELSON - VICE PRESIDENT AND SECRETARY (ONE MOODY PLAZA, GALVESTON,
TEXAS) Vice President and Secretary of SM&R, American National Investment
Accounts, Inc., American National Growth Fund, Inc., American National Income
Fund, Inc., and Triflex Fund, Inc., mutual funds.

VERA M. YOUNG - VICE PRESIDENT AND PORTFOLIO MANAGER (ONE MOODY PLAZA,
GALVESTON, TEXAS) Vice President and Portfolio Manager of the Primary Series
and member of the Fixed Income Investment Committee of SM&R; Portfolio Manager
of Money Market Portfolio of the American National Investment Accounts, Inc.,
mutual funds; Assistant Vice President, Securities, American National.

TERRY E. FRANK - VICE PRESIDENT AND PORTFOLIO MANAGER (ONE MOODY PLAZA,
GALVESTON, TEXAS) Vice President and Portfolio Manager of the Government Income
Series and the Tax Free Series and a member of the Fixed Income Investment
Committee of SM&R; Former research analyst, Equitable Investment Services, Des
Moines, Iowa; Former securities analyst, Gibraltar Savings Association,
Houston, Texas; Former Senior Money Market Trader, American Capital Asset
Management, Houston, Texas.

* "Interested persons" as defined by the Investment Company Act of 1940.
(1) Member of the Fund's nominating committee.
(2) Member of the Fund's audit committee.

Officers and directors of the Fund affiliated with SM&R may receive
indirect compensation from the Fund to the extent of underwriting commissions
and investment advisory and service fees paid to SM&R.

During the year ended August 31, 1996, the Fund paid or accrued
approximately $32,872 to such directors for fees and expenses in attending
meetings of the Board of Directors.

REMUNERATION OF DIRECTORS

Each director is reimbursed for expenses incurred in connection with each
meeting of the Board of Directors or any Committee meeting attended. Each
director receives a fee, allocated among the Series, which consists of an annual
retainer component and a meeting fee component.

Set forth below is information regarding compensation paid or accrued
during the fiscal year ended August 31, 1996 for each director of the Fund.

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<PAGE>

AGGREGATE TOTAL COMPENSATION
DIRECTOR COMPENSATION FROM ALL AMERICAN
FROM FUND NATIONAL FUNDS
- --------------------------------------------------------------------------------

Samuel K. Finegan $3,500 $3,500

Brent E. Masel, M.D. $4,000 $8,000

Allan W. Matthews $4,000 $4,000

Lea McLeod Matthews $4,000 $8,000

Michael W. McCroskey $0 $0

Shannon L. Moody $4,000 $4,000

Andrew J. Mytelka $4,000 $4,000

Edwin K. Nolan $3,000 $3,000

Louis E. Pauls, Jr. $4,000 $8,000

POLICY REGARDING PERSONAL INVESTING

The following policies have been made a part of the Fund's Code of Ethics.

A portfolio manager must use extreme care to avoid even the appearance of a
conflict of interest in trading in any personal account (or an account in which
he has a beneficial interest). Accordingly, a portfolio manager may not trade
in (or otherwise acquire) any security for his personal account if that same
security is held in, or is being considered as a potential acquisition by, any
of the Funds. Any beneficial interest in a security held by a portfolio manager
must be sold at least 24 hours prior to any investment by the Funds. The
following exceptions apply: (1) Any beneficial interest in a security owned at
the time of employmentmay be held or traded at any time other than within 24
hours of a trade inthe Funds for the same or related security. Dividends inthat
security may be re-invested in accordance with a formal paln offered by the
issuer; (2) Any beneficial interest in a security acquired by devise or bequeath
may be held or traded at any time other than within 24 hours of a trade in the
Funds for the same or related security; (3) Any beneficial interest in a
security issued by the Government or any Agency of the United States, a State,
or any political subdivision thereof may be traded or held; and (4) Any
beneficial interest in a security for which a written approval is first obtained
from the President & CEO may be traded or held.

PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES:

Officers and employees of the Company other than portfolio managers may
trade in (or otherwise acquire) or hold any security for his own account (or an
account in which he has beneficial interest). However, the trade must not occur
within 24 hours of a trade in the Funds for the same or related security.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of July 1, 1997, the officers and directors of the Fund as a group
owned 0.002% of the outstanding shares of the Fund. As of July 1, 1997,
American National and SM&R owned 50.74% and 3.69% of the outstanding shares
of the Fund, respectively. See the "Control and Management of SM&R" below.

CONTROL AND MANAGEMENT OF SM&R

SM&R has been the investment adviser, manager and underwriter of the Fund
since the Fund began business in 1992. SM&R acts pursuant to a written
agreement periodically approved by the directors or

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<PAGE>

shareholders of the Fund. SM&R is also the investment adviser and underwriter
of the American National Funds Group and the American National Investment
Accounts, Inc. SM&R's address is that of the Fund.

SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"), a Texas life insurance company with its principal offices
in Galveston, Texas. The Moody Foundation (the "Foundation"), a charitable
foundation established for charitable and educational purposes, owns
approximately 23.7% of American National's common stock and the Libbie S. Moody
Trust, a private trust, owns approximately 37.6% of such shares. The trustees
of the Moody Foundation are Robert L. Moody ("RLM"), Chairman of the Board of
Directors of American National, Frances Moody Newman and Ross R. Moody.

The Moody National Bank of Galveston (the "Bank") is trustee of the Libbie
S. Moody Trust. RLM is Chairman of the Board and President, Chief Executive
Officer of the Bank, President and Director of Moody Bancshares, Inc.
("Bancshares"), the sole shareholder of Moody Bank Holding Company, Inc.
("MBHC"), and President and Director of MBHC, the Bank's controlling
stockholder. The Three R Trusts, trusts established by RLM for the benefit of
his children, owns 100% of Bancshares' Class B stock (which elects a majority of
Bancshares' and MBHC's directors) and 47.5% of its Class A Stock. The trustee
of the Three R Trusts is Irwin M. Herz, Jr., who is also a director of American
National and a partner in Greer, Herz & Adams, L.L.P., 18th Floor, One Moody
Plaza, Galveston, Texas, General Counsel to American National, the Bank,
Bancshares, MBHC, the Fund, the other American National Funds, the American
National Investment Accounts, Inc. and SM&R.

Michael W. McCroskey, President and Director of the Fund, is also
President, Chief Executive Officer, Director and a member of the Executive
Committee of SM&R, and President and Director of the American National Funds
Group and the American National Investment Accounts, Inc.; Emerson V. Unger,
Vice President of the Fund, is also Vice President of SM&R and Vice President of
the American National Funds Group and the American National Investment Accounts,
Inc.; Teresa E. Axelson, Vice President, Secretary of the Fund, is also Vice
President and Secretary of SM&R, the American National Investment Accounts,
Inc., and the American National Funds Group; Brenda T. Koelemay, Vice President
and Treasurer of the Fund, is also Vice President and Treasurer of SM&R, the
American National Investment Accounts, Inc. and the American National Funds
Group; Vera M. Young, Vice President and Portfolio Manager of the Primary Series
is also Vice President and Portfolio Manager of the Money Market Portfolio of
the American National Investment Accounts, Inc., and a member of the Fixed
Income Investment Committee of SM&R and is affiliated with American National as
Assistant Vice President, Securities Investment; and Terry E. Frank is Vice
President and Portfolio Manager of the Government Income Series and Tax Free
Series and a member of the Fixed Income Investment Committee.

INVESTMENT ADVISORY AGREEMENT

Under Investment Advisory Agreements (the "Advisory Agreement") between the
Fund and SM&R dated February 19, 1992, and July 1, 1993 for the Tax Free Series
SM&R acts as investment adviser for and provides certain investment-related
administrative services to the Fund.

As investment adviser, SM&R manages the investment and reinvestment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. SM&R provides and evaluates economic, statistical and
financial information to formulate and implement Fund investment programs. All
investments are reviewed quarterly by the Fund's Board of Directors to determine
whether or not such investments are within the policies, objectives and
restrictions of the Fund.

INVESTMENT ADVISORY FEE

Under its Advisory Agreements with the Fund, SM&R receives the following
investment advisory fees:

GOVERNMENT INCOME SERIES AND TAX FREE SERIES - A monthly investment advisory fee
computed by applying to the average daily net asset value of the Government
Income Series each month one-twelfth (1/12th) of the annual rate as follows:

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<PAGE>

ON THE PORTION OF EACH SERIES' INVESTMENT ADVISORY FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE

Not exceeding $100,000,000 .50 of 1%

Exceeding $100,000,000 but not exceeding $300,000,000 .45 of 1%

Exceeding $300,000,000 .40 of 1%

PRIMARY SERIES - An investment advisory fee, computed and paid monthly, at the
annual rate of 0.50 of 1% of the Primary Series' average daily net asset value.

For the years ended August 31, 1996, 1995 and 1994, SM&R received
investment advisory fees from the Fund of $278,378, $216,492, and $211,039,
respectively.

ADMINISTRATIVE SERVICE AGREEMENT

Under an Administrative Service Agreement between the Fund and SM&R dated
July 1, 1993, SM&R acts as transfer agent and provides all management,
operational and executive services to the Fund. SM&R pays the salaries of all
officers and employees administering the Fund's affairs and maintains office
facilities, furnishes statistical and research data, clerical help, accounting,
data processing, bookkeeping, transfer agency services, dividend disbursements
and certain other services required by the Fund. The Fund has agreed to pay
other expenses incurred in the operation of the Fund, such as interest, taxes,
commissions and other expenses incidental to portfolio transactions, Securities
and Exchange Commission fees, fees of the Custodian (See "The Custodian"
herein), auditing and legal expenses, fees and expenses of qualifying Fund
shares for sale and maintaining such qualifications under the various state
securities laws where Fund shares are offered for sale, fees and expenses of
directors not affiliated with SM&R, costs of maintaining corporate existence,
costs of printing and mailing prospectuses and shareholder reports to existing
shareholders and expenses of shareholders' meetings.

ADMINISTRATIVE SERVICE FEE

Under an Administrative Service Agreement with the Fund, SM&R receives a
management and administrative service fee from each Series which is computed by
applying to the aggregate average daily net asset value of each Series of the
Fund each month one-twelfth (1/12th) of the annual rate as follows:

ON THE PORTION OF EACH SERIES' ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE

Not exceeding $100,000,000 .25 of 1%

Exceeding $100,000,000 but not exceeding $200,000,000 .25 of 1%

Exceeding $200,000,000 but not exceeding $300,000,000 .15 of 1%

Exceeding $300,000,000 .10 of 1%

Under its Administrative Service Agreement with the Fund, SM&R has agreed
to pay (or to reimburse each Series for) each Series' expenses (including the
advisory fee and administrative service fee, if any, paid to SM&R, but exclusive
of interest, taxes, commissions and other expenses incidental to portfolio
transactions) in excess of 1.25% per year of such Series' average daily net
assets.

FEE WAIVERS

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<PAGE>

Administrative Service Agreement, may be rescinded by SM&R at any time without
notice to investors. SM&R has voluntarily agreed to waive the advisory fee for
the Tax Free Series and reimburse expenses incurred by the Fund's Series to the
extent that total expenses exceed average daily net assets as follows: Primary
Series - 0.80% and the Government Income Series -1.00%.

During the years ended August 31, 1996, 1995 and 1994, SM&R reimbursed the
Fund $237,833, $226,597 and $62,394, respectively for expenses in excess of the
expense limitation and/or any undertaking then in existence.

The administrative service fee is payable to SM&R whether or not the actual
expenses to SM&R for providing administrative services is more or less than the
amount of such fee. For the years ended August 31, 1996, 1995 and 1994, SM&R
received administrative service fees from the Fund of $139,189, $108,246 and
$105,530, respectively.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

SM&R, which supervises the Fund's investments, is responsible for effecting
portfolio transactions through eligible securities brokers and dealers, subject
to the general supervision of the Fund's Board of Directors. Investment
decisions are made by an Investment Committee of SM&R, and orders are placed by
persons supervised by that committee.

There is no arrangement or intention to place orders with any specific
broker or group of brokers. The paramount factors considered by SM&R in placing
orders are efficiency in the execution of orders and obtaining the most
favorable prices for the Fund in both purchases and sales of portfolio
securities. In seeking the best prices and executions, purchases and sales of
securities which are not listed or traded on a securities exchange are generally
executed with a principal market maker acting as principal. SM&R continuously
evaluates the brokerage fees paid by each Series to any affiliated person by
comparing such fees to those paid by other investment companies for similar
transactions as reported in various industry surveys.

Whenever the primary consideration of best price and best execution is met
to the satisfaction of SM&R, the brokers and dealers selected will include those
who provide supplementary statistical and research services. Such research
services include advice as to the advisability of investing in, purchasing or
selling securities, as well as analyses and reports concerning securities,
economic factors and trends. While SM&R is able to fulfill its obligation to
the Fund without such information, its expenses might be materially increased if
it had to obtain and assemble such information through its staff. However, the
value of such information is not determinable. SM&R also uses such information
when rendering investment advisory services to the American National Funds
Group, the American National Investment Accounts, Inc. and to American National
and its other accounts. SM&R will authorize each Series of the Fund to pay an
amount of commission for effecting a securities transaction in excess of the
amount of commission another broker-dealer would have charged only if it
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer. Generally, the Series pay higher than the lowest commission
rates available. During the years ended August 31, 1996, 1995 and 1994, the
Fund paid no brokerage fees for transactions in Portfolio securities. The
Portfolio turnover rate for this same period for the Government Income Series
was 30.17%, 2.20% and 45.48%, respectively. The Tax Free turnover rate was
18.44%, 12.63% and 16.49% for the years ended August 31, 1996 and 1995 and
the period ended August 31, 1994. The Primary Series experienced no
portfolio turnover as the majority of securities owned during the period had
maturities of one year or less at the time of acquisition. No brokerage
commissions have been paid during the period to any broker which is an
affiliated person of the Fund, which is an affiliated person of a broker
which is an affiliated person of the Fund or an affiliated person of which is
an affiliated person of the Fund or SM&R.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, and subject to seeking the best price and execution, the
Fund may give consideration to sales of shares of the Fund as a factor in the
selection of brokers and dealers to execute Fund portfolio transactions.

If purchases or sales of securities of the Series and one or more other
investment companies or clients managed by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all

55
<PAGE>

by the Adviser, taking into account the respective sizes of the Series and such
other investment companies and clients and the amount of securities to be
purchased or sold.

The Fund's Board of Directors has determined that such ability to effect
simultaneous transactions may be in the best interests of each Series. It is
recognized that in some cases these practices could have a detrimental effect
upon the price and volume of securities being bought and sold by each Series,
while in other cases these practices could produce better executions.

CAPITAL STOCK

The Fund's authorized capital stock consists of Two Hundred Million
(200,000,000) shares of common stock with a par value of $0.01 per share,
issuable in separate series. Currently three such series have been established
- - the Government Income Series, the Primary Series and the Tax Free Series. All
shares are equal with respect to distributions from income and capital gains.
There are no conversion, pre-emptive or other subscription rights. In the event
of liquidation, each share is entitled to an equal portion of all the Fund's
assets after all debts and expenses have been paid.

Each share is entitled to one vote, and the Fund's shares have
non-cumulative voting rights with respect to election of directors. This means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they so choose, and in such event,
holders of the remaining shares will not be able to elect any directors.

Prior to the Fund's offering of any shares to investors, SM&R provided the
Fund with initial capital by purchasing 100,000 shares of the Primary Series at
a purchase price of $1.00 per share and 10,000 shares of the Government Income
Series at a purchase price of $10.00 per share. In addition, SM&R purchased an
additional 190,000 shares of the Government Income Series at a purchase price of
$10.00 per share, and American National purchased 400,000 shares of the
Government Income Series at a price of $10.00 per share. Such additional shares
of the Government Income Series were acquired by SM&R and American National in
connection with the formation of the Fund, were acquired for investment and can
be disposed of only by redemption.

The Tax Free Series initial capital was provided by SM&R through the
purchase of 10,000 shares at a price of $10.00 per share. In addition, SM&R
purchased an additional 90,000 shares and American National purchased 500,000
shares at a price of $10.00 per share. These additional shares were acquired by
SM&R and American National in connection with the formation of the Series for
investment and can only be disposed of by redemption.

Both SM&R's and American National's shares will be redeemed only when
permitted by the Investment Company Act of 1940 and when the other assets of the
Series are large enough that such redemption will not have a material adverse
effect upon investment performance.

PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED

Certificates representing shares purchased are not ordinarily issued in an
effort to minimize the risk of loss or theft. Most investors do not choose to
receive certificates for their shares as this eliminates the problem of
safekeeping and facilitates redemptions and transfers. However, a confirmation
will be sent to the investor promptly after each share purchase. The investor
will have the same ownership rights with respect to shares purchased as if
certificates had been issued. Investors may receive a certificate representing
shares by making written request to SM&R. If a certificate is requested, it
will normally be forwarded to the investor within 14 days after receipt of the
request. SM&R reserves the right to charge a small administrative fee for
issuance of any certificates. Certificates will not be issued for fractional
shares (although fractional shares remain in your account on the books of each
Series of the Fund).

All purchases must be in (or payable in) United States dollars. All checks
must be drawn in United States dollars on a United States bank. Investors will
be subject to a service charge on dishonored checks. The Fund reserves the
right to reject any order for the purchase of its shares when in the judgment of
management such rejection is in the best interests of the Fund.

DETERMINATION OF NET ASSET VALUE

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<PAGE>

GOVERNMENT INCOME SERIES AND TAX FREE SERIES

The net asset value per share of the Government Income and Tax Free Series'
shares is determined by adding the market value of its portfolio securities and
other assets, subtracting liabilities, and dividing the result by the number of
the Fund shares outstanding. Expenses and fees of such Series, including the
advisory fee and the expense limitation reimbursement, if any, are accrued daily
and taken into account in determining net asset value. The portfolio securities
of the Fund are valued as of the close of trading on each day when the New York
Stock Exchange is open for trading other than customary national business
holidays and SM&R's business holidays described below. Securities listed on
national securities exchanges are valued at the last sales price on such day, or
if there is no sale, then at the closing bid price therefor on such day on such
exchange. The value of unlisted securities is determined on the basis of the
latest bid prices therefor on such day. Debt obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities, and
instrumentalities are valued on the basis of prices provided by an independent
pricing service. Prices provided by the pricing service may be determined
without exclusive reliance on quoted prices, and may reflect appropriate factors
such as yield, type of issue, coupon rate, maturity and seasoning differential.
Securities in corporate short-term notes are valued at cost plus amortized
discount, which approximates market value. If no quotations are available for a
security or other property, it is valued at fair value as determined in good
faith by the Board of Directors of the Fund on a consistent basis.

PRIMARY SERIES

The net asset value per share of the Primary Series is determined by
adding the market value of its portfolio securities and other assets,
subtracting liabilities, and dividing the result by the number of such
Series' shares outstanding. Expenses of the Primary Series, if any, are
accrued daily and taken into account in determining the net asset value. The
portfolio securities of the Primary Series are valued as of 3:00 p.m. Central
Time on each business day and on any other day in which there is a sufficient
degree of trading in such Series' investment securities that the current net
asset value of such Series shares might be materially affected by changes in
the value of its portfolio of investment securities, other than customary
national business holidays and SM&R's business holidays. Securities listed
on national exchanges are valued at the last sales price on such day, or if
there is no sale, then at the closing bid price therefor on such day on such
exchange. The value of unlisted securities is determined on the basis of the
latest bid prices therefor on such day. Securities in corporate short-term
notes are valued at cost plus amortized discount, which approximates market
value. If no quotations are available for a security or other property, it
is valued at fair value as determined in good faith by the Board of Directors
of the Fund on a consistent basis.

Securities subject to floating or variable interest rates with demand features
in compliance with applicable Rules of the Securities and Exchange Commission
may have stated maturities in excess of one year.

OFFERING PRICE

GOVERNMENT INCOME SERIES AND TAX FREE SERIES

Full and fractional shares of the Government Income Series and Tax Free
Series are purchased at the offering price, which is the net asset value next
determined after receipt of a purchase plus the sales charge. The sales charge
is a percentage of the net asset value per share and will vary as shown below.
Purchases received by SM&R at its office in Galveston, Texas prior to 3:00 p.m.,
Central Time, will be executed at the applicable offering price determined on
that day. Purchases received thereafter will be executed at the offering price
determined on the next business day.

The offering price of the Government Income Series and Tax Free Series is
the net asset value per share plus a sales charge computed at the rates set
forth in the following table:

(1) (2) (3)
SALES CHARGE AS SALES CHARGE AS DISCOUNT TO
A PERCENTAGE OF A PERCENTAGE OF SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT A PERCENTAGE OF
INVESTED OFFERING PRICE

57
<PAGE>

<S> <C> <C> <C>
Less than $100,000 4.5% 4.7% 4.0%
$100,000 but less than $250,000 3.5% 3.6% 3.0%
$250,000 but less than $500,000 2.5% 2.6% 2.0%
$500,000 and over* None None None

</TABLE>

*In connection with purchases of $500,000 or more, SM&R may pay its
representatives and broker-dealers from its own profits and resources, a per
annum percent of the amount invested as follows: Year 1 - Government Income
and Tax Free Series 0.35% and Year 2 - 0.25%, respectively. The Primary
Series 0.10% for Years 1 and 2. In the third and subsequent years, SM&R may
pay 0.075% per annum, in quarterly installments, to those representatives and
broker-dealers with accounts totaling assets of $1 million or more.

The following illustrates the calculation of the net asset value and
offering price per share at August 31, 1996 for the Government Income Series and
the Tax Free Series.

GOVERNMENT INCOME SERIES

Net Assets ($21,127,465)
------------------------ = Net Asset Value Per Share ($10.14)
Shares outstanding (2,082,877)

$ 10.14
------------- = Public Offering Price Per Share ($10.62)
.955

TAX FREE SERIES

Net Assets ($9,148,197)
------------------------ = Net Asset Value Per Share ($9.93)
Shares outstanding (920,950)

$ 9.93
------------- = Public Offering Price Per Share ($10.40)
.955

REDUCED SALES CHARGE

The reduced sales charge rates set forth in the table above apply to
purchases of shares of the Government Income Series and the Tax Free Series,
either singly or in combination with purchases of shares of the American
National Funds Group at the respective sales charges applicable to each, made at
one time by: (1) Any individual; (2) Any individual, his or her spouse, and
trusts or custodial accounts for their minor children; (3) A trustee or
fiduciary of a single trust estate or single fiduciary account.

Purchases in the Government Income Series will also receive a reduction in
sales charge pursuant to the rates set forth in the table above for purchases
either singly or in combination with purchases of shares of the American
National Funds Group at the respective sales charges applicable to each, made at
one time by: (1) Tax-exempt organizations specified in Sections 501(c)(3) or
(13) of the Internal Revenue Code, or employees' trusts, pension,
profit-sharing, or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code; and (2) Employees or employers on behalf of employees
under any employee benefit plan not qualified under Section 401 of the Internal
Revenue Code.

58
<PAGE>

bearing the expense of any payroll deduction plan, making the Fund's prospectus
available to individual investors or employees, forwarding investments by such
employees to the Fund, and the like.

The rates set forth above are applicable to single, lump sum purchases made
under the provisions of the preceding paragraphs 1, 2 and 3 and to qualified
investments under a "Letter of Intent" or under the "Accumulation Privilege" as
described below.

SPECIAL PURCHASE PLANS

LETTER OF INTENT - Shareholders may qualify for a reduced sales charge on the
Government Income Series and the Tax Free Series by completing a Letter of
Intent (See "Letter of Intent" in the Prospectus). A minimum initial investment
equal to 10% of the amount necessary for the applicable reduced sales charge is
required when a Letter of Intent is executed. Investments made under a Letter
of Intent will purchase shares at the total sales charge rate applicable to the
specified total investment. SM&R will hold in escrow from the initial
investment shares equal to 5% of the amount of the total intended investment.
Such escrow shares may not be exchanged for or reinvested in shares of another
Series or fund and, subject to the right of early cancellation described below,
will not be released until the amount purchased equals the commitment set forth
in the Letter of Intent. If the intended investment is not completed during the
13-month period, the difference between the sales charge actually paid and the
sales charge applicable to the total of such purchases made will be deducted
from the escrow shares if not paid by the investor within twenty days after the
date notice thereof has been mailed to such investor.

A Letter of Intent agreement can be canceled prior to the end of the
13-month period and escrow shares released to the investor if the investor pays
the difference between the sales charge paid and the sales charge applicable to
the amount actually invested and agrees that such Letter of Intent agreement is
canceled and no longer in effect.

The offering value of the shares of the Government Income Series, the Tax
Free Series and the funds in the Group currently owned may also be included in
the aggregate amount of an investment covered by a Letter of Intent. For
example, if an investor owns shares of the Government Income Series, the Tax
Free Series or shares of the Growth Fund, the Income Fund or the Triflex Fund,
or some combination of these funds, currently valued at $80,000 and intends to
invest $25,000 over the next thirteen months in the Government Income Series
and/or the Tax Free Series, such investor may execute a Letter of Intent and the
entire $25,000 will purchase shares of either or all of such funds at the
reduced sales charge rate applicable to an investment of $100,000 or more. A
Letter of Intent does not represent a binding obligation on the part of the
investor to purchase or the Government Income Series or the Tax Free Series to
sell the full amount of shares specified.

SYSTEMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFER SERVICE - All Series
provide a convenient, voluntary method of purchasing their shares through
"Systematic Investment Plan and Electronic Transfer Service" (a "Plan" or
"Plans"). The principal purposes of such Plans are to encourage thrift by
enabling investors to make regular purchases in amounts less than normally
required, and, in the case of the Government Income Series and the Tax Free
Series, to employ the principle of dollar cost averaging described below.

By acquiring shares of the Government Income Series and the Tax Free Series
on a regular basis pursuant to a Plan, or investing regularly on any other
systematic plan, the investor takes advantage of the principle of Dollar Cost
Averaging. Under Dollar Cost Averaging, if a constant amount is invested at
regular intervals at varying price levels, the average cost of all the shares
will be lower than the average of the price levels. This is because the same
fixed number of dollars buys more shares when price levels are low and fewer
shares when price levels are high. It is essential that the investor consider
his or her financial ability to continue this investment program during times of
market decline as well as market rise. The principle of Dollar Cost averaging
will not protect against loss in a declining market, as a loss will result if
the Plan is discontinued when the market value is less than cost.

A Plan may be opened by indicating an intention to invest $20 or more (per
individual) in the Government Income Series or the Tax Free Series or $100 or
more in the Primary Series monthly for at least one year. The investor will
receive a confirmation showing the number of shares purchased, purchase price,
and subsequent new balance of shares accumulated.

59
<PAGE>

An investor has no obligation to invest regularly or to continue
participating in a Plan, which may be terminated by the investor at any time
without penalty. Under a Plan, any distributions of income and realized capital
gains will be reinvested in additional shares at net asset value unless a
shareholder instructs SM&R in writing to pay them in cash. SM&R reserves the
right to increase or decrease the amount required to open and continue the Plan,
and to terminate any shareholder's right to participate in the Plan if after one
year the value of the amount invested is less than $100 in the Government Income
Series or the Tax Free Series or $1,000 in the Primary Series.

GROUP SYSTEMATIC INVESTMENT PLAN - A Group Systematic Investment Plan
provides employers and employees with a convenient means for purchasing
shares of the Fund under various types of employee benefit and thrift plans,
including payroll deduction and bonus incentive plans. The plan may be
started with an initial cash investment of $100 ($20 per individual) in the
Government Income Series or the Tax Free Series or $1,000 in the Primary
Series for a group consisting of five or more participants. The shares
purchased by each participant under the Plan will be credited to a separate
account in the name of each investor in which all dividends and capital gains
will be reinvested in additional shares of the applicable Series at net asset
value (plus a sales charge, if applicable). Such reinvestments will be made
at the start of business on the day following the record date for such
dividends and capital gains distributions. To keep his or her account open,
subsequent payments in the amount of $20 must be made into each participant's
account. If the group is reduced to less than five participants, the
minimums set forth under "Systematic Investment Plan and Electronic Transfer
Service" shall apply. The plan may be terminated by SM&R or the shareholder
at any time upon sixty (60) days' prior written notice.

EXCHANGE PRIVILEGE - Investors owning shares of the Government Income Series or
the Tax Free Series can exchange such shares for shares of funds in the American
National Funds Group. There is no administrative charge for this privilege at
this time, however, the Fund reserves the right to charge a fee in the future.
(See "Exchange Privilege" in the Prospectus)

Such exchange privileges are not options or rights to purchase such
securities, but are revocable privileges permitted under the present policies of
each of the Government Income Series, the Tax Free Series and such funds, and
are not available in any state or other jurisdiction where the shares of the
Government Income Series, the Tax Free Series or fund into which transfer is to
be made are not registered for sale. SM&R reserves the right to restrict the
frequency of or otherwise modify, condition, terminate or impose additional
charges upon the exchange privilege.

The minimum number of shares of the Government Income Series, the Tax Free
Series or fund that may be exchanged is the number of shares of the such Series
or fund whose shares are being exchanged which have a net asset value on the
date of such exchange equal to the minimum initial or subsequent investment, as
the case may be, of the fund into which the exchange is being made.

REDEMPTION

Any shareholder may redeem all or any part of his shares by submitting a
written request to SM&R as the Fund's agent for such purpose. Such requests
must be duly executed by each registered owner and must be accompanied by
certificates endorsed for transfer, if certificates have been issued, with
signatures guaranteed by an "eligible guarantor institution" as discussed in
the Prospectus. No signature guarantees are required on the written request
for redemption by a shareholder of record when payment is to be made to such
shareholder of record at such shareholder's address of record and the value
of the shares redeemed is $25,000 or less. In all other cases the signatures
on the request for redemption, as well as on certificates being tendered,
must be guaranteed. On all redemption requests for joint accounts, the
signatures of all joint owners are required. Redemptions may also be
requested by telephone, see "HOW TO REDEEM" in the Prospectus. Corporations,
executors, divorced persons, administrators, trustees or guardians will be
required to submit further documentation.

Shares are redeemed at the net asset value per share next computed after
the request and certificates, if any, are received in "Proper Form" as set forth
above. (See "HOW TO REDEEM" in the Prospectus). A shareholder may receive more
or less than he paid for his shares, depending on the prevailing market value of
the portfolio value of the Series being redeemed.

60
<PAGE>

Redemption checks are delivered as soon as practicable and normally will be
sent to the investor within seven days following the date on which redemption is
made.

At various times the Fund may be requested to redeem shares for which it
has not yet received good payment for prior purchases of Fund shares.
Accordingly, proceeds of the Fund will not be paid until good payment has been
received which could be as much as fifteen business days after the purchase, or
until SM&R can verify that good payment (for example, cash or certified check on
a United States bank) has been, or will be, collected for the purchase of such
shares.

The right of redemption is subject to suspension and payment therefor
postponed during any period when the New York Stock Exchange is closed other
than customary weekend or holiday closings, or during which trading on such
Exchange is restricted; for any period during which an emergency exists, as a
result of which disposal by the Fund of its securities is not reasonably
practicable or it is not reasonably practicable for the Fund to fairly determine
the value of its net assets; or for such other periods as the Commission has by
order permitted such suspension for the protection of the Fund's security
holders.

The Fund has made an election under the Investment Company Act of 1940, as
amended, to pay in cash all requests for redemption by any shareholder of
record, limited in amount with respect to each shareholder during any ninety-day
period to the lesser of (i) $250,000 or (ii) 1% of the net asset value of the
Fund at the beginning of such period. The Fund may pay the redemption price, if
any, in excess of the amounts described above in whole or in part in portfolio
securities, at the market value thereof determined as of the close of business
next following receipt of the request in proper form, if deemed advisable by the
Board of Directors. In such case a shareholder would incur brokerage costs if
he sold the securities received.

There is presently no charge for redeeming Fund shares. However, the Fund
reserves the right to charge for any redemption an amount, to be determined by
the Board of Directors, not to exceed 1% of the net asset value of the shares
being redeemed, but it is not the present intent of the Board of Directors to
make such a charge.

SYSTEMATIC WITHDRAWAL PLAN

As described in the Prospectus under "Systematic Withdrawal Plan", the
Series have a Systematic Withdrawal Plan pursuant to which shareholders having
an account value of $5,000 or more to automatically withdraw a minimum of $50
monthly or quarterly.

A Systematic Withdrawal Plan provides for regular monthly or quarterly
payments to the account investor or his designee through redemption of a portion
of the shares held in the account. Some portion of each withdrawal may be
taxable gain or loss to the account investor at the time of the withdrawal, the
amount of the gain or loss being determined by the investment in the Series'
shares. The minimum, though not necessarily recommended, withdrawal amount is
$50. Shares sufficient to provide the designated withdrawal payment are
redeemed each month or quarterly on the 20th, or the next succeeding business
day, and checks are mailed to reach the investor on or about the lst of the
following month. All income dividends and capital gains distributions are
automatically reinvested at net asset value, without sales charge. Since each
withdrawal check represents proceeds from the sale of sufficient shares equal to
the withdrawal, there can be a reduction of invested capital, particularly in a
declining market. If redemptions are consistently in excess of shares added
through reinvestment of distributions, the withdrawals will ultimately exhaust
the capital.

The shareholder may designate withdrawal payments for a fixed dollar
amount, as stated in the preceding paragraph, or a variable dollar amount based
on (1) redemption of a fixed number of shares at monthly or quarterly intervals,
or (2) redemption of a specified and increasing fraction of shares held at
monthly or quarterly intervals. To illustrate the latter option, if an investor
wanted quarterly payments for a ten-year period, the first withdrawal payment
would be the proceeds from redemption of 1/40th of the shares held in the
account. The second payment would be 1/39th of the remaining shares; the third
payment would be 1/38th of the remaining shares, etc. Under this option, all
shares would be redeemed over the ten-year period, and the payment amount would
vary each quarter, depending upon the number of shares redeemed and the
redemption price.

61
<PAGE>

No charge is made for a non-qualified Systematic Withdrawal Plan, and the
account investor may change the option or payment amount at any time upon
written request received by SM&R no later than the month prior to the month of a
scheduled redemption for a withdrawal payment. A Systematic Withdrawal Plan may
also be terminated at any time by the account investor or the Series without
penalty.

Occasionally certain limited types of qualified retirement plans are
involved in making investments and withdrawals during the same year. Under such
an arrangement, it is possible for the plan to be, in effect, charged duplicate
sales charges. In order to eliminate this possibility, each Series of the Fund
will permit additional investments, without sales charge, equal to all sums
withdrawn, providing the additional investments are made during the next twelve
months following the withdrawal or redemption, and providing that all funds
withdrawn were for the specific purpose of satisfying plan benefits of
participants who have retired, become disabled or left the plan. Furthermore,
for a qualified plan to qualify under this provision, the plan must include at
least one participant who is a non-owner employee. The Fund and SM&R discourage
shareholders from maintaining a withdrawal account while concurrently and
regularly purchasing shares of the Fund although such practice is not
prohibited.

THE UNDERWRITER

SM&R serves as principal underwriter of the shares of all Series of the
Fund pursuant to an Underwriting Agreement dated July 1, 1993 (the "Underwriting
Agreement"). Such Underwriting Agreement provides that it shall continue in
effect only so long as such continuance is specifically approved at least
annually by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of a Series and, in either case, by the specific
approval of a majority of directors who are not parties to such agreement or not
"interested" persons (as defined in the Investment Company Act of 1940, as
amended) of any such parties, cast in person at a meeting called for the purpose
of voting on such approval. The Underwriting Agreement was approved by the
Board of Directors of the Fund in accordance with such procedures at a meeting
held on August 13, 1996. The Underwriting Agreement may be terminated without
penalty by vote of the Board of Directors or by vote of the holders of a
majority of the outstanding voting securities of the Fund, or by SM&R, upon
sixty (60) days' written notice and will automatically terminate if assigned (as
provided in the Investment Company Act of 1940, as amended).

As principal underwriter, SM&R continuously offers and sells shares of each
Series of the Fund through its own sales representatives and broker-dealers. As
compensation for such services, SM&R receives the sales charge, which is the
difference between the offering price at which shares are issued and the net
asset value thereof. Prior to April 1, 1996, SM&R allowed varying portions of
the sales charge to broker-dealers, ranging from a maximum of 4.7% to a minimum
of .50% of the net amount invested and from a maximum of 4.0% to a minimum of
.30% of the public offering price. Effective April 1, 1996, the sales charge
allowance to broker-dealers, ranges from a maximum of 4.7% to a minimum of 2.6%
of the net amount invested, and from a maximum of 4.0% to a minimum of 2.0% of
the public offering price. In connection with purchases of $500,000 or more,
SM&R may pay broker-dealers, in quarterly installments, from its own profits and
resources, a per annum percent of the amount invested as follows: Year 1 -
0.35% and Year 2 - 0.25%. In the third and subsequent years, SM&R may pay
0.075% per annum, in quarterly installments, to those broker-dealers with
accounts totaling assets of $1 million or more.. The amount of sales charge
received and retained by SM&R from the sale of Fund shares for the years ended
August 31, 1996, 1995 and 1994 was $92,706, $46,578 and $145,244, and $13,795,
$8,654 and $44,496, respectively. SM&R reallowed to dealers less than $500 for
the years ended August 31, 1996, 1995 and 1994.

CUSTODIAN

The cash and securities of the Fund are held by SM&R, One Moody Plaza,
Galveston, Texas, 77550, pursuant to a Custodian Agreement dated July 1, 1993.
The Custodian holds and administers the Fund's cash and securities as provided
for in such Custodian Agreement. The compensation paid to the Custodian is paid
by the Fund and is based upon and varies with the number, type and amount of
transactions conducted by the Custodian.

SM&R, as custodian, will hold and administer the Fund's cash and securities
and maintain certain financial and accounting books and records as provided for
in such Custodian Agreement.

62
<PAGE>

TRANSFER AGENT AND DIVIDEND PAYING AGENT

SM&R, One Moody Plaza, Galveston, Texas 77550, is the transfer agent and
dividend paying agent for the Fund, the American National Funds Group and the
American National Investments Accounts, Inc.

COUNSEL

The Fund's General Counsel is Greer, Herz & Adams, L.L.P. 18th Floor, One
Moody Plaza, Galveston, Texas 77550.

AUDITORS AND FINANCIAL STATEMENTS

KPMG Peat Marwick LLP, 700 Louisiana, Houston, Texas 77002, are the Fund's
independent auditors and perform annual audits of the Fund's financial
statements. The audited financial statements of SM&R Capital Funds, Inc., as of
August 31, 1996 have been included herein as Exhibit "1" in reliance upon the
report of KPMG Peat Marwick LLP and upon the authority of said firm as experts
in accounting and auditing. KPMG Peat Marwick LLP's business address is 700
Louisiana, Houston, Texas 77002.

OTHER PERFORMANCE QUOTATIONS

With respect to those categories of investors who are permitted to purchase
shares of a Series of the Fund at net asset value, sales literature pertaining
to the Series may quote a current distribution rate, yield, total return,
average annual total return and other measures of performance as described
elsewhere in this Statement with the substitution of net asset value for the
public offering price.

Sales literature referring to the use of the Fund or any of its Series as a
potential investment for Individual Retirement Accounts (IRAs), and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.

COMPARISONS

To help investors better evaluate how an investment in a Series of the Fund
might satisfy their investment objective, advertisements and other materials
regarding the Fund or any of its Series may discuss various measures of the
Series' performance as reported by various financial publications. Materials
may also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. The following publications, indices,
and averages may be used:

DOW JONES COMPOSITE AVERAGE OR ITS COMPONENT AVERAGES - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.

STANDARD & POOR'S 500 STOCK INDEX OR ITS COMPONENT INDICES - an unmanaged index
composed of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and
20 transportation stocks. Comparisons of performance assume reinvestment of
dividends.

THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES - unmanaged indices
of all industrial, utilities, transportation, and finance stocks listed on the
New York Stock Exchange.

LIPPER - MUTUAL FUND PERFORMANCE ANALYSIS AND LIPPER - FIXED INCOME FUND
PERFORMANCE ANALYSIS - measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.

CDA MUTUAL FUND REPORT, PUBLISHED BY CDA INVESTMENT TECHNOLOGIES, INC. -analyzes
price, current yield, risk, total return, and average rate of return (average
annual compounded growth rate) over specified time periods for the mutual fund
industry.

63
<PAGE>

MUTUAL FUND SOURCE BOOK, PUBLISHED BY MORNINGSTAR, INC. - analyzes price, yield,
risk and total return for equity funds.

FINANCIAL PUBLICATIONS: THE WALL STREET JOURNAL AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.

CONSUMER PRICE INDEX (OR COST OF LIVING INDEX), PUBLISHED BY THE U.S. BUREAU OF
LABOR STATISTICS - a statistical measure of change, over time, in the price of
goods and services in major expenditure groups.

SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES - The Aggregate Bond
Index measures yield, price and total return for Treasury, Agency, Corporate,
Mortgage, and Yankee bonds.

STANDARD & POOR'S BOND INDICES - measures yield and price of Corporate,
Municipal, and Government bonds.

SHEARSON LEHMAN BROTHERS AGGREGATE BOND INDEX OR ITS COMPONENT INDICES - The
Aggregate Bond Index measures yield, price and total return for Treasury,
Agency, Corporate, Mortgage and Yankee bonds.

SHEARSON LEHMAN BROTHERS MUNICIPAL BOND INDEX (SLMBI) OR ITS COMPONENT INDICES -
SLMBI measures yield, price and total return for the municipal bond market.

BOND BUYER'S 20-BOND INDEX - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.

BOND BUYER'S 30-BOND INDEX - an index of municipal bond yields based upon yields
of 20 revenue bonds maturing in 30 years.

HISTORICAL DATA supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill, Lynch,
Pierce, Fenner & Smith, Shearson Lehman Hutton and Bloomberg, L.P.

In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the portfolio of any Series of the Fund, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by any
Series to calculate its figures. In addition there can be no assurance that any
series of the Fund will continue this performance as compared to such other
averages.

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<PAGE>

ANNUAL REPORT

[LOGO]
AMERICAN
NATIONAL

GOVERNMENT
INCOME
FUND

PRIMARY
FUND

TAX FREE
FUND

August 31, 1996

[LOGO]
SM&R
CAPITAL
FUNDS

Form 9202
<PAGE>

Securities Management & Research BULK RATE
One Moody Plaza U.S. POSTAGE
Galveston, TX 77550 PAID
PERMIT NO. 14
GALVESTON,
TEXAS

<PAGE>

SM&R CAPITAL FUNDS ANNUAL REPORT
- -----------------------------------------------------
SHAREHOLDER FEATURES AND BENEFITS

PRE-AUTHORIZED CHECK PLAN
MAKES IT EASY FOR YOU TO INVEST ON A REGULAR BASIS.
You can invest regularly into your mutual fund account by authorizing your bank
to automatically draft your personal checking account.

WEALTH ACCUMULATION ACCOUNT--A SYSTEMATIC EXCHANGE FEATURE*
This exchange feature allows you to gradually and periodically move assets from
one fund to another without charge. *We are required by the SEC to note that the
exchange privilege is subject to change or termination, although we have no such
plans.

EDUCATION FUNDING INVESTMENT ACCOUNT
WHEN YOUR CHILDREN OR GRANDCHILDREN ARE READY FOR COLLEGE--WILL YOU BE?
A special account to help you accumulate funds for a child's or grandchild's
college education. Such accounts qualify for a reduced sales charge. See the
prospectus for details.

SYSTEMATIC WITHDRAWAL PLAN
YOU CAN SUPPLEMENT YOUR INCOME
This feature offers you a way of redeeming shares to meet current cash needs
while the rest of your money continues to work for you. See the prospectus for
details.

RETIREMENT PLANS
HELP IN PLANNING FOR A MORE SECURE FUTURE
You can use the SM&R Capital Funds for IRA, 403(b)(7), SEP, 457, 401(k) and
pension and profit sharing plans. The SM&R Capital Funds are well-suited for
pension fund fiduciaries seeking prudent investment alternatives with the
potential for higher rates of return.

DISTRIBUTIONS
CONVENIENT MONTHLY DIVIDEND DISTRIBUTIONS
Each fund distributes essentially all earned net income to shareholders monthly.
You can supplement your income with a convenient monthly check, or automatically
reinvest your distributions and purchase additional shares without a sales
charge.

REINVESTMENT PRIVILEGE
OUR COMMITMENT TO SERVICE
Shareholders who redeem all or part of their shares may repurchase shares up to
the same dollar amount within 90 days of the redemption without an additional
sales charge.

INFORMATION LINE
ACCESS YOUR ACCOUNT INFORMATION BY PHONE
Simply call toll free 1-800-231-4639 and you'll speak to an Investor Services
Representative--in person. Whatever you need, they are there to help.

This annual report must be preceded or accompanied by a prospectus of the SM&R
Capital Funds, Inc.
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1996
- --------------------------------------------------------------------------------
GOVERNMENT INCOME FUND SERIES

<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>

COMMERCIAL PAPER
FINANCIAL SERVICES--0.57%
Textron Financial Corporation 09/09/96 5.47 $ 120,000 $ 119,854
FOODS--0.94%
ConAgra, Incorporated 09/13/96 5.50 199,000 198,635
UTILITY-ELECTRIC--1.23%
Minnesota Power & Light Company 09/06/96 5.47 260,000 259,803
------------
TOTAL COMMERCIAL PAPER--2.74%
(COST $578,292) 578,292
------------
U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--94.91%
Federal Home Loan Bank 08/05/04 7.38 1,000,000 1,014,240
Federal Home Loan Bank 08/19/04 7.57 1,000,000 1,025,720
Federal Home Loan Bank 10/24/05 6.23 150,000 140,404
Federal Home Loan Bank 10/25/05 6.23 150,000 140,452
Federal Home Loan Mortgage Corporation 07/27/04 7.81 1,000,000 1,014,300
Federal Home Loan Mortgage Corporation 08/19/04 8.08 1,500,000 1,509,075
Federal Home Loan Mortgage Corporation 08/01/05 6.75 165,000 160,162
Federal Home Loan Mortgage Corporation 08/03/05 7.46 250,000 244,272
Federal Home Loan Mortgage Corporation 05/17/06 7.70 1,000,000 981,800
Federal Home Loan Mortgage Corporation 06/21/06 8.00 1,500,000 1,484,715
Federal Home Loan Mortgage Corporation 09/15/06 7.00 539,912 537,629
Federal Home Loan Mortgage Corporation 11/15/06 7.00 1,500,000 1,450,470
Federal Home Loan Mortgage Corporation 03/15/07 7.00 1,000,000 977,240
Federal Home Loan Mortgage Corporation 09/15/07 7.00 1,000,000 977,520
Federal Home Loan Mortgage Corporation 08/15/08 7.00 1,600,000 1,523,152
Federal National Mortgage Association 02/11/02 7.50 1,585,000 1,621,661
Federal National Mortgage Association 04/22/02 7.55 200,000 205,212
Federal National Mortgage Association 07/14/04 8.05 500,000 502,555
Federal National Mortgage Association* 09/12/05 6.55 100,000 95,801
Federal National Mortgage Association** 06/07/06 7.85 1,000,000 986,460
Federal National Mortgage Association** 07/14/06 8.03 2,000,000 2,002,380
Federal National Mortgage Association** 08/11/06 7.50 500,000 486,030
Federal National Mortgage Association 07/25/07 7.00 1,000,000 971,540
------------
20,052,790
U S GOVERNMENT SECURITIES--2.03%
U S Treasury Bonds 02/15/26 6.00 500,000 429,170
------------
TOTAL U S GOVERNMENT AGENCY and U S GOVERNMENT SECURITIES--96.94%
(COST $20,544,286) 20,481,960
------------
TOTAL INVESTMENTS--99.68%
(COST $21,122,578) 21,060,252
CASH AND OTHER ASSETS LESS LIABILITIES--0.32% 67,213
------------
TOTAL NET ASSETS--100.00% $ 21,127,465
------------
------------
</TABLE>

* --Global Bond
**--Medium Term Notes

See notes to financial statements.

2
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1996
- --------------------------------------------------------------------------------
PRIMARY FUND SERIES

<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>

AEROSPACE--2.82%
Lockheed Martin Corporation 09/03/96 5.55 $ 1,057,000 $ 1,056,674
CONTAINERS--3.80%
Crown Cork & Seal Company, Incorporated 09/09/96 5.53 1,193,000 1,191,534
Crown Cork & Seal Company, Incorporated 10/09/96 5.48 233,000 231,652
------------
1,423,186
DIVERSIFIED--16.54%
Carpenter Technology Corporation 10/16/96 5.50 1,253,000 1,244,386
Cox Enterprises, Incorporated 09/03/96 5.48 480,000 479,854
Cox Enterprises, Incorporated 09/23/96 5.46 1,120,000 1,116,263
ITT Corporation 09/20/96 5.58 841,000 838,523
Textron, Incorporated 09/10/96 5.48 1,273,000 1,271,256
White Consolidated Industries 09/04/96 5.51 1,245,000 1,244,428
------------
6,194,710
ENERGY MISCELLANEOUS--4.21%
Niantic Bay Fuel Trust 09/05/96 5.65 1,578,000 1,577,009
FINANCIAL SERVICES--10.82%
Dana Credit Corporation 10/02/96 5.48 1,222,000 1,216,234
Kerr-McGee Credit Corporation 10/01/96 5.48 521,000 518,621
Nynex Credit Company 10/21/96 5.45 1,298,000 1,288,175
Textron Financial Corporation 09/26/96 5.47 1,035,000 1,031,068
------------
4,054,098
FOODS--7.57%
ConAgra, Incorporated 09/13/96 5.45 1,221,000 1,218,782
ConAgra, Incorporated 10/01/96 5.45 328,000 326,510
Quaker Oats Company 09/30/96 5.50 1,297,000 1,291,254
------------
2,836,546
LEISURE RELATED--2.50%
Mattel Incorporated 09/12/96 5.45 938,000 936,438
MEDICAL SUPPLY/SERVICE--3.58%
Baxter International Inc. 09/27/96 5.45 1,348,000 1,342,694
OIL DOMESTIC--3.31%
Union Oil Company of California 10/15/96 5.45 1,249,000 1,240,680
RETAIL-SPECIALTY--6.76%
Rite Aid Corporation 09/25/96 5.47 1,049,000 1,045,175
Tandy Corporation 10/22/96 5.47 1,500,000 1,488,376
------------
2,533,551
TRANSPORTATION MISCELLANEOUS--11.37%
CSX Corporation 10/02/96 5.40 1,115,000 1,109,815
General American Transportation Corporation 09/19/96 5.64 1,100,000 1,096,898
Union Pacific Corporation 09/11/96 5.45 1,056,000 1,054,401
XTRA Incorporated 09/06/96 5.64 998,000 997,218
------------
4,258,332
</TABLE>

3
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1996
- --------------------------------------------------------------------------------
PRIMARY FUND SERIES, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE (%) AMOUNT VALUE
UTILITY-ELECTRIC/GAS--19.90%
<S> <C> <C> <C> <C>
Central & Southwest Corporation 09/17/96 5.47 1,335,000 1,331,755
Houston Industries Incorporated 10/03/96 5.47 1,300,000 1,293,679
Minnesota Power & Light Company 09/20/96 5.45 1,377,000 1,373,039
PacifiCorp Holdings Incorporated 10/04/96 5.45 1,299,000 1,292,510
Penn Power & Light Company 09/24/96 5.45 1,025,000 1,021,431
Public Service Company of Colorado 09/16/96 5.48 1,145,000 1,142,386
------------
7,454,800
UTILITY-MISCELLANEOUS--7.20%
Penn Fuel Corporation 09/18/96 5.49 1,041,000 1,038,301
Public Service Electric & Gas Company 10/07/96 5.43 1,668,000 1,658,943
------------
2,697,244
------------
TOTAL INVESTMENTS--100.38%
(Cost $37,605,962) 37,605,962
CASH AND OTHER ASSETS LESS LIABILITIES--(0.38%) (140,938)
------------
TOTAL NET ASSETS--100.00% $ 37,465,024
------------
------------
</TABLE>

<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1996
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES

MUNICIPAL BONDS FACE
RATING(A) AMOUNT VALUE
ARIZONA--4.17%
Aaa/AAA Central Arizona Water
Conservation District
(Central Arizona
Project)-Contract Revenue
Refunding Bonds, Series B
1994, 4.750%, 11/01/07 $ 200,000 $ 190,478
Aaa/AAA Central Arizona Water
Conservation District
(Central Arizona
Project)-Contract Revenue
Refunding Bonds, Series B
1994, 4.750%, 11/01/08 100,000 93,994
Aaa/AAA Pima County, Arizona-Sewer
Revenue Refunding Bonds,
Series 1994A, 4.400%,
07/01/03 100,000 97,312
---------
381,784
---------
CALIFORNIA--2.15%
Aaa/AAA Sacramento, California
Municipal Utility
District Electric Revenue
Bonds, Series I, 5.750%,
01/01/15 200,000 196,648
---------
FLORIDA--2.63%
Aa/AA State of Florida-State
Board of Education,
Public Education Capital
Outlay Bonds, 1992 Series
E, 4.600%, 06/01/03 100,000 98,681
Aa/AA State of Florida-State
Board of Education,
Public Education Capital
Outlay Bonds, 1992 Series
E, 5.750%, 06/01/19 145,000 141,925
---------
240,606
---------
GEORGIA--1.88%
A/A Municipal Electric
Authority of
Georgia-Power Revenue
Bonds, Series AA, 5.400%,
01/01/07 175,000 171,999
---------
ILLINOIS--9.42%
Aa/AA Illinois Health Facilities
Authority-Revenue Bonds,
Series A, (Northwestern
Memorial Hospital),
6.000%, 08/15/24 100,000 98,795
Aa/AA Illinois Health Facilities
Authority-Revenue Bonds,
Series 1994A,
(Northwestern Memorial
Hospital), 6.100%,
08/15/14 200,000 199,994

MUNICIPAL BONDS FACE
RATING(A) AMOUNT VALUE

ILLINOIS--CONTINUED
Aaa/AAA Illinois State Toll
Highway Authority-Highway
Priority Revenue Bonds,
Series A-FGIC, 5.750%,
01/01/17 175,000 167,508
Aaa/AAA Regional Transportation
Authority of Illinois
Revenue Bonds, Refunding
MBIA, 5.500%, 06/01/18 200,000 189,312
A1/AAA State of Illinois-Build
Illinois Bonds, Sales Tax
Revenue Bonds, Series V,
6.375%, 06/15/17 200,000 206,032
---------
861,641
---------
KANSAS--2.13%
Aa/AA State of Kansas-Department
of Transportation,
Highway Revenue Bonds,
Series 1994A, 4.250%,
09/01/01 100,000 98,058
Aa/AA State of Kansas-Department
of Transportation,
Highway Revenue Bonds,
Series 1994A, 4.250%,
09/01/02 100,000 96,958
---------
195,016
---------
MARYLAND--7.31%
Aa/AA+ Anne Arundel County,
Maryland-General
Obligation Bonds,
Consolidated General
Improvements Series,
1994, 4.800%, 02/01/09 200,000 187,204
Aa/AA+ Anne Arundel County,
Maryland-General
Obligation Bonds,
Consolidated Water and
Sewer Series, 1994,
4.700%, 02/01/07 100,000 95,532
Aa/AA Department of
Transportation of
Maryland-Consolidated
Transportation Bonds,
Refunding Series 1993
(Second Issue), 4.400%,
12/15/04 200,000 191,216
Aa1/AA Washington Suburban
Sanitary District,
Maryland-Sewage Disposal
Refunding Bonds of 1994,
4.375%, 06/01/03 200,000 194,516
---------
668,468
---------

5
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1996
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES, CONTINUED

MUNICIPAL BONDS FACE
RATING(A) AMOUNT VALUE

NEW MEXICO--2.13%
Aaa/AAA Central Consolidated
School District No. 22
San Juan County, New
Mexico General Obligation
School Building Bonds,
5.300%, 08/15/09 100,000 97,926
Aa/AA City of Albuquerque, New
Mexico-Joint Water and
Sewer System, Refunding
and Improvement Revenue
Bonds, Series 1994A,
4.300%, 07/01/02 100,000 97,079
---------
195,005
---------
NEW YORK--1.05%
Aaa/AAA New York City, New York-
General Obligation Bonds
Unlimited, Series J,
5.000%, 02/15/07 100,000 96,446
---------
NORTH CAROLINA--2.23%
Aaa/AAA City of Charlotte, North
Carolina-General
Obligation Public
Improvement Bonds, Series
1994, 5.700%, 02/01/08 100,000 103,911
A/BBB+ North Carolina Eastern
Municipal Power
Agency-Power System
Revenue Bonds, Refunding
Series 1993 B, 6.250%,
01/01/12 100,000 99,599
---------
203,510
---------
OHIO--4.30%
Aaa/AAA Franklin County,
Ohio-General Obligation
Bonds Limited, 5.100%,
12/01/08 300,000 295,599
Aaa/AAA Franklin County,
Ohio-General Obligation
Bonds Limited, 5.300%,
12/01/11 100,000 98,106
---------
393,705
---------
OKLAHOMA--1.49%
Aaa/NR Oklahoma Housing Finance
Agency-Single Family
Mortgage Revenue Bonds
(Homeownership Loan
Program), 1994 Series
A-1, 6.250%, 09/01/07 (b) 135,000 136,097
---------

MUNICIPAL BONDS FACE
RATING(A) AMOUNT VALUE

OREGON--2.26%
A1/A+ City of Portland,
Oregon-Sewer System
Revenue Bonds, 1994
Series A, 6.250%,
06/01/15 200,000 206,310
---------
PENNSYLVANIA--1.08%
A1/AA- Pennsylvania State General
Obligation Bonds
Unlimited, Refunding &
Projects-First Series,
5.000%, 04/15/06 100,000 98,272
---------
PUERTO RICO--2.47%
Baa1/A Commonwealth of Puerto
Rico-Public Improvement
Refunding Bonds, Series
1992A, General Obligation
Bonds, 6.000%, 07/01/14 100,000 99,557
Baa1/BBB+ Puerto Rico Electric Power
Authority-Power Revenue
Bonds, Series R, 6.250%,
07/01/17 125,000 126,451
---------
226,008
---------
RHODE ISLAND--1.09%
Aa/AA+ Rhode Island Housing &
Mortgage Financial
Corporation,
Homeownership
Opportunity, Series 20-A,
6.150%, 04/01/17 100,000 99,993
---------
TENNESSEE--2.19%
A1/A+ Tennessee Housing
Development
Agency-Mortgage Finance
Program Bonds, 1994
Series B, 6.200%,
01/01/09 (b) 200,000 200,038
---------
TEXAS--27.80%
Aaa/AAA Baytown, Texas-Water and
Sewer Revenue Bonds,
5.950%, 02/01/14 100,000 100,744
Aaa/AAA Board of Regents of The
University of Texas
System-Permanent
University Fund,
Refunding Bonds Series
1992A, 6.250%, 07/01/13 200,000 205,278
Aaa/AAA City of Austin,
Texas-Combined Utility
Systems Revenue Refunding
Bonds, Series 1994,
6.250%, 05/15/16 100,000 103,732

6
<PAGE>

SCHEDULE OF INVESTMENTS August 31, 1996
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES, CONTINUED

MUNICIPAL BONDS FACE
RATING(A) AMOUNT VALUE

TEXAS--CONTINUED
Aa/AA City of Austin,
Texas-(Travis and
Williamson
Counties)-Public
Improvement Refunding
Bonds, Series 1993A,
4.000%, 09/01/00 100,000 97,473
Aa/AA City of Dallas,
Texas-Waterworks and
Sewer System Revenue
Bonds, Series 1994,
5.600%, 04/01/07 100,000 101,599
Aaa/AAA Clear Lake City Water
Authority-Waterworks and
Sewer System Combination,
Unlimited Tax and Revenue
Refunding Bonds, Series
1994, 4.875%, 03/01/07 250,000 240,552
Aaa/AAA Dallas-Fort Worth
International
Airport-Dallas-Fort Worth
Regional Airport, Joint
Revenue Refunding Bonds,
Series 1994A, 6.000%,
11/01/10 100,000 102,915
Aaa/AAA Denton, Texas-General
Obligation Bonds Limited,
5.500%, 02/15/08 130,000 130,567
Aaa/AAA Denton, Texas-General
Obligation Bonds Limited,
5.600%, 02/15/09 120,000 120,521
Aaa/AAA Galveston Independent
School District-Unlimited
Tax Schoolhouse Bonds,
Series 1994, 5.200%,
02/01/07 100,000 98,919
Aa/AA Harris County, Texas-Tax
and Revenue Certificates
of Obligation, Series
1994, 6.100%, 10/01/12 135,000 139,069
Aa/AA Harris County, Texas-Tax
and Revenue Certificates
of Obligation, Series
1994, 6.100%, 10/01/13 125,000 128,359
Aaa/AAA Laredo, Texas-General
Obligation Bonds
Unlimited, 5.250%,
02/15/11 100,000 96,272
Aaa/AAA North Texas Municipal
Water District-Regional
Wastewater System
Refunding Revenue Bonds,
Series 1993, 4.300%,
06/01/01 100,000 98,233
Aaa/AAA North Texas Municipal
Water District-Regional
Wastewater System
Refunding Revenue

MUNICIPAL BONDS FACE
RATING(A) AMOUNT VALUE

TEXAS--CONTINUED Bonds,
Series 1993, 4.400%,
06/01/02 100,000 97,954
A/NR Tarrant County Health
Facilities Development
Corporation-Health System
Revenue Bonds, (Harris
Methodist Health System),
Series 1994, 6.000%,
09/01/14 200,000 193,594
Aa1/AA+ Tarrant County,
Texas-Limited Tax
Refunding Bonds, Series
1994, 4.400%, 07/15/02 200,000 196,138
A1/AA Texas Tech University
Health Sciences
Center-Revenue Financing
System Refunding Bonds,
First Series (1993),
4.200%, 02/15/01 100,000 97,741
Aaa/AAA Texas Turnpike
Authority-Dallas North
Tollway System Revenue
Bonds, Series 1995
(President George Bush
Turnpike) 5.400%,
01/01/15 100,000 95,295
Aaa/AAA West University Place,
Texas-General Obligation
Bonds Limited, Permanent
Improvement, 5.650%,
02/01/14 100,000 98,256
---------
2,543,211
---------
UTAH--2.05%
Aaa/AA Utah Housing Finance
Agency-Single Family
Mortgage Bonds, 1995
Issue A, (Federally
Insured or Guaranteed
Mortgage Loans), 7.150%,
07/01/12 (b) 90,000 92,771
Aaa/NR Utah State Housing
Financial Agency-Single
Family Mortgage Bonds,
Series F1, 6.000%,
07/01/13 95,000 94,990
---------
187,761
---------
VIRGINIA--1.11%
Aaa/AAA Virginia State Housing
Development Authority
Commonwealth Mortgage
Bonds, Series A,
Subseries A-4, 6.300%,
07/01/15 (b) 100,000 101,855
---------

7
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1996
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES, CONTINUED

MUNICIPAL BONDS FACE
RATING(A) AMOUNT VALUE

WASHINGTON--10.98%
Aaa/AAA City of Richland,
Washington-Water and
Sewer Improvement Revenue
Bonds, 1993, 5.550%,
04/01/07 300,000 302,754
Aa1/AA+ King County, Washington-
Department of
Metropolitan Services,
Limited Tax General
Obligation Bonds, 1994
Series A, 5.800%,
01/01/08 200,000 205,068
Aa1/AA+ King County, Washington-
Limited Tax General
Obligation and Refunding
Bonds, 1993 Series A,
6.000%, 12/01/10 100,000 102,707
Aaa/AAA Municipality of
Metropolitan Seattle
Sewer Refunding Revenue
Bonds, Series X, 5.400%,
01/01/15 100,000 94,328
Aa1/AA+ Port of Seattle,
Washington-General
Obligation Bonds, 5.750%,
05/01/14 (b) 100,000 96,972
Aa/AA State of
Washington-General
Obligation Bonds, Series
1994B, 5.750%, 05/01/09 100,000 101,164
Aa/AA State of
Washington-General
Obligation Bonds, Series
1994B, 6.000%, 09/01/16 100,000 101,266
---------
1,004,259
---------
WISCONSIN--4.32%
Aa/AA City of Green Bay-General
Obligation Refunding
Bonds, Series 1994B,
5.900%, 04/01/09 200,000 204,336
Aa/AA State of Wisconsin-General
Obligation Bonds of 1994,
Series A, 4.500%,
05/01/05 200,000 190,854
---------
395,190
---------
TOTAL MUNICIPAL BONDS--96.24%
(Cost $8,779,306) 8,803,822
---------

FACE
GOVERNMENT AGENCIES AMOUNT VALUE

Federal Home Loan Mortgage
Corporation, 5.150%, 09/05/96 180,000 179,897
Federal Home Loan Mortgage
Corporation, 5.190%, 09/06/96 150,000 149,892
---------
TOTAL GOVERNMENT AGENCIES--3.60%
(Cost $329,789) 329,789
---------
TOTAL INVESTMENTS--99.84%
(Cost $9,109,095) 9,133,611
CASH AND OTHER ASSETS LESS LIABILITIES--0.16% 14,586
---------
TOTAL NET ASSETS--100.00% $9,148,197
---------
---------

Notes to Schedule of Investments
(a) Ratings assigned by Moody's Investor's Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P").
Ratings are not covered by auditor's report.
(b) Security subject to the alternative minimum tax.

See notes to financial statements.

8
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES August 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
ASSETS
Investment in securities, at value $21,060,252 $37,605,962 $9,133,611
Cash 22,321 1,996 33,055
Prepaid expenses 11,106 24,658 12,395
Receivable for:
Interest 159,724 -- 118,380
Expense reimbursement -- 672 8,734
Other assets 11,477 9,051 4,891
----------- ----------- ----------
TOTAL ASSETS 21,264,880 37,642,339 9,311,066
----------- ----------- ----------
LIABILITIES
Distribution payable 113,786 136,005 41,936
Capital stock reacquired 1,000 3,632 --
Investment securities purchased -- -- 99,059
Accrued:
Investment advisory fee 9,125 14,397 3,915
Service fee 4,563 7,213 1,957
Other liabilities 8,941 16,068 16,002
----------- ----------- ----------
TOTAL LIABILITIES 137,415 177,315 162,869
----------- ----------- ----------
NET ASSETS $21,127,465 $37,465,024 $9,148,197
----------- ----------- ----------
----------- ----------- ----------
Shares of capital stock outstanding, (200,000,000 shares
authorized,
$.01 par value per share) 2,082,877 37,470,797 920,950
----------- ----------- ----------
----------- ----------- ----------
Net asset value $ 10.14 $ 1.00 $ 9.93
----------- ----------- ----------
----------- ----------- ----------
Offering price per share:
(Net asset value DIVIDED BY 95.5%) $ 10.62 $ 10.40
----------- ----------
----------- ----------
Offering price per share $ 1.00
-----------
-----------
</TABLE>

STATEMENTS OF OPERATIONS Year Ended August 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $1,520,178 $1,453,584 $ 483,699
EXPENSES
Investment advisory fees 106,126 126,371 45,881
Service fees 53,063 63,186 22,940
Professional fees 6,000 6,000 6,000
Custody and transaction fees 13,299 24,683 11,561
Directors' fees 10,958 10,958 10,956
Organization expenses 12,539 12,539 --
Qualification fees 45,324 41,611 8,851
Other 7,097 5,839 1,754
----------- ---------- ---------
TOTAL EXPENSES 254,406 291,187 107,943
LESS EXPENSES REIMBURSED (43,795) (86,095) (107,943)
----------- ---------- ---------
NET EXPENSES 210,611 205,092 --
----------- ---------- ---------
INVESTMENT INCOME--NET 1,309,567 1,248,492 483,699
----------- ---------- ---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments (17,444) -- (11,015)
Change in unrealized appreciation (depreciation) of investments
for the year (741,026) -- (30,116)
----------- ---------- ---------
NET LOSS ON INVESTMENTS (758,470) -- (41,131)
----------- ---------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 551,097 $1,248,492 $ 442,568
----------- ---------- ---------
----------- ---------- ---------
</TABLE>

See notes to financial statements.

9
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT INCOME FUND SERIES

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,309,567 $ 1,327,891
Net realized loss on investments (17,444) (10,778)
Change in unrealized appreciation (depreciation) (741,026) 823,605
------------- -------------
Net increase in net assets resulting from operations 551,097 2,140,718
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,309,536) (1,327,891)
CAPITAL SHARE TRANSACTIONS--Net 1,420,095 (137,113)
------------- -------------
TOTAL INCREASE 661,656 675,714
NET ASSETS
Beginning of year 20,465,809 19,790,095
------------- -------------
End of year $ 21,127,465 $ 20,465,809
------------- -------------
------------- -------------
</TABLE>

PRIMARY FUND SERIES

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,248,492 $ 803,361
Net realized loss on investments -- (9)
Change in unrealized appreciation (depreciation) -- (1,522)
------------- -------------
Net increase in net assets resulting from operations 1,248,492 801,830
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,248,506) (803,361)
CAPITAL SHARE TRANSACTIONS--Net 16,480,762 5,778,066
------------- -------------
TOTAL INCREASE 16,480,748 5,776,535
NET ASSETS
Beginning of year 20,984,276 15,207,741
------------- -------------
End of year $ 37,465,024 $ 20,984,276
------------- -------------
------------- -------------
</TABLE>

See notes to financial statements.

10
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 483,699 $ 417,823
Net realized loss on investments (11,015) (34,685)
Change in unrealized appreciation (depreciation) (30,116) 316,014
----------- -----------
Net increase in net assets resulting from operations 442,568 699,152
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (483,700) (415,605)
CAPITAL SHARE TRANSACTIONS--Net 790,213 820,183
----------- -----------
TOTAL INCREASE 749,081 1,103,730
NET ASSETS
Beginning of year 8,399,116 7,295,386
----------- -----------
End of year $ 9,148,197 $ 8,399,116
----------- -----------
----------- -----------
</TABLE>

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
GOVERNMENT INCOME FUND SERIES

<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED AUGUST 31, AUGUST 31,
---------------------------------------------------- ------------
1996 1995 1994 1993 1992
------------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.51 $ 10.07 $ 10.87 $ 10.56 $ 10.00
Investment income--net 0.65 0.70 0.54 0.50 0.25
Net realized and unrealized gain (loss) on
investments during the period (0.37) 0.44 (0.79) 0.49 0.55
------------- ------------- ---------- ---------- ------------
Total from Investment Operations 0.28 1.14 (0.25) 0.99 0.80
Less distributions
Distributions from investment income--net (0.65) (0.70) (0.55) (0.50) (0.24)
Distributions from capital gains 0.00 0.00 0.00 (0.18) 0.00
------------- ------------- ---------- ---------- ------------
Total Distributions (0.65) (0.70) (0.55) (0.68) (0.24)
------------- ------------- ---------- ---------- ------------
Net Asset Value, End of Period $ 10.14 $ 10.51 $ 10.07 $ 10.87 $ 10.56
------------- ------------- ---------- ---------- ------------
------------- ------------- ---------- ---------- ------------
Total Return 2.63% 11.85% (2.41)% 10.23% 7.96%**
------------- ------------- ---------- ---------- ------------
------------- ------------- ---------- ---------- ------------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 21,127 $ 20,466 $ 19,790 $ 19,783 $ 12,529
Ratio of expenses to average net assets 1.00%(1) 0.70%(1) 1.12% 1.07% 1.00%*
Ratio of net investment income to average net
assets 6.17% 6.90% 5.11% 5.07% 4.82%*
Portfolio turnover rate 30.17% 2.20% 45.48% 18.14% 49.70%
</TABLE>

See notes to financial statements.

11
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
PRIMARY FUND SERIES

<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED AUGUST 31, AUGUST 31,
---------------------------------------------- ------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income--net 0.05 0.05 0.03 0.02 0.015
---------- ---------- ---------- ---------- ------------
Total from Investment Operations 0.05 0.05 0.03 0.02 0.015
Less distributions
Distributions from investment income--net (0.05) (0.05) (0.03) (0.02) (0.015)
---------- ---------- ---------- ---------- ------------
Total Distributions (0.05) (0.05) (0.03) (0.02) (0.015)
---------- ---------- ---------- ---------- ------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Total Return 5.07% 5.01% 2.91% 2.59% 1.50%**
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 37,465 $ 20,984 $ 15,208 $ 15,539 $ 12,432
Ratio of expenses to average net assets (1) 0.81% 0.84% 0.79% 0.85% 0.70%*
Ratio of net investment income to average net assets 4.93% 4.91% 2.88% 2.47% 2.99%*
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, PERIOD ENDED
AUGUST 31,
---------------------- ------------
1996 1995 1994
---------- ---------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.95 $ 9.62 $ 10.00
Investment income--net 0.53 0.51 0.24
Net realized and unrealized gain (loss) on investments during the period (0.02) 0.33 (0.38)
---------- ---------- ------
Total from Investment Operations 0.51 0.84 (0.14)
Less distributions
Distributions from investment income--net (0.53) (0.51) (0.24)
---------- ---------- ------
Total Distributions (0.53) (0.51) (0.24)
---------- ---------- ------
Net Asset Value, End of Period $ 9.93 $ 9.95 $ 9.62
---------- ---------- ------
---------- ---------- ------
Total Return 5.18% 9.15% (1.49)%**
---------- ---------- ------
---------- ---------- ------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 9,148 $ 8,399 $ 7,295
Ratio of expenses to average net assets -- (2) -- (2) 1.11%*
Ratio of net investment income to average net assets 5.27% 5.43% 2.50%*
Portfolio turnover rate 18.44% 12.63% 16.49%
</TABLE>

* Ratios annualized
** Returns are not annualized
(1) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.15%, 1.21%, 1.20%, 1.23%,
and 1.04% (annualized) for the years ended August 31, 1996, 1995, 1994 and
1993 and the period ended August 31, 1992, respectively.
(2) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.18% and 1.25% for the years
ended August 31, 1996 and 1995.

See notes to financial statements.

12
<PAGE>
NOTES TO FINANCIAL STATEMENTS August 31, 1996
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Capital Funds, Inc. (the "Funds") is a diversified open-end management
investment company registered as a series fund under the Investment Company Act
of 1940, as amended. The Funds are comprised of the American National Government
Income Fund Series ("Government Income Fund Series"), American National Primary
Fund Series ("Primary Fund Series"), and American National Tax Free Fund Series
("Tax Free Fund Series"). Operations commenced March 16, 1992, for the
Government Income Fund Series and Primary Fund Series. The Tax Free Fund Series
began operations September 9, 1993.

The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

SECURITY VALUATION:
Investments in securities are valued based on market quotations or at fair value
as determined by a pricing service approved by the Board of Directors. Prices
provided by the pricing service represent valuations at bid prices or on a basis
determined without exclusive reliance on quoted prices and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield quality, coupon rate, maturity, type of issue, individual
trading characteristics and other market data. Securities for which market
quotations are not readily available are valued as determined by the Board of
Directors. Commercial paper is stated at amortized cost, which is equivalent to
fair value.

SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date (date order to buy
or sell is executed). Dividend income is recognized on the ex-dividend date, and
interest income is recognized on an accrual basis. Realized gains and losses
from security transactions are reported on the basis of identified cost for
financial reporting and federal income tax purposes.

FEDERAL INCOME TAXES:
For federal income tax purposes, each series is treated as a separate entity.
The Funds intend to comply with requirements of the Internal Revenue Code
relating to regulated investment companies and intend to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is recorded in the accompanying financial
statements. At December 31, 1995, the Government Income Fund Series, Primary
Fund Series and the Tax Free Fund Series had capital loss carryforwards that
will expire in 2010 of approximately $353,000, $6,000 and $49,000, respectively.

CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering and may be redeemed on any
business day.

AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES; AMERICAN NATIONAL TAX FREE
FUND SERIES
Dividends to shareholders from net investment income are declared and paid
monthly. Capital gain distributions are declared and paid annually.

AMERICAN NATIONAL PRIMARY FUND SERIES
All capital stock transactions are made at net asset value. Distributions
are computed daily and distributed monthly.

EXPENSES:
Operating expenses not directly attributable to a series' shares are prorated
among the series based on the relative amount of each series' net assets or
shareholders. Organization expenses have been deferred and are being amortized
over a five-year period. All organization expenses for the Tax Free Fund Series
were paid by Securities Management & Research, Inc.

NOTE 2-- INVESTMENT ADVISORY AND SERVICE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Securities Management & Research, Inc. ("SM&R") is the investment adviser and
principal underwriter for the Funds. Investment advisory fees paid to SM&R are
computed as a percentage of the average daily net assets as follows:

GOVERNMENT INCOME FUND SERIES
TAX FREE FUND SERIES

<TABLE>
<CAPTION>
INVESTMENT
NET ASSETS ADVISORY FEE
<S> <C>
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding $300,000,000 0.45%
Exceeding $300,000,000 0.40%
</TABLE>

13
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.

NOTE 2--CONTINUED
PRIMARY FUND SERIES

<TABLE>
<S> <C>
All Average daily net assets 0.50%
</TABLE>

Administrative fees paid to SM&R by the Funds are computed as a percentage of
average daily net assets as follows:

<TABLE>
<CAPTION>
NET ASSETS SERVICE FEES
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>

SM&R has agreed to reimburse the Funds for all expenses, other than taxes,
interest and expenses directly related to the purchase and sale of investment
securities, in excess of 1.25% per annum of the average daily net assets. SM&R
has voluntarily agreed to reimburse the Primary Fund Series for expenses in
excess of 0.80% per annum of average daily net assets for the year ended August
31, 1996.

For the year ended August 31, 1996, SM&R voluntarily reimbursed the Government
Income Fund Series for expenses in excess of 1.00% per annum of average daily
net assets and the Tax Free Fund Series for all expenses.

For the year ended August 31, 1996, SM&R, as principal underwriter, received as
sales charges on sales of shares of capital stock of the Funds as follows:

<TABLE>
<CAPTION>
SALES CHARGES
RECEIVED BY SM&R
<S> <C>
Government Income $ 64,130
Tax Free 28,576
</TABLE>

SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 1996, SM&R and American National had the
following ownership in the Funds:

<TABLE>
<CAPTION>
SM&R AMERICAN NATIONAL
------------------------------ ------------------------------
PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING
<S> <C> <C> <C> <C>
Government Income 212,373 10% 538,108 28%
Primary 2,963,649 8% 12,551,579 33%
Tax Free 113,943 12% 569,716 62%
</TABLE>

NOTE 3--COST, PURCHASES AND SALES OF INVESTMENT SECURITIES

Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:

<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
Government Income $7,411,786 $6,047,395
Tax Free $2,233,828 $1,576,302
</TABLE>

Gross unrealized appreciation and depreciation as of August 31, 1996, were as
follows:

<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
<S> <C> <C>
Government Income $ 147,686 $ 210,012
Tax Free $ 114,550 $ 90,034
</TABLE>

14
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.

NOTE 4--CAPITAL STOCK

GOVERNMENT INCOME FUND SERIES

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1995
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Sale of capital shares 254,620 $2,666,115 170,678 $1,735,005
Investment income dividends reinvested 102,499 1,068,933 114,860 1,150,393
--------- ---------- --------- ----------
Subtotals 357,119 3,735,048 285,538 2,885,398
Redemptions of capital shares (220,983) (2,314,953) (304,466) (3,022,511)
--------- ---------- --------- ----------
Net increase (decrease) in capital shares outstanding 136,136 $1,420,095 (18,928) $ (137,113)
---------- ----------
---------- ----------
Shares outstanding at beginning of year 1,946,741 1,965,669
--------- ---------
Shares outstanding at end of year 2,082,877 1,946,741
--------- ---------
--------- ---------
Net assets as of August 31, 1996 are comprised of the following:
Capital (par value and additional paid-in) $21,560,404
Undistributed net investment income 31
Accumulated net realized loss on investments (370,644)
Net unrealized depreciation of investments (62,326)
----------
Net Assets $21,127,465
----------
----------
</TABLE>

PRIMARY FUND SERIES

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1995
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sale of capital shares 38,678,248 $38,678,248 19,960,125 $19,960,121
Investment income dividends reinvested 1,065,346 1,065,346 833,350 833,350
---------- ----------- ---------- -----------
Subtotals 39,743,594 39,743,594 20,793,475 20,793,471
Redemptions of capital shares (23,262,832) (23,262,832) (15,015,405) (15,015,405)
---------- ----------- ---------- -----------
Net increase in capital shares outstanding 16,480,762 $16,480,762 5,778,070 $ 5,778,066
----------- -----------
----------- -----------
Shares outstanding at beginning of year 20,990,035 15,211,965
---------- ----------
Shares outstanding at end of year 37,470,797 20,990,035
---------- ----------
---------- ----------
Net assets as of August 31, 1996 are comprised of the
following:
Capital (par value and additional paid-in) $37,470,779
Accumulated net realized loss on investments (5,755)
-----------
Net Assets $37,465,024
-----------
-----------
</TABLE>

15
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.

NOTE 4--CONTINUED
TAX FREE FUND SERIES

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1995
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sale of capital shares 119,074 $1,201,877 60,669 $ 582,253
Investment income dividends reinvested 43,655 438,208 44,973 428,694
--------- --------- --------- ---------
Subtotals 162,729 1,640,085 105,642 1,010,947
Redemptions of capital shares (86,193) (849,872) (19,738) (190,764)
--------- --------- --------- ---------
Net increase in capital shares outstanding 76,536 $ 790,213 85,904 $ 820,183
--------- ---------
--------- ---------
Shares outstanding at beginning of year 844,414 758,510
--------- ---------
Shares outstanding at end of year 920,950 844,414
--------- ---------
--------- ---------
Net assets as of August 31, 1996 are comprised of the following:
Capital (par value and additional paid-in) $9,184,305
Undistributed net investment income 2,217
Accumulated net realized loss on investments (62,841)
Net unrealized appreciation of investments 24,516
---------
Net Assets $9,148,197
---------
---------
</TABLE>

16
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
SM&R Capital Funds, Inc.

We have audited the accompanying statements of assets and liabilities of SM&R
Capital Funds, Inc. (comprised of American National Government Income Fund
Series ("Government Fund"). American National Primary Fund Series ("Primary
Fund") and American National Tax Free Fund Series ("Tax Free Fund")), including
the schedule of investments as of August 31, 1996, the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the four-year period then ended and the
period March 16, 1992 (date operations commenced) through August 31, 1992 for
the Government Fund and Primary Fund and for each of the years in the two-year
period ended August 31, 1996 and for the period September 9, 1993 (date
operations commenced) through August 31, 1994 for the Tax Free Fund. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996, by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of SM&R
Capital Funds, Inc. as of August 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the four-year period then ended and the period March 16, 1992 (date
operations commenced) through August 31, 1992 for the Government Fund and
Primary Fund and for each of the years in the two-year period ended August 31,
1996 and for the period September 9, 1993 (date operations commenced) through
August 31, 1994 for the Tax Free Fund, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Houston, Texas
October 11, 1996

17
<PAGE>
SM&R CAPITAL FUNDS, INC. One Moody Plaza, Galveston, Texas 77550
- --------------------------------------------------------------------------------

DIRECTORS
Samuel K. Finegan
Brent E. Masel, M.D.
Allan W. Matthews
Lea McLeod Matthews
Michael W. McCroskey
Shannon L. Moody
Andrew J. Mytelka
Edwin K. Nolan
Louis E. Pauls, Jr.

OFFICERS
Michael W. McCroskey, President
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
Vera M. Young, Vice President and Portfolio Manager--
Primary Fund Series
Terry E. Frank, Vice President and Portfolio Manager--
Government Income Fund Series and Tax Free Fund Series

INVESTMENT ADVISOR AND MANAGER
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550

CUSTODIAN
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550

LEGAL COUNSEL
Greer, Herz & Adams, L.L.P.
One Moody Plaza
Galveston, Texas 77550

UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550

TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
700 Louisiana
Houston, Texas 77002