CAMBRIDGE SERIES TRUST, 497, 1995-06-02

CAMBRIDGE SERIES TRUST
497, 1995-06-02

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<PAGE>
PROSPECTUS MAY 30, 1995
THE MENTOR FUNDS
The Mentor Funds, an open-end management investment company, is offering
shares of eight different investment portfolios by this Prospectus: Mentor
Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Strategy Portfolio (a
total return fund), Mentor Income and Growth Portfolio, Mentor Perpetual Global
Portfolio (a global growth fund), Mentor Quality Income Portfolio, Mentor
Municipal Income Portfolio, and Mentor Short-Duration Income Portfolio. CERTAIN
OF THE PORTFOLIOS MAY USE "LEVERAGE" -- THAT IS, THEY MAY BORROW MONEY TO
PURCHASE ADDITIONAL PORTFOLIO SECURITIES, WHICH INVOLVES SPECIAL RISKS.
The Mentor Funds provides investors an opportunity to design their own
investment programs by investing in a variety of Portfolios offering a wide
array of investment strategies. Each Portfolio pursues its investment objectives
through the investment policies described in this Prospectus.
This Prospectus sets forth concisely the information about The Mentor Funds
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. You can find more detailed
information in the May 30, 1995 Statement of Additional Information, as amended
from time to time. For a free copy of the Statement or for other information,
please call 1-800-382-0016. The Statement has been filed with the Securities and
Exchange Commission and is incorporated into this Prospectus by reference. The
address of The Mentor Funds is P.O. Box 1357, Richmond, Virginia 23286-0109.
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.

<PAGE>
SUMMARY OF PORTFOLIO EXPENSES
Expenses are one of several factors to consider when investing in a
Portfolio. The following tables summarize your maximum transaction costs from
investing in each of the Portfolios. The Examples show the cumulative expenses
attributable to a hypothetical $1,000 investment in each of the Portfolios over
specified periods.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)
Mentor Growth Portfolio...................................................................... 5.75% None
Mentor Capital Growth Portfolio.............................................................. 5.75% None
Mentor Strategy Portfolio.................................................................... 5.75% None
Mentor Income and Growth Portfolio........................................................... 5.75% None
Mentor Perpetual Global Portfolio............................................................ 5.75% None
Mentor Quality Income Portfolio.............................................................. 4.75% None
Mentor Municipal Income Portfolio............................................................ 4.75% None
Mentor Short-Duration Income Portfolio....................................................... 1.00% None
Maximum Sales Load Imposed on Reinvested Dividends............................................. None None
Exchange Fee................................................................................... None None
Contingent Deferred Sales Charge (as a percentage of
the lower of the original purchase price or redemption proceeds of shares redeemed)
Class A Shares(1):........................................................................ None(1)
Class B Shares(2):
</TABLE>

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF CONTINGENT DEFERRED SALES
APPLICABLE AMOUNT REDEEMED CHARGE AS A PERCENTAGE OF
(GROWTH, CAPITAL GROWTH, APPLICABLE AMOUNT REDEEMED
STRATEGY, INCOME AND (QUALITY INCOME, MUNICIPAL
YEAR SINCE GROWTH, AND GLOBAL INCOME, AND SHORT-DURATION
PURCHASE PAYMENT MADE PORTFOLIOS)(3) INCOME PORTFOLIOS)(3)
<S> <C> <C>
First 4.0% 4.0%
Second 4.0% 4.0%
Third 3.0% 3.0%
Fourth 2.0% 2.0%
Fifth 1.0% 1.0%
Sixth None 1.0%
Seventh and Thereafter None None
</TABLE>

(1) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1 million that are redeemed within one year of purchase.
(2) A CDSC of 1.00% is assessed on Class B shares that are purchased pursuant to
certain asset-allocation plans and that are not otherwise subject to the
CDSC shown in the table, if those shares are redeemed within one year of
purchase. Consult Mentor Distributors, Inc.
(3) The amount redeemed is computed as the lesser of the current net asset value
of the redemption amount, excluding reinvested distributions, and the
original purchase amount. See "How to Buy Shares -- Class B Shares."
2

<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY MUNICIPAL DURATION
GROWTH GROWTH STRATEGY GROWTH GLOBAL INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Management Fees
(after waiver)(1)... 0.70% 0.80% 0.85% 0.75% 1.10% 0.50%(2) 0.60% 0.00%(2)
12b-1 Fees.......... None None None None None None None None
Shareholder Service
Fees................ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses
(after waiver)(1)... 0.37% 0.40% 0.37% 0.37% 0.65% 0.30% 0.30% 0.61%
Total Portfolio
Operating
Expenses(1)..... 1.32% 1.45% 1.47% 1.37% 2.00% 1.05% 1.15% 0.86%
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY MUNICIPAL DURATION
GROWTH GROWTH STRATEGY GROWTH GLOBAL INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Management Fees
(after waiver)(1)... 0.70% 0.80% 0.85% 0.75% 1.10% 0.50%(2) 0.60% 0.00%(2)
12b-1 Fees.......... 0.75% 0.75% 0.75% 0.75% 0.75% 0.50% 0.50% 0.30%
Shareholder Service
Fees................ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses
(after waiver)(1)... 0.37% 0.40% 0.37% 0.37% 0.65% 0.30% 0.30% 0.61%
Total Portfolio
Operating
Expenses(1)..... 2.07% 2.20% 2.22% 2.12% 2.75% 1.55% 1.65% 1.16%
</TABLE>

(1) The amounts shown in the tables reflect the Total Other Expenses
and Total Portfolio Operating Expenses each of the Portfolios
expects to incur during the current fiscal year. If Total Portfolio
Operating Expenses of any Portfolio materially exceed the amounts
shown above, Mentor Investment Group, Inc. intends to bear the
Portfolio's expenses to that extent. In the information presented
below where a Portfolio's expenses for the last fiscal year were
reduced by fee waivers, amounts shown in parenthesis reflect the
amounts of those expenses without giving effect to the fee waivers.
For their last fiscal year, the Portfolios' Total Other Expenses
for Class A shares were as follows: Capital Growth
Portfolio -- 0.65%; Income and Growth Portfolio -- 0.75%; Global
Portfolio -- 1.84%; Quality Income Portfolio -- 0.53% (0.54%);
Municipal Income -- 0.48%. For their last fiscal year, the
Portfolios' Total Other Expenses for Class B shares were as
follows: Growth Portfolio -- 0.31%; Capital Growth
Portfolio -- 0.66%; Strategy Portfolio -- 0.34% (0.42)%; Income and
Growth Portfolio -- 0.69%; Global Portfolio, -- 1.79% (1.84%);
Quality Income Portfolio -- 0.53% (0.55%); Municipal Income
Portfolio -- 0.51%; Short-Duration Income Portfolio -- 0.74%
(0.84%). Total Portfolio Operating Expenses for each of the
Portfolios during its last fiscal year were as follows: Growth
Portfolio: Class A -- NA; Class B -- 2.01%; Capital Growth
Portfolio: Class A -- 1.70%; Class B -- 2.46%; Strategy Portfolio:
Class A -- NA; Class B -- 2.19% (2.27%); Income and Growth
Portfolio: Class A -- 1.75%; Class B -- 2.44%; Quality Income
Portfolio: Class A -- 1.38% (1.39%); Class B -- 1.88%; (1.90%);
Municipal Income Portfolio: Class A -- 1.24% (1.33%); Class
B -- 1.74% (1.86%); Short-Duration Income Portfolio: Class A -- NA;
Class B -- 1.29% (1.89%); Global Portfolio: Class A -- 2.09%
(3.18%); Class B -- 2.79% (3.93%). For the last fiscal year, the
investment adviser to the Municipal Income and Global Portfolios
waived some or all of its Management Fees in respect of those
Portfolios, such that the Portfolios paid Management Fees at the
following rates: Municipal Income Portfolio -- 0.51%; Global
Portfolio -- 0.00%; in the absence of those waivers, the
Portfolios' Management Fees would have been 0.60% and 1.10%,
respectively.
3

<PAGE>
(2) In order to limit the Portfolios' operating expenses, the
investment advisers of each of the Quality Income and
Short-Duration Income Portfolios have agreed to limit their
compensation during the current fiscal year to the levels shown in
the tables; in the absence of such limitations, these Portfolios'
Management Fees and Total Portfolio Operating Expenses would be as
follows: Quality Income Portfolio -- Class A -- 0.60% and 1.15%,
respectively; Class B -- 0.60% and 1.65%, respectively;
Short-Duration Income Portfolio -- Class A -- 0.50% and 1.36%,
respectively; Class B -- 0.50% and 1.66%, respectively.
4

<PAGE>
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Portfolio............... $70 $21 $ 97 $65 $ 126 $ 111 $ 207 $ 240
Capital Growth Portfolio....... 71 22 101 69 132 118 221 253
Strategy Portfolio............. 72 23 101 69 133 119 223 255
Income and Growth Portfolio.... 71 22 98 66 128 114 213 245
Global Portfolio............... 77 28 117 85 159 145 277 308
Quality Income Portfolio....... 58 16 79 49 103 84 170 185
Municipal Income Portfolio..... 59 17 82 52 108 90 181 195
Short-Duration Income
Portfolio.................... 19 12 37 37 57 64 115 141
</TABLE>

You would pay the following expenses on a $1,000 investment assuming
redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Portfolio............... $70 $61 $ 97 $95 $ 126 $ 121 $ 207 $ 240
Capital Growth Portfolio....... 71 62 101 99 132 128 221 253
Strategy Portfolio............. 72 63 101 99 133 129 223 255
Income and Growth Portfolio.... 71 62 98 96 128 124 213 245
Global Portfolio............... 77 68 117 115 159 155 277 308
Quality Income Portfolio....... 58 56 79 79 103 94 170 185
Municipal Income Portfolio..... 59 57 82 82 108 100 181 195
Short-Duration Income
Portfolio.................... 19 52 37 67 57 74 115 141
</TABLE>

The tables are provided to help you understand the expenses of investing in
each of the Portfolios and your share of the operating expenses of each of
the Portfolios. The amounts shown in the table reflect the expenses each of
the Portfolios expects to incur during the current fiscal year. THE
EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE PERFORMANCE;
ACTUAL EXPENSES MAY VARY. Long-term Class B shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the rules of the National Association of Securities Dealers, Inc.
5

<PAGE>
FINANCIAL HIGHLIGHTS
MENTOR CAPITAL GROWTH, MENTOR QUALITY INCOME,
MENTOR MUNICIPAL INCOME, MENTOR INCOME AND GROWTH, AND
MENTOR PERPETUAL GLOBAL PORTFOLIOS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick LLP, The
Mentor Funds' independent auditors. Their report dated November 11,
1994 on the Portfolios' financial statements for the period ended
September 30, 1994 is included in the Annual Report dated September 30,
1994, which is incorporated by reference. This table should be read in
conjunction with each Portfolio's financial statements and notes
thereto, which are included in the Statement of Additional Information
and which may be obtained free of charge from The Mentor Funds. Until
April 12, 1995, Mentor Quality Income Portfolio was known as "Cambridge
Government Income Portfolio"; until that time, the Portfolio was
required, among other things, to invest at least 65% of its assets in
U.S. Government securities.
CLASS A SHARES
<TABLE>
<CAPTION>
MENTOR MUNICIPAL
INCOME PORTFOLIO
MENTOR CAPITAL GROWTH PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO (FORMERLY CAMBRIDGE
MUNICIPAL INCOME
(FORMERLY CAMBRIDGE CAPITAL (FORMERLY CAMBRIDGE GOVERNMENT PORTFOLIO)
GROWTH PORTFOLIO) INCOME PORTFOLIO) YEAR ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1992* 1994 1993 1992* 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD...... $ 15.26 $ 14.21 $ 14.18 $ 14.04 $ 14.39 $ 14.30 $ 16.05 $ 14.76
Income from investment
operations
Net investment income
(loss)............... 0.09 0.14 0.08 0.84 1.06 0.44 0.82 0.92
Net realized and
unrealized gain
(loss) on
investments.......... (0.30) 1.02 0.03 (1.30) (0.31) 0.09 (1.54) 1.32
Total from investment
operations........... (0.21) 1.16 0.11 (0.46) 0.75 0.53 (0.72) 2.24
Less distributions
Dividends from
income............... (0.04) (0.11) (0.08) (0.83) (1.06) (0.44) (0.81) (0.92)
Distributions from
capital gains........ (0.13) -- -- -- -- -- (0.10) --
Distributions in excess
of net investment
income............... -- -- -- -- (0.04) -- -- (0.03)
NET ASSET VALUE PER SHARE,
END OF PERIOD............ $ 14.88 $ 15.26 $ 14.21 $ 12.75 $ 14.04 $ 14.39 $ 14.42 $ 16.05
Total return.............. (1.37%) 8.21% 0.78% (3.39%) 5.41% 3.37% (4.83%) 16.00%
Ratios to Average Net
Assets(a)
Expenses................. 1.70% 1.49% 1.14% 1.38% 1.04% 0.36% 1.24% 0.71%
Net investment income
(loss)................. 0.53% 0.96% 1.54% 6.33% 7.31% 8.00% 5.43% 5.92%
Expense adjustment(b).... -- 0.10% 0.29% 0.01% 0.18% 0.85% 0.09% 0.68%
Supplemental Data
Net assets, end of period
(000 omitted).......... $21,181 $31,360 $20,864 $30,142 $ 47,780 $36,740 $25,056 $29,245
Portfolio turnover
rate................... 149% 192% 61% 455% 102% 9% 87% 88%
<CAPTION>

MENTOR INCOME AND

GROWTH
PORTFOLIO (FORMERLY
MENTOR PERPETUAL
GLOBAL PORTFOLIO
CAMBRIDGE INCOME (FORMERLY
AND GROWTH CAMBRIDGE GLOBAL
PORTFOLIO) PORTFOLIO) YEAR
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1992* 1994 1993** 1994***
<S> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD...... $ 14.29 $ 14.88 $ 14.14 $ 14.18
Income from investment
operations
Net investment income
(loss)............... 0.32 0.31 0.09 (0.01)
Net realized and
unrealized gain
(loss) on
investments.......... 0.47 0.64 0.73 0.06
Total from investment
operations........... 0.79 0.95 0.82 0.05
Less distributions
Dividends from
income............... (0.32) (0.30) (0.08) --
Distributions from
capital gains........ -- (0.26) -- --
Distributions in excess
of net investment
income............... -- -- -- --
NET ASSET VALUE PER SHARE,
END OF PERIOD............ $ 14.76 $ 15.27 $ 14.88 $ 14.23
Total return.............. 5.34% 6.54% 5.54% 0.35%
Ratios to Average Net
Assets(a)
Expenses................. 0.00% 1.75% 1.56% 2.09%
Net investment income
(loss)................. 6.21% 2.20% 2.35% (0.10%)
Expense adjustment(b).... 1.26% -- 0.38% 1.09%
Supplemental Data
Net assets, end of period
(000 omitted).......... $18,801 $17,773 $ 9,849 $ 8,882
Portfolio turnover
rate................... 0% 78% 13% 2%
</TABLE>

* Reflects operations for the period from April 29, 1992 (date of
initial public investment) to September 30, 1992.
** Reflects operations for the period from May 24, 1993 (date of
initial public investment) to September 30, 1993.
*** Reflects operations for the period from March 29, 1994 (date of
initial public investment) to September 30, 1994.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses.
5

<PAGE>
CLASS B SHARES
<TABLE>
<CAPTION>
MENTOR MUNICIPAL
INCOME PORTFOLIO
MENTOR CAPITAL GROWTH PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO (FORMERLY CAMBRIDGE
MUNICIPAL INCOME
(FORMERLY CAMBRIDGE CAPITAL (FORMERLY CAMBRIDGE GOVERNMENT PORTFOLIO)
GROWTH PORTFOLIO) INCOME PORTFOLIO) YEAR ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1992* 1994 1993 1992* 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD...... $ 15.23 $ 14.22 $ 14.18 $ 14.06 $ 14.40 $ 14.30 $ 16.06 $ 14.78
Income from investment
operations
Net investment income
(loss)............... (0.04) 0.05 0.46 0.82 0.99 0.41 0.74 0.82
Net realized and
unrealized gain
(loss) on
investments.......... (0.26) 1.02 0.04 (1.37) (0.31) 0.10 (1.54) 1.32
Total from investment
operations........... (0.30) 1.07 0.50 (0.55) 0.68 0.51 (0.80) 2.14
Less distributions
Dividends from
income............... -- (0.05) (0.46) (0.75) (0.99) (0.41) (0.73) (0.82)
Distributions from
capital gains........ (0.13) -- -- -- -- -- (0.10) --
Distributions in excess
of net investment
income............... -- (0.01) -- -- (0.03) -- -- (0.04)
NET ASSET VALUE PER SHARE,
END OF PERIOD............ $ 14.80 $ 15.23 $ 14.22 $ 12.76 $ 14.06 $ 14.40 $ 14.43 $ 16.06
Total return.............. (2.00%) 7.52% 0.61% (3.97%) 4.86% 3.24% (5.34%) 15.27%
Ratios to Average Net
Assets(a)
Expenses................. 2.46% 2.24% 1.86% 1.88% 1.54% 0.83% 1.74% 1.21%
Net investment income
(loss)................. (0.22%) 0.21% 0.83% 6.21% 6.81% 7.53% 4.93% 5.42%
Expense adjustment(b).... -- 0.10% 0.30% 0.02% 0.18% 0.84% 0.12% 0.68%
Supplemental Data
Net assets, end of period
(000 omitted).......... $41,106 $57,030 $25,468 $77,888 $127,346 $65,661 $46,157 $50,976
Portfolio turnover
rate................... 149% 192% 61% 455% 102% 9% 87% 88%
<CAPTION>

MENTOR INCOME AND

GROWTH
PORTFOLIO (FORMERLY
MENTOR PERPETUAL
GLOBAL PORTFOLIO
CAMBRIDGE INCOME (FORMERLY
AND GROWTH CAMBRIDGE GLOBAL
PORTFOLIO) PORTFOLIO)
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1992* 1994 1993** 1994***
<S> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD...... $ 14.29 $ 14.91 $ 14.14 $ 14.18
Income from investment
operations
Net investment income
(loss)............... 0.29 0.21 0.05 (0.04)
Net realized and
unrealized gain
(loss) on
investments.......... 0.49 0.61 0.77 0.01
Total from investment
operations........... 0.78 0.82 0.82 (0.03)
Less distributions
Dividends from
income............... (0.29) (0.19) (0.05) --
Distributions from
capital gains........ -- (0.26) -- --
Distributions in excess
of net investment
income............... -- -- -- --
NET ASSET VALUE PER SHARE,
END OF PERIOD............ $ 14.78 $ 15.28 $ 14.91 $ 14.15
Total return.............. 5.28% 5.66% 5.54% (0.21%)
Ratios to Average Net
Assets(a)
Expenses................. 0.50% 2.44% 2.31% 2.79%
Net investment income
(loss)................. 5.80% 1.51% 1.60% (0.82%)
Expense adjustment(b).... 1.26% -- 0.38% (1.14%)
Supplemental Data
Net assets, end of period
(000 omitted).......... $24,265 $43,219 $18,127 $ 7,987
Portfolio turnover
rate................... 0% 78% 13% 2%
</TABLE>

<PAGE>
FINANCIAL HIGHLIGHTS
MENTOR GROWTH, MENTOR STRATEGY, AND
MENTOR SHORT-DURATION INCOME PORTFOLIOS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick LLP.
Their report dated February 3, 1995 on the following Portfolios'
financial statements for the period ended December 31, 1994 is included
in the Annual Report dated December 31, 1994. This table should be read
in conjunction with each Portfolio's financial statements and notes
thereto, which are included in the Statement of Additional Information
and which may be obtained free of charge from The Mentor Funds. The
Growth, Strategy, and Short-Duration Income Portfolios are successors
to the Mentor Growth, Strategy, and Short-Duration Income Funds, each
of which was a series of shares of beneficial interest of Mentor Series
Trust, a Massachusetts business trust. Each of those Funds offered only
one class of shares during the period for which information is
presented.
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
NINE MOS.
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER
1994 1993 1992 1991 1990 1989 1988 31, 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share
Operating
Performance
NET ASSET
VALUE,
BEGINNING
OF
PERIOD..... $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54 $ 7.45 $ 9.91
Net
investment
income
(loss)..... (0.15) (0.08) (0.06) (0.09) 0.02 0.13 0.01 (0.01)
Net realized
and
unrealized
gain (loss)
on
investments... (0.47) 2.07 1.94 4.30 (1.10) 1.35 1.24 (2.32)
Total from
investment
operations... (0.62) 1.99 1.88 4.21 (1.08) 1.48 1.25 (2.33)
Less
Distributions
Dividends
from net
investment
income... -- -- -- -- (0.05) (0.12) (0.01) --
Distributions
from
capital
gains.... (1.00) (1.02) (1.23) (0.42) (0.13) (0.27) (0.15) (0.13)
Distributions
in excess
of
capital
gains.... (0.01) -- -- -- -- -- -- --
Total
distributions.. (1.01) (1.02) (1.23) (0.42) (0.18) (0.39) (0.16) (0.13)
NET ASSET
VALUE, END
OF
PERIOD..... $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54 $ 7.45
Total
return..... (4.48%) 15.60% 15.46% 50.30% (11.21%) 17.33% 16.78% (23.47%)
Ratios/Supplemental
Data
Net assets,
end of
period, (in
000's)..... $190,126 $186,978 $136,053 $108,719 $ 83,540 $107,315 $ 96,425 $ 92,763
Ratio of
expenses to
average net
assets..... 2.01% 2.02% 2.05% 2.17% 2.25% 2.24% 2.19% 2.18%(a)
Ratio of net
investment
income
(loss) to
average net
assets..... (1.20%) (1.12%) (0.76%) (0.80%) 0.26% 1.36% 0.16% (0.19%)(a)
Portfolio
turnover
rate..... 77% 64% 50% 40% 50% 26% 31% 33%
<CAPTION>
MENTOR
SHORT-
MENTOR STRATEGY DURATION
PORTFOLIO INCOME
YEAR YEAR PORTFOLIO
ENDED PERIOD ENDED 10/29/93* PERIOD
MARCH 4/16/85* TO DECEMBER TO 04/29/94* TO
31, 1987 3/31/86 31, 1994 12/31/93 12/31/94
<S> <C> <C> <C> <C> <C>
Per Share
Operating
Performance
NET ASSET
VALUE,
BEGINNING
OF
PERIOD..... $ 9.34 $ 6.67 $ 12.70 $ 12.50 $ 12.50
Net
investment
income
(loss)..... (0.01) (0.03) (0.06) -- 0.41
Net realized
and
unrealized
gain (loss)
on
investments 0.92 2.70 (0.40) 0.20 (0.29)
Total from
investment

operations. 0.91 2.67 (0.46) 0.20 0.12
Less
Distribution
Dividends
from net
investment
income... -- -- -- -- (0.41)

Distributio
from
capital
gains.... (0.34) -- -- -- (0.03)

Distributio
in excess
of
capital
gains.... -- --
Total
distribution (0.34) -- -- -- (0.44)
NET ASSET
VALUE, END
OF
PERIOD..... 9.91 $ 9.34 $ 12.24 $ 12.70 $ 12.18
Total
return..... 9.74% 41.77% (3.61%) 1.60% 0.95%
Ratios/Suppl
Data
Net assets,
end of
period, (in
000's)..... $113,317 $ 63,767 $ 179,274 $122,177 $ 17,144
Ratio of
expenses to
average net
assets..... 2.16% 2.43%(a) 2.19% 2.06%(a) 1.29%(a)
Ratio of net
investment
income
(loss) to
average net
assets..... (0.18%) (0.53%)(a) (0.54%) 0.08%(a) 4.90%(a)
Portfolio
turnover
rate..... 34% 35% 143% 0% 166%
</TABLE>

* Commencement of operations
(a) Determined on an annualized basis
7

<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Mentor Funds is offering shares of eight Portfolios by this Prospectus.
Each Portfolio has a different investment objective or objectives which it
pursues through the investment policies described below. The differences in
objectives and policies among the Portfolios can be expected to affect the
investment return of each Portfolio and the degree of market and financial risk
of an investment in each Portfolio. For a discussion of certain investment
practices in which the Portfolios may engage, and the risks they may entail, see
"Other Investment Practices" below. Except for the investment policies
designated in this Prospectus or the Statement of Additional Information as
fundamental, the investment policies described herein are not fundamental and
may be changed by approval of the Trustees without shareholder approval. There
can, of course, be no assurance that any Portfolio will achieve its investment
objective. The investment objectives of the Portfolios, other than those of the
Strategy Portfolio and the Short-Duration Income Portfolio, are fundamental
policies and may not be changed without shareholder approval.
Any percentage limitation on a Portfolio's investments will apply only at
the time of investment; a Portfolio would not be considered to have violated any
such limitation, unless an excess or deficiency occurs or exists immediately
after, and as a result of, an investment. In addition, a Portfolio will not
necessarily dispose of a security when its rating is reduced below any minimum
rating applicable to investments by the Portfolio, although the investment
adviser or sub-adviser of the Portfolio will monitor the investment to determine
whether continued investment in the security will assist in meeting the
Portfolio's investment objective.
MENTOR GROWTH PORTFOLIO (FORMERLY, MENTOR GROWTH FUND)
INVESTMENT ADVISER: CHARTER ASSET MANAGEMENT, INC. ("CHARTER")
The Growth Portfolio's investment objective is long-term capital growth.
Although the Portfolio may receive current income from dividends, interest, and
other sources, income is only an incidental consideration.
The Portfolio attempts to achieve long-term capital growth by investing in
a diversified portfolio of securities. Under normal circumstances at least 75%
of the Portfolio's assets will be invested in common stocks of companies
domiciled in or located throughout the United States. Although the Portfolio may
invest in companies of any size, the Portfolio invests principally in common
stocks of companies with market capitalizations in excess of $30 million which,
in the opinion of Charter, have demonstrated earnings, asset values, or growth
potential not yet reflected in their market price. A key indication of such
undervaluation considered by Charter is earnings growth which is above average
as compared to the S&P 500 Index. Other important factors in selecting
investments include a strong balance sheet and product leadership in niche
markets. Charter believes that such investments may offer better than average
potential for long-term capital growth.
MENTOR CAPITAL GROWTH PORTFOLIO (FORMERLY, CAMBRIDGE CAPITAL GROWTH PORTFOLIO)
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC. ("COMMONWEALTH ADVISORS")
The investment objective of the Capital Growth Portfolio is to provide
long-term appreciation of capital. The Portfolio may invest in a wide variety of
securities which Commonwealth Advisors believes offers the potential for capital
appreciation over both the intermediate and long term. The Portfolio does not
invest for current income.
The Portfolio invests primarily in common stocks of companies believed by
Commonwealth Advisors to have potential for capital appreciation. The Portfolio
may invest without limit in preferred stocks, investment-grade bonds,
convertible preferred stocks, and convertible debentures and any other class or
type of security
8

<PAGE>
Commonwealth Advisors believes offers the potential for capital appreciation. In
selecting investments, Commonwealth Advisors will attempt to identify securities
it believes will provide capital appreciation over the intermediate or long term
due to change in the financial condition of issuers, changes in financial
condition, or other factors. The Portfolio also may invest in fixed-income
securities, and cash or money market investments, for temporary defensive
purposes.
MENTOR STRATEGY PORTFOLIO (FORMERLY, MENTOR STRATEGY FUND)
INVESTMENT ADVISER: WELLESLEY ADVISORS, INC. ("WELLESLEY")
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Wellesley actively
allocates the Portfolio's assets among the major asset categories of equity
securities, fixed-income securities, and money market instruments. The Portfolio
will normally invest some portion of its assets in each asset category, but may
invest without limit in any asset category. Total return consists of current
income (including dividends, interest, and, in the case of discounted
instruments, discount accruals) and capital appreciation (including realized and
unrealized capital gains and losses).
Wellesley believes that the Portfolio has the potential to achieve
above-average investment returns at comparatively lower risk by actively
allocating its resources among the equity, debt, and money market sectors of the
market as opposed to relying solely on just one market sector. For example,
Wellesley may at times believe that the equity market holds a higher potential
for total return than the debt market and that a relatively large portion of the
Portfolio's assets should be allocated to the equity market sector. The reverse
would be true at times when Wellesley believes that the potential for total
return in the bond market is greater than that in the equity market. Wellesley
might also allocate the Portfolio's investments to short-term bonds and money
market instruments in order to earn current return and to reduce the potential
adverse effect of declines in the bond and equity markets. After determining the
portions of the Portfolio's assets to be invested in the various market sectors,
Wellesley attempts to select the securities of companies within those sectors
offering potential for above-average total return. The achievement of the
Portfolio's investment objective depends upon, among other things, the ability
of Wellesley to assess correctly the effects of economic and market trends on
different sectors of the market. The Portfolio's investments may include both
securities of U.S. issuers and securities traded principally in foreign markets.
The Portfolio may invest without limit in foreign securities. See "Other
Investment Practices -- Foreign Securities" for a description of risks
associated with investments in such securities.
Within the equity sector, Wellesley actively allocates the Portfolio's
assets to those industries and issuers it expects to benefit from major market
trends or which it otherwise believes offer the potential for above-average
total return. The Portfolio may purchase equity securities (including
convertible debt obligations and convertible preferred stock) sold on the New
York, American, and other U.S. or foreign stock exchanges and in the over-the-
counter market.
Within the fixed-income sector, Wellesley seeks to maximize the return on
its investments by adjusting maturities and coupon rates as well as by
exploiting yield differentials among different types of investment-grade
securities. The Portfolio may invest in debt securities of any maturity,
preferred stocks, and other fixed-income instruments, including, for example,
U.S. Government securities and corporate debt securities (including zero-coupon
securities). A substantial portion of the Portfolio's investments in the
fixed-income sector may be in mortgage-backed securities, including
collateralized mortgage obligations ("CMOs") and certain other stripped
mortgage-backed securities, which have certain special risks. See "Other
Investment Practices -- Mortgage-backed securities; other asset-backed
securities" and " -- Other mortgage-related securities" for a description of
these risks. The Portfolio will only invest in debt securities which are rated
at the time of purchase Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P") or
9

<PAGE>
which, if unrated, are deemed by Wellesley to be of comparable quality. While
bonds rated Baa or BBB are considered to be of investment grade, they have
speculative characteristics as well. A description of securities ratings is
contained in the Appendix to this Prospectus.
The money market portion of the Portfolio will contain short-term
fixed-income securities issued by private and governmental institutions. Such
securities may include, for example, U.S. Government securities; bank
obligations; Eurodollar certificates of deposit issued by foreign branches of
domestic banks; obligations of savings institutions; fully insured certificates
of deposit; and commercial paper rated within the two highest grades by S&P or
the highest grade by Moody's or, if not rated, issued by a company having an
outstanding debt issue rated at least Aa by Moody's or AA by S&P.
MENTOR INCOME AND GROWTH PORTFOLIO (FORMERLY, CAMBRIDGE INCOME AND GROWTH
PORTFOLIO)
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
SUB-ADVISER: WELLINGTON MANAGEMENT COMPANY ("WMC")
The investment objective of the Income and Growth Portfolio is to provide a
conservative combination of income and growth of capital, consistent with
capital protection. The Portfolio invests in a diversified portfolio of equity
securities of companies WMC believes exhibit sound fundamental characteristics
and in investment-grade fixed-income securities and U.S. Government securities,
as described below.
WMC will manage the allocation of assets among asset classes based upon its
analysis of economic conditions, relative fundamental values and the
attractiveness of each asset class, and expected future returns of each asset
class. The Portfolio will normally have some portion of its assets invested in
each asset class at all times but may invest without limit in any asset class.
The Portfolio may invest in a wide variety of equity securities, such as
common stocks and preferred stocks, as well as debt securities convertible into
equity securities or that are accompanied by warrants or other equity
securities. In selecting equity investments, WMC will attempt to identify
securities of out-of-favor companies which WMC believes are undervalued. Within
the equity asset class, the Portfolio seeks to achieve long-term appreciation of
capital and a moderate income level by selecting investments in out-of-favor
companies with sound fundamentals. These decisions are based primarily on WMC's
fundamental research and security valuations.
Within the fixed-income asset class, WMC seeks to invest in a portfolio
that provides as high a level of current income as is consistent with prudent
investment risk. The Portfolio may invest in debt securities of any maturity,
preferred stocks, and other fixed-income instruments, including, for example,
U.S. Government securities and corporate debt securities (including zero-coupon
securities). The Portfolio will only invest in debt securities which are rated
at the time of purchase Baa or better by Moody's or BBB or better by S&P or
which, if unrated, are deemed by WMC to be of comparable quality. While
fixed-income securities rated Baa or BBB are considered to be of investment
grade, they have speculative characteristics as well. A description of
securities ratings is contained in the Appendix to this Prospectus.
The Portfolio may invest up to 10% of its assets in securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests in real estate. The Portfolio will limit its investment in
real estate investment trusts to 10% of its total assets. Such investments may
involve many of the risks of direct investment in real estate, such as declines
in the value of real estate, risks related to general and local economic
conditions, and adverse changes in interest rates. Other risks associated with
real estate investment trusts include lack of diversification, borrower default,
and voluntary liquidation.
10

<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO (FORMERLY, CAMBRIDGE GLOBAL PORTFOLIO)
INVESTMENT ADVISER: MENTOR PERPETUAL ADVISORS, L.C. ("MENTOR PERPETUAL")
The investment objective of the Global Portfolio is to seek long-term
growth of capital through a diversified portfolio of marketable securities made
up primarily of equity securities, including common stocks, preferred
stocks,securities convertible into common stocks, and warrants. The Portfolio
may also invest in debt securities and other fixed-income securities of private
or governmental issuers (including zero-coupon securities) which Mentor
Perpetual believes to be consistent with the Portfolio's objective.
It is expected that the Portfolio's investments will normally be spread
broadly around the world, although (except as described in the next sentence)
there is no limit on the amount of the Portfolio's assets that may be invested
in any single country. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in securities of at least three
countries, one of which may be the United States. The Portfolio may invest all
of its assets in securities of issuers outside the United States, and for
temporary defensive purposes may at times invest all of its assets in securities
of U.S. issuers. To the extent that the Portfolio invests a substantial portion
of its assets in securities of issuers located in a single country, it will be
more susceptible to adverse economic, business, political, or regulatory
conditions in or affecting that country than if it were to invest in a
geographically more diverse portfolio. The Portfolio may invest in closed-end
investment companies holding foreign securities. The Portfolio also may hold a
portion of its assets in cash or cash equivalents, including foreign and
domestic money market instruments.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally although
those risks may be increased due to conditions in such markets. For example, the
securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide all of the conveniences or protections provided by securities
exchanges in more developed markets. The Portfolio may also invest a substantial
portion of its assets in securities traded in the over-the-counter markets and
not on any exchange, which may affect the liquidity of the investment and expose
the Portfolio to the credit risk of its counteparties in trading those
investments. See "Other Investment Practices -- Foreign securities."
Mentor Perpetual may seek investment opportunities in securities of large,
widely traded companies as well as securities of small, less well known
companies. Small companies may present greater opportunities for investment
return, but may also involve greater risks. They may have limited product lines,
markets, or financial resources, or may depend on a limited management group.
Their securities may trade less frequently and in limited volume. As a result
the prices of these securities may fluctuate more than prices of securities of
larger, more established companies.
Except as described below, debt and fixed-income securities in which the
Portfolio may invest will be investment-grade securities or those of equivalent
quality as determined by Perpetual. The Portfolio may invest up to 5% of its
total assets in debt securities rated Baa or below by Moody's, or BBB or below
by S&P, or deemed by Mentor Perpetual to be of comparable quality, and may
invest in securities rated as low as C by Moody's or D by S&P. Securities rated
below investment grade are commonly referred to as "junk bonds" and are
predominately speculative, and securities rated investment grade (BBB/Baa or
above) may have speculative characteristics. Securities rated D may be in
default with respect to payment of principal or interest.
11

<PAGE>
MENTOR QUALITY INCOME PORTFOLIO (FORMERLY, CAMBRIDGE GOVERNMENT INCOME
PORTFOLIO)
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
The Quality Income Portfolio's investment objective is to seek high current
income consistent with what Commonwealth Advisors believes to be prudent risk.
The Portfolio may invest in debt securities, including both U.S. Government and
corporate obligations, and in other income-producing securities, including
preferred stocks and dividend-paying common stocks. The Portfolio may also hold
a portion of its assets in cash or money market instruments. There can, of
course, be no assurance that the Portfolio will achieve its investment
objective.
Corporate debt obligations and preferred stocks in which the Portfolio may
invest will be of investment grade. A security will be deemed to be of
"investment grade" if, at the time of investment by the Portfolio, it is rated
at least Baa3 by Moody's or BBB- by Standard & Poor's or at a comparable rating
by another nationally recognized rating organization, or, if unrated, determined
by Commonwealth Advisors to be of comparable quality. Securities rated Baa or
BBB lack outstanding investment characteristics and have speculative
characteristics and are subject to greater credit and market risks than
higher-rated securities. The Portfolio will normally invest at least 80% of its
assets in U.S. Government securities and in other securities rated at least A by
Moody's or Standard & Poor's or at a comparable rating by another nationally
recognized rating organization, or, if unrated, determined by Commonwealth
Advisors to be of comparable quality.
Commonwealth Advisors may take full advantage of the entire range of
maturities of the securities in which the Portfolio may invest and may adjust
the average maturity of the Portfolio's securities from time to time, depending
on its assessment of relative yields on securities of different maturities and
expectations of future changes in interest rates. The Portfolio may invest in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including collateralized mortgage obligations and
certain stripped mortgage-backed securities (including certain "residual"
interests), which involve certain risks. See "Other Investment
Practices -- Mortgage-backed securities; other asset-backed securities" and
" -- Other mortgage-related securities" below. The Portfolio may also engage in
a variety of interest rate transactions, including swaps, caps, floors and
collars. See "Other Investment Practices -- Interest rate transactions" below
for a description of risks associated with these transactions.
MENTOR MUNICIPAL INCOME PORTFOLIO (FORMERLY, CAMBRIDGE MUNICIPAL INCOME
PORTFOLIO)
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
SUB-ADVISER: VAN KAMPEN/AMERICAN CAPITAL MANAGEMENT, INC. ("VAN KAMPEN")
The investment objective of the Municipal Income Portfolio is to provide
investors with a high level of current income exempt from federal regular income
tax, consistent with preservation of capital. Under normal market conditions,
the Portfolio will invest at least 80% of its total assets in tax-exempt
municipal securities rated investment grade, or deemed by Van Kampen to be of
comparable quality, at the time of investment. The Portfolio may invest a
substantial portion of its assets in municipal securities that pay interest that
is a tax preference item under the federal alternative minimum tax. The
Portfolio may not be a suitable investment for investors who are already subject
to federal alternative minimum tax or who would become subject to federal
alternative minimum tax as a result of an investment in the Portfolio.
Tax-exempt municipal securities are debt obligations issued by or on behalf
of the governments of states (including the District of Columbia) and United
States territories or possessions, and their political subdivisions, agencies,
and instrumentalities, and certain interstate agencies, the interest on which,
in the opinion of bond counsel or other counsel to the issuer of such
securities, is exempt from federal income tax. The Portfolio may
12

<PAGE>
also invest up to 10% of its assets in tax-exempt money market funds, which will
be considered tax-exempt municipal securities for this purpose.
Up to 20% of the Portfolio's total assets may be invested in tax-exempt
municipal securities rated between BB and B-(inclusive) by S&P or between Ba and
B3 (inclusive) by Moody's (or equivalently rated short-term obligations) and
unrated tax-exempt securities that Van Kampen considers to be of comparable
quality. These securities are below investment grade and are considered to be of
poor standing and predominantly speculative. Assurance of interest and principal
payments or of maintenance of other terms of the securities' contract over any
long period of time may be small. The Portfolio will not invest in securities
rated below B- by S&P or below B3 by Moody's at the time of purchase. For more
detailed information about the risks associated with investing in lower-rated
securities, see "Risks of lower-grade securities" below. The Portfolio may hold
a portion of its assets in cash or money market instruments.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are usually payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Industrial development bonds are usually revenue bonds, the credit quality of
which is normally directly related to the credit standing of the industrial user
involved.
There are, in addition, a variety of hybrid and special types of municipal
securities, including variable rate securities, municipal notes, and municipal
leases. Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize fluctuation in values of
the instruments. Municipal notes include tax, revenue, and bond anticipation
notes of short maturity, generally less than three years, which are issued to
obtain temporary funds for various public purposes. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered not to be liquid.
They may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation certificate on any of the above.
No more than 5% of the net assets of the Portfolio will be invested in municipal
leases. A more detailed description of the types of municipal securities in
which the Portfolio may invest is included in the Statement of Additional
Information.
RISKS OF LOWER-GRADE SECURITIES. Investors should carefully consider the
risks of owning shares of a mutual fund which invests in lower-grade securities,
commonly known as "junk bonds", before making an investment in the Portfolio.
The higher yield on certain securities held by the Portfolio reflects a greater
possibility that the financial condition of the issuer, or adverse changes in
general economic conditions, or both, may impair the ability of the issuer to
make payments of income and principal. Lower-grade securities generally involve
greater credit risk than higher-grade municipal securities and are more
sensitive to adverse economic changes, significant increases in interest rates,
and individual issuer developments. The inability (or perceived inability) of
issuers to make timely payments of interest and principal would likely make the
values of securities held by the Portfolio more volatile and could limit the
Portfolio's ability to sell its securities at prices approximating the values
the Portfolio had placed on such securities. In the absence of a liquid trading
market for securities held by it, the Portfolio may be unable at times to
establish the fair value of such securities and may not be able to dispose of
such securities in a timely manner at a price which reflects the value of such
securities. The rating assigned to a security by Moody's or S&P does not reflect
an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security. For more information about the
rating services' descriptions of lower-rated municipal securities, see the
Appendix to this Prospectus.
13

<PAGE>
Van Kampen seeks to minimize the risks involved in investing in lower-grade
securities through diversification and careful investment analysis. However, the
amount of information about the financial condition of an issuer of lower-grade
municipal securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. When the Portfolio invests in
tax exempt securities in the lower rating categories, the achievement of the
Portfolio's goals is more dependent on Van Kampen's ability than would be the
case if the Portfolio were investing in securities in the higher rating
categories. To the extent that there is no established retail market for some of
the lower-grade securities in which the Portfolio may invest, trading in such
securities may be relatively inactive. During periods of reduced market
liquidity and in the absence of readily available market quotations for
lower-grade municipal securities held by the Portfolio, the valuation of the
Portfolio's securities becomes more difficult and the use of judgment may play a
greater role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established market exists as compared with the effects on securities for which
such a market does exist. Further, the Portfolio may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established market does exist.
CONCENTRATION. The Portfolio generally will not invest more than 25% of its
total assets in any one industry. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that the Portfolio may
invest more than 25% of its assets in a broader segment of the municipal
securities market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations, or airport revenue
obligations, if Van Kampen determines that the yields available from obligations
in a particular segment of the market justify the additional risks associated
with such concentration. Although such obligations could be supported by the
credit of governmental users, or by the credit of nongovernmental users engaged
in a number of industries, economic, business, political, and other developments
generally affecting the revenues of such users (for example, proposed
legislation or pending court decisions affecting the financing of such projects
and market factors affecting the demand for their services or products) may have
a general adverse effect on all municipal securities in such a market segment.
The Portfolio reserves the right to invest more than 25% of its assets in
industrial development or private activity bonds or in issuers located in any
individual state, although Van Kampen has no present intention to invest more
than 25% of the Portfolio's assets in issuers located in the same state. If the
Portfolio were to invest more than 25% of its assets in issuers located in one
individual state, it would be more susceptible to adverse economic, business, or
regulatory conditions in or affecting that state than if it were to invest in a
geographically more diverse portfolio.
MENTOR SHORT-DURATION INCOME PORTFOLIO (FORMERLY, MENTOR SHORT-DURATION INCOME
FUND)
INVESTMENT ADVISER: COMMONWEALTH INVESTMENT COUNSEL, INC. ("COMMONWEALTH
INVESTMENT COUNSEL")
The Short-Duration Income Portfolio's investment objective is to seek
current income. As a secondary objective, the Portfolio seeks preservation of
capital, to the extent consistent with its objective of current income. The
Portfolio will normally invest at least 65% of its assets in debt securities
with a "duration" of three years or less. The Portfolio may invest in U.S.
Government securities and debt obligations of private issuers and in preferred
stocks and dividend-paying common stocks, and may hold a portion of its assets
in cash or money market instruments.
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<PAGE>
The Portfolio may at times invest a substantial portion of its assets in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs and certain other stripped
mortgage-backed securities (including certain "residual" interests). See "Other
Investment Practices -- Mortgage-backed securities; other asset-backed
securities" and " -- Other mortgage-related securities" below for a description
of these securities and risks they may entail. The Portfolio may also invest a
substantial portion of its assets in securities representing secured or
unsecured interests in other types of assets, such as automobile finance or
credit card receivables.
Traditionally, a debt security's "term to maturity" has been used to
evaluate the sensitivity of the security's price to changes in interest rates
(the security's interest-rate "volatility"). However, a security's term to
maturity measures only the period of time until the last payment of principal or
interest on the security, and does not take into account the timing of the
various payments of principal or interest to be made prior to the instrument's
maturity. By contrast, "duration" is a measure of the full stream of payments to
be received on a debt instrument, including both interest and principal
payments, based on their present values. Duration measures the periods of time
between the present time and the time when the various interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by their present values.
There are some situations where even the standard duration calculation does
not properly reflect the interest-rate volatility of a security. For example,
floating and variable rate securities often have final maturities of ten years
or more; however, their interest-rate volatility is determined based principally
on the period of time until their interest rates are reset and on the terms on
which they may be reset. Another example where a security's interest-rate
volatility is not properly measured by its duration is the case of mortgage
securities. The stated final maturity of such securities may be up to 30 years,
but the actual cash flow on the securities will be determined by the prepayment
rates on the underlying mortgage loans. Therefore, the duration of such a
security can change if prepayment rates change. In these and other similar
situations, Commonwealth Investment Counsel will estimate a security's duration
using sophisticated analytical techniques that take into account such factors as
the expected prepayment rate on the security and how the prepayment rate might
change under various market conditions.
The Portfolio will invest in debt securities and preferred stocks of
investment grade, and the Portfolio will seek under normal market conditions to
maintain a portfolio of securities with a dollar-weighted average rating of A or
better. A security will be considered to be of "investment grade" if, at the
time of investment by the Portfolio, it is rated at least Baa3 by Moody's or
BBB- by S&P or the equivalent by another nationally recognized rating
organization or, if unrated, determined by Commonwealth Investment Counsel to be
of comparable quality. Securities rated Baa or BBB lack outstanding investment
characteristics and have speculative characteristics and are subject to greater
credit and market risks than higher-rated securities. A description of
securities ratings is contained in the Appendix to this Prospectus.
The Portfolio may also engage in a variety of interest rate transactions,
including swaps, caps, floors, and collars. See "Other Investment
Practices -- Interest rate transactions" below for a description of risks
associated with these transactions.
OTHER INVESTMENT PRACTICES
Each of the Portfolios (except as noted below) may engage in the other
investment practices described below. See the Statement of Additional
Information for a more detailed description of these practices and certain risks
they may involve.
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MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. Each of the
Strategy, Short-Duration Income, Quality Income, and Income and Growth
Portfolios may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including CMOs and, in the
case of the Quality Income and Short-Duration Income Portfolios, "residual"
interests therein (described more fully below). Interest and principal payments
on the mortgages underlying mortgage-backed securities are passed through to the
holders of the mortgage-backed securities. Mortgage-backed securities currently
offer yields higher than those available from many other types of fixed-income
securities but because of their prepayment aspects, their price volatility and
yield characteristics will change based on changes in prepayment rates. As a
result, mortgage-backed securities are less effective than other securities as a
means of "locking in" long-term interest rates. Generally, prepayment rates
increase if interest rates fall and decrease if interest rates rise. For many
types of mortgage-backed securities, this can result in unfavorable changes in
price and yield characteristics in response to changes in interest rates and
other market conditions. For example, as a result of their prepayment aspects,
mortgage-backed securities have less potential for capital appreciation during
periods of declining interest rates than other fixed-income securities of
comparable maturities, although such obligations may have a comparable risk of
decline in market value during periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Each of the Strategy, Short-Duration Income, and Quality Income Portfolios
may invest in stripped mortgage-backed securities. Stripped mortgage-backed
securities are usually structured with two classes that receive different
portions of the interest and principal distributions on a pool of mortgage
assets. A Portfolio may invest in both the interest-only -- or "IO" -- class
and the principal-only -- or "PO" -- class. The yield to maturity and price of
an IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's net
asset value. This would typically be the case in an environment of falling
interest rates. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may under some circumstances
fail to fully recoup its initial investment in these securities. Conversely, POs
tend to increase in value if prepayments are greater than anticipated and
decline if prepayments are slower than anticipated. The secondary market for
stripped mortgage-backed securities may be more volatile and less liquid than
that for other mortgage-backed securities, potentially limiting a Portfolio's
ability to buy or sell those securities at any particular time.
Certain mortgage-backed securities held by the Portfolios may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by a Portfolio during a time of declining interest rates,
the Portfolio may not be able to reinvest the proceeds in securities providing
the same investment return as the securities redeemed.
Each of the Strategy, Quality Income, and Short-Duration Income Portfolios
may invest in securities representing interests in other types of financial
assets, such as automobile-finance receivables or credit-card receivables. Such
securities may or may not be secured by the receivables themselves or may be
unsecured obligations of their issuers. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying
16

<PAGE>
assets may be limited. For example, the laws of certain states may prevent or
restrict repossession of collateral from a debtor.
OTHER MORTGAGE-RELATED SECURITIES. The Quality Income and Short-Duration
Income Portfolios may also invest in other types of mortgage-related securities,
including any securities that directly or indirectly represent a participation
in, or are secured by and payable from, mortgage loans or real property,
including collateralized mortgage obligation "residual" interests. "Residual"
interests represent the right to any excess cash flow remaining after all other
payments are made among the various tranches of interests issued by structured
mortgage-backed vehicles. The values of such interests are extremely sensitive
to changes in interest rates and in prepayment rates on the underlying
mortgages. In the event of a significant change in interest rates or other
market conditions, the value of an investment by the Portfolio in such interests
could be substantially reduced and the Portfolio may be unable to dispose of the
interests at prices approximating the values the Portfolio had previously
assigned to them or to recoup its initial investment in the interests. The
Portfolios may invest in new types of mortgage-related securities that may be
developed and marketed from time to time. If any of the Portfolios were to
invest in such newly developed securities, shareholders would, where
appropriate, be notified and this Prospectus would be revised accordingly.
ZERO-COUPON BONDS. Each of the Income and Growth, Global, Quality Income,
Strategy, Municipal Income, and Short-Duration Income Portfolios may at times
invest in so-called "zero-coupon" bonds. Zero-coupon bonds are issued at a
significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security. Because zero-coupon bonds do
not pay current interest, their value is subject to greater fluctuation in
response to changes in market interest rates than bonds that pay interest
currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash
to meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds that pay interest currently. Even though such bonds do
not pay current interest in cash, a Portfolio is nonetheless required for
federal income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, a Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
PREMIUM SECURITIES. The Portfolios may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although a Portfolio generally amortizes the amount of any
such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, a Portfolio may recognize a
capital loss if it holds such securities to maturity.
OPTIONS AND FUTURES. Each of the Portfolios may buy and sell put and call
options on securities it owns or plans to purchase to hedge against changes in
net asset value or to realize a greater current return. In addition, through the
purchase and sale of futures contracts and related options, each of the
Portfolios may at times seek to hedge against fluctuations in net asset value.
In addition, to the extent consistent with applicable law, the Portfolios may
buy and sell futures contracts and related options to increase investment
return. The Strategy Portfolio may also buy and sell options and futures
contracts (including index options and futures contracts) to implement changes
in its asset allocations among various market sectors, pending the sale of its
existing investments and reinvestments in new securities.
INDEX FUTURES AND OPTIONS. Each of the Portfolios may buy and sell index
futures contracts ("index futures") and options on index futures and on indices
for hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index futures"
contract is a contract to buy or sell units of a particular bond or stock index
at an agreed price on a specified future date.
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<PAGE>
Depending on the change in value of the index between the time when a Portfolio
enters into and terminates an index futures or option transaction, the Portfolio
realizes a gain or loss. The Portfolios may also, to the extent consistent with
applicable law, buy and sell index futures and options to increase investment
return.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. OPTIONS AND FUTURES
TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN LOSSES. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by a Portfolio that are the subject of a hedge.
The successful use by a Portfolio of the strategies described above further
depends on the ability of its investment adviser or sub-adviser to forecast
market movements correctly. Other risks arise from a Portfolio's potential
inability to close out futures or options positions. Although a Portfolio will
enter into options or futures transactions only if its investment adviser or
sub-adviser believes that a liquid secondary market exists for such option or
futures contract, there can be no assurance that a Portfolio will be able to
effect closing transactions at any particular time or at an acceptable price.
Transactions in options and futures contracts involve brokerage costs and may
require a Portfolio to segregate assets to cover its outstanding positions. For
more information, see the Statement of Additional Information. Federal tax
considerations may also limit a Portfolio's ability to engage in options and
futures transactions.
Each Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and sell
options in transactions in the over-the-counter markets. A Portfolio's ability
to terminate options in the over-the-counter markets may be more limited than
for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. A Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of its investment adviser or
sub-adviser, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their contractual obligations.
LEVERAGE. The Short-Duration Income Portfolio may borrow money to invest in
additional securities to seek current income. This technique, known as
"leverage," increases the Portfolio's market exposure and risk. When the
Portfolio has borrowed money for leverage and its investments increase or
decrease in value, its net asset value will normally increase or decrease more
than if it had not borrowed money for this purpose. The interest that the
Portfolio must pay on borrowed money will reduce its net investment income, and
may also either offset any potential capital gains or increase any losses. The
Portfolio currently intends to use leverage in order to adjust the
dollar-weighted average duration of its portfolio. The Portfolio will not always
borrow money for investment and the extent to which the Portfolio will borrow
money, and the amount it may borrow, depends on market conditions and interest
rates. Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse" repurchase agreements,
"dollar-roll" transactions, and forward commitments, described below) that can
exist at any one time will not exceed one-third of the value of the Portfolio's
total assets.
SECURITIES LOANS, REPURCHASE AGREEMENTS, AND FORWARD COMMITMENTS. Each
Portfolio, other than the Municipal Income Portfolio, may lend portfolio
securities and may enter into repurchase agreements with banks, broker/dealers,
and other recognized financial institutions. Each of the Strategy and
Short-Duration Income Portfolios may enter into each type of transaction on up
to 25% of its assets, and each of the Growth, Capital Growth, Global, Income and
Growth, and Quality Income Portfolios may enter into each type of transaction on
up to one-third of its assets. These transactions must be fully collateralized
at all times, but involve some risk to a Portfolio if the other party should
default on its obligations and the Portfolio is delayed or prevented from
recovering the collateral. Each Portfolio, other than the Growth and Strategy
Portfolios, may enter into "reverse" repurchase agreements. Each of the Capital
Growth, Quality Income, Income and Growth, and Global Portfolios may do so
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<PAGE>
with respect to up to one-third of its assets, and the Municipal Income
Portfolio may do so with respect to up to 5% of its assets. "Reverse" repurchase
agreements generally involve the sale by a Portfolio of securities held by it
and an agreement to repurchase the securities at an agreed-upon price, date, and
interest payment. Each Portfolio also may enter into forward commitments, in
which a Portfolio buys securities for future delivery. Reverse repurchase
agreements and forward commitments may increase overall investment exposure and
may result in losses.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, each Portfolio, other than the Growth, Strategy, and Municipal
Income Portfolios, may engage in dollar roll transactions with respect to
mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a dollar roll
transaction, a Portfolio sells a mortgage-related security to a financial
institution, such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon, and maturity)
security from the institution at a later date at an agreed upon price. The
mortgage-related securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. During the period between the
sale and repurchase, the Portfolios will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in short-term instruments, and the income from these investments, together with
any additional fee income received on the sale, will generate income for the
Portfolios exceeding the yield.
FOREIGN SECURITIES. Each Portfolio other than the Growth and Municipal
Income Portfolios may invest in securities principally traded in foreign
markets. The Capital Growth and Income and Growth Portfolios will limit such
investments to 15% and 10%, respectively, of their total assets. Since foreign
securities are normally denominated and traded in foreign currencies, the values
of a Portfolio's assets may be affected favorably or unfavorably by changes in
currency exchange rates and by exchange control regulations. There may be less
information publicly available about a foreign company than about a U.S.
company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign companies are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of a Portfolio's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the value of a Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. The laws of some foreign countries may limit a
Portfolio's ability to invest in securities of certain issuers located in those
foreign countries. Special tax considerations apply to foreign securities. A
Portfolio may buy or sell foreign currencies and options and futures contracts
on foreign currencies for hedging purposes in connection with its foreign
investments as described more fully below.
The risks described above are typically increased to the extent that a
Portfolio invests in securities traded in underdeveloped and developing nations,
which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio that may invest in
foreign securities may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates. A
Portfolio may engage in foreign currency exchange transactions in connection
with the purchase and sale of portfolio securities ("transaction hedging") and
to protect against changes in the value of specific portfolio positions
("position hedging").
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A Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which a Portfolio
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements. For transaction hedging purposes, a
Portfolio may also purchase and sell call and put options on foreign currency
futures contracts and on foreign currencies.
A Portfolio may engage in position hedging to protect against a decline in
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, a Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, a Portfolio may also purchase
or sell foreign currency on a spot basis.
Although there is no limit to the amount of a Portfolio's assets that may
be invested in foreign currency exchange and foreign currency forward contacts,
a Portfolio will only enter into such transactions to the extent necessary to
effect the hedging transactions described above.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of a
portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of the portfolio, the Global, Quality Income, and Short-Duration
Income Portfolios may enter into interest rate swaps and other interest rate
transactions, such as interest rate caps, floors, and collars. Interest rate
swaps involve the exchange by a Portfolio with another party of their respective
commitments to pay or receive interest (E.G., an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. Each Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative investment.
A Portfolio's ability to engage in certain interest rate transactions may be
limited by tax considerations. The use of interest rate swaps and other interest
rate transactions is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If a Portfolio's investment adviser or sub-adviser is
incorrect in its forecasts of market values, interest rates, or other applicable
factors, the investment performance of a Portfolio would be less favorable than
it would have been if this investment technique were not used.
INDEXED SECURITIES. The Global Portfolio may invest in indexed securities,
the values of which are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Investment in indexed securities
involves certain risks. In addition to the credit risk of the securities issuer
and normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the
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value of the security may then reduce the principal amount payable on maturity.
Further, indexed securities may be more volatile than the reference instruments
underlying indexed securities.
PORTFOLIO TURNOVER. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by a Portfolio is known as "portfolio turnover." As a result
of each Portfolio's investment policies, under certain market conditions its
portfolio turnover rate may be higher than that of other mutual funds. Portfolio
turnover generally involves some expense to a Portfolio, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. Such transactions may result in
realization of taxable gains. The portfolio turnover rates for the ten most
recent fiscal years (or for the life of a Portfolio if shorter) are contained in
the section "Financial Highlights." The relatively high portfolio turnover rate
for the Quality Income Portfolio during fiscal 1994 was due in substantial part
to the implementation of the investment program of Pacific Investment Management
Company, which differed from the investment program of the Portfolio's previous
sub-adviser. Commonwealth Investment Counsel expects that the portfolio turnover
rate for the Short-Duration Income Portfolio will not exceed 250% for its first
full fiscal year.
VALUING SHARES
Each Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and assets
are valued at their fair values. The net asset value for Class A shares will,
from time to time, differ from that of Class B shares due to the variance in
daily net income realized by and dividends paid on each class of shares, and any
differences in the expenses of the different classes.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to Buy Shares -- Class A
shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five or six years,
depending on the Portfolio. Class B Shares also bear 12b-1 fees. Class B shares
provide an investor the benefit of putting all of the investor's dollars to work
from the time the investment is made, but will have a higher expense ratio and
pay lower dividends than Class A shares due to the 12b-1 fees. See "How to Buy
Shares -- Class B shares."
WHICH ARRANGEMENT IS FOR YOU? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. For more information about these sales
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arrangements, consult your investment dealer or Mentor Distributors. Sales
personnel may receive different compensation depending on which class of shares
they sell. Shares may only be exchanged for shares of the same class of another
Mentor fund and for shares of Cash Resource U.S. Government Money Market Fund.
See "How to Exchange Shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little at $100. Investments under
IRAs and investments under qualified retirement plans are subject to a minimum
initial investment of $250. The minimum initial investment may be waived for
current and retired Trustees, and current and retired employees of The Mentor
Funds or Mentor Distributors. You can buy Portfolio shares BY COMPLETING THE
ENCLOSED NEW ACCOUNT FORM and sending it to Mentor Distributors along with a
check or money order, THROUGH YOUR FINANCIAL INSTITUTION, which may be an
investment dealer, a bank, or another institution, OR THROUGH AUTOMATIC
INVESTING. If you do not have a dealer, Mentor Distributors can refer you to
one.
AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum
investment in a Portfolio, you can make regular investments of $50 or more on a
monthly or quarterly basis through automatic deductions from your bank checking
account. Application forms are available from your investment dealer or through
Mentor Distributors.
Shares are sold at a Portfolio's net asset value next determined after
Mentor Distributors receives your purchase order. In most cases, in order to
receive that day's public offering price, Mentor Distributors or your investment
dealer must receive your order before the close of regular trading on the New
York Stock Exchange. If you buy shares through your investment dealer, the
dealer must ensure that Mentor Distributors receives your order before the close
of regular trading on the New York Stock Exchange for you to receive that day's
public offering price.
CLASS A SHARES
The public offering price of Class A shares is the net asset value plus a
sales charge. The Portfolio receives the net asset value. The sales charge
varies depending on the size of your purchase and is allocated between your
investment dealer and Mentor Distributors. The current sales charges for the
GROWTH, CAPITAL GROWTH, STRATEGY, INCOME AND GROWTH, AND GLOBAL PORTFOLIOS are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
<S> <C> <C> <C>
Less than $50,000..................................................... 5.75% 5.82% 5.00%
$50,000 but less than $100,000........................................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000....................................... 3.00% 3.09% 2.50%
$500,000 but less than $1 million..................................... 2.00% 2.04% 1.75%
$1 million or more.................................................... 0% 0% (see below )
</TABLE>

<PAGE>
The current sales charges for the QUALITY INCOME AND MUNICIPAL INCOME
PORTFOLIOS are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
<S> <C> <C> <C>
Less than $100,000.................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................................... 4.00% 4.17% 3.25%
$250,000 but less than $500,000....................................... 3.00% 3.09% 2.50%
$500,000 but less than $1 million..................................... 2.00% 2.04% 1.75%
$1 million or more.................................................... 0% 0% (see below )
</TABLE>

* At the discretion of Mentor Distributors, the entire sales charge may at times
be reallowed to dealers. The Staff of the Securities and Exchange Commission
has indicated that dealers who receive more than 90% of the sales charge may
be considered underwriters.
Shares of the SHORT-DURATION INCOME PORTFOLIO are sold subject to a sales
charge of 1%.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. (A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Distributors for more
information.) Any of the shares which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. In determining whether a CDSC is
payable in respect of the shares redeemed, the Portfolio will first redeem
shares not subject to any charge. Mentor Distributors receives the entire amount
of any CDSC you pay.
You may be eligible to buy Class A shares at reduced sales charges. Consult
your investment dealer or Mentor Distributors for details about Quantity
Discounts and Accumulated Purchases, Letters of Intent, the Reinvestment
Privilege, Concurrent Purchases, and the Automatic Investment Plan. Descriptions
are also included in the New Account Form and in the Statement of Additional
Information. Shares may be sold at net asset value to certain categories of
investors, and the CDSC may be waived under certain circumstances. See "How to
Buy Shares -- General" below.
Mentor Distributors, the investment advisers, or certain sub-advisers, or
affiliates thereof, at their own expense and out of their own assets, may also
provide other compensation to dealers in connection with sales of shares of the
Portfolios. Compensation may also include, but is not limited to, financial
assistance to dealers in connection with conferences, sales, or training
programs for their employees, seminars for the public, advertising or sales
campaigns, or other dealer-sponsored special events. In some instances, this
compensation may be made available only to certain dealers whose representatives
have sold or are expected to sell significant amounts of shares. Dealers may not
use sales of The Mentor Funds' shares to qualify for this compensation to the
extent such may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers, Inc.
CLASS B SHARES
Class B shares are sold without an initial sales charge, although a CDSC
will be imposed if you redeem shares within five or six years of purchase,
depending on the Portfolio. The following types of shares may be
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redeemed without charge: (i) shares acquired by reinvestment of distributions
and (ii) shares otherwise exempt from the CDSC, as described in "How to Buy
Shares -- General" below. For other shares, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. The amount of the CDSC will depend on the number
of years since you invested in the shares being redeemed and the dollar amount
being redeemed, according to the following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF CHARGE AS A PERCENTAGE OF
APPLICABLE AMOUNT APPLICABLE AMOUNT
REDEEMED (GROWTH, CAPITAL REDEEMED (QUALITY INCOME,
GROWTH, STRATEGY, INCOME MUNICIPAL INCOME, AND
AND GROWTH, AND GLOBAL SHORT- DURATION INCOME
YEAR SINCE PURCHASE PAYMENT MADE PORTFOLIOS) PORTFOLIOS)
<S> <C> <C>
First 4.0% 4.0%
Second 4.0% 4.0%
Third 3.0% 3.0%
Fourth 2.0% 2.0%
Fifth 1.0% 1.0%
Sixth None 1.0%
Seventh and Thereafter None None
</TABLE>

No CDSC is imposed upon the redemption of Class B shares purchased pursuant
to certain asset-allocation plans and that are not otherwise subject to the CDSC
shown above. However, a CDSC of 1.00% is imposed on redemptions of such shares
within the first year after purchase, based on the lower of the shares' cost and
current net asset value. Consult Mentor Distributors for more information.
Any of the shares which were acquired by reinvestment of distributions will
be redeemed without a CDSC, and amounts representing capital appreciation will
not be subject to a CDSC. In determining whether a CDSC is payable in respect of
the shares redeemed, the Portfolio will first redeem shares not subject to any
charge. For this purpose, the amount of any increase in a shares's value above
its initial purchase price is exempt from the CDSC. Thus, when a share that has
appreciated in value is redeemed during the five- or six-year period, a CDSC is
assessed only on its initial purchase price. For information on how sales
charges are calculated if you exchange your shares, see "How to Exchange
Shares." Mentor Distributors receives the entire amount of any CDSC you pay.
Consult Mentor Distributors for more information.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be calculated
as follows:

(Bullet) Proceeds of 50 shares redeemed at $12 per share $600

(Bullet) Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment (10
x $12) -120

(Bullet) Minus appreciation on remaining shares, also not
subject to CDSC (40 x $2) -80

(Bullet) Amount subject to a CDSC $400

<PAGE>
GENERAL
A Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by The Mentor Funds' current and retired
Trustees (and their families), current and retired employees (and their
families) of Mentor Distributors, each investment adviser or sub-adviser, and
each of their affiliates, registered representatives and other employees (and
their families) of broker-dealers having sales agreements with Mentor
Distributors, employees (and their families) of financial institutions having
sales agreements with Mentor Distributors (or otherwise having an arrangement
with a broker-dealer or financial institution with respect to sales of Portfolio
shares), financial institution trust departments investing an aggregate of $1
million or more in one or more funds in the Mentor family, clients of certain
administrators of tax-qualified plans, employer-sponsored retirement plans,
tax-qualified plans when proceeds from repayments of loans to participants are
invested (or reinvested) in funds in the Mentor family, shares redeemed under a
Portfolio's Systematic Withdrawal Plan (limited to 10% of a shareholder's
account in any calendar year), and "wrap accounts" for the benefit of clients of
financial planners adhering to certain standards established by Mentor
Distributors. A Portfolio may sell shares without a sales charge or a CDSC in
connection with the acquisition by the Portfolio of assets of an investment
company or personal holding company. In addition, the CDSC may be waived in the
case of (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, including the shares of a shareholder who owns the shares with his or
her spouse as joint tenants with right of survivorship, provided that the
redemption is requested within one year of the death or initial determination of
disability; (ii) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified retirement
plan following retirement; (b) distributions from an IRA, Keogh Plan, or
Custodial Account under Section 403(b)(7) of the Internal Revenue Code following
attainment of age 59 1/2; and (c) a tax-free return of an excess contribution to
an IRA; (iii) redemptions by pension or profit sharing plans sponsored by Mentor
Investment Group, Inc. ("Mentor") or an affiliate; and (iv) redemptions by
pension or profit sharing plans of which Mentor or any affiliate serves as a
plan fiduciary. In addition, certain retirement plans with over 200 employees
may purchase Class A shares at net asset value without a sales charge.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in, shares
of a Portfolio at net asset value.
If you are considering redeeming or exchanging shares of a Portfolio or
transferring shares to another person shortly after purchase, you should pay for
those shares with a certified check to avoid any delay in redemption, exchange
or transfer. Otherwise the Portfolio may delay payment until the purchase price
of those shares has been collected or, if you redeem by telephone, until 15
calendar days after the purchase date.
To eliminate the need for safekeeping, The Mentor Funds will not issue
certificates for your shares unless you request them. Mentor Distributors may,
at its expense, provide additional promotional incentives or payments to dealers
that sell shares of the Portfolios. In some instances, these incentives or
payments may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all classes of
shares.
Because of the relatively high cost of maintaining accounts, each Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however, avoid
such a redemption by a Portfolio by increasing his investment in shares of that
Portfolio to a value of $500 or more during such 60-day period.
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<PAGE>
REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of any Portfolio,
you have a one-time right, within 60 days, to reinvest the redemption proceeds
plus the amount of CDSC you paid, if any, at the next-determined net asset
value. Front-end sales charges will not apply to such reinvestment. Mentor
Distributors must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in any of the Portfolios, there may be tax
consequences.
DISTRIBUTION PLANS (CLASS B SHARES)
Mentor Distributors, Inc. (formerly, Cambridge Distributors, Inc.), having
its principal offices at 901 East Byrd Street, Richmond, Virginia 23219, is the
principal distributor for the Portfolios' shares.
Each of the Portfolios has adopted a Distribution Plan under Rule 12b-1
with respect to its Class B shares (each, a "Class B Plan") providing for
payments by the Portfolio to Mentor Distributors from the assets attributable to
the Portfolio's Class B shares at the annual rate set out under "Summary of
Portfolio Expenses -- Annual Portfolio Operating Expenses" above. The Trustees
may reduce the amount of payments or suspend the Class B Plan for such periods
as they may determine. Mentor Distributors also receives the proceeds of any
CDSC imposed on redemptions of shares.
Payments under the Plans are intended to compensate Mentor Distributors for
services provided and expenses incurred by it as principal underwriter of a
Portfolio's Class B shares. Mentor Distributors may select financial
institutions (such as a broker/dealer or bank) to provide sales support services
as agents for their clients or customers who beneficially own Class B shares of
the Portfolios. Financial institutions will receive fees from Mentor
Distributors based upon Class B shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by Mentor Distributors. Mentor Distributors may
suspend or modify such payments to dealers. Such payments are also subject to
the continuation of the relevant Class B Plan, the terms of any agreements
between dealers and Mentor Distributors, and any applicable limits imposed by
the National Association of Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares in any Portfolio to the Portfolio any day the New
York Stock Exchange is open, either directly to the Portfolio or through your
investment dealer. The Portfolio will only redeem shares for which it has
received payment.
SELLING SHARES DIRECTLY TO A PORTFOLIO. Send a signed letter of instruction
or stock power form, along with any certificates that represent shares you want
to sell, to The Mentor Funds, c/o Boston Financial Data Services, Inc. ("BFDS"),
2 Heritage Drive, North Quincy, Massachusetts 02171. The price you will receive
is the net asset value next calculated after your request is received in proper
form less any applicable CDSC. In order to receive that day's net asset value,
your request must be received before the close of regular trading on the New
York Stock Exchange. If you sell shares having a net asset value of $50,000 or
more or if you want your redemption proceeds payable to you at a different
address or to someone else, the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer, or certain other
financial institutions. See the Statement of Additional Information for more
information about where to obtain a signature guarantee. Stock power forms are
available from your investment dealer, Mentor Distributors, and many commercial
banks. Mentor Distributors usually requires additional documentation for the
sale of shares by a corporation, partnership, agent, or fiduciary, or surviving
joint owner. Contact Mentor Distributors for details.
SELLING SHARES BY TELEPHONE. You may use Mentor Distributors' Telephone
Redemption Privilege to redeem shares from your account unless you have notified
Mentor Distributors of an address change within the preceding
26

<PAGE>
15 days. Unless an investor indicates otherwise on the New Account Form, Mentor
Distributors will be authorized to act upon redemption and transfer instructions
received by telephone from a shareholder, or any person claiming to act as his
or her representative, who can provide Mentor Distributors with his or her
account registration and address as it appears on Mentor Distributors' records.
Mentor Distributors will employ these and other reasonable procedures to confirm
that instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, Mentor Distributors may be liable for any losses due to
unauthorized or fraudulent instructions. For information, consult Mentor
Distributors. During periods of unusual market changes and shareholder activity,
you may experience delays in contacting Mentor Distributors by telephone in
which case you may wish to submit a written redemption request, as described
above, or contact your investment dealer, as described below. The Telephone
Redemption Privilege may be modified or terminated without notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive
your request before the close of regular trading on the New York Stock Exchange
to receive that day's net asset value. Your dealer will be responsible for
furnishing all necessary documentation to Mentor Distributors, and may charge
you for its services.
The Portfolio generally sends you payment for your shares the business day
after your request is received. Under unusual circumstances, the Portfolio may
suspend redemptions, or postpone payment for more than seven days, as permitted
by federal securities law.
SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of a
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact Mentor Distributors for more information.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in a
Portfolio worth at least $1,000 for shares of the same class of any other
Portfolio at net asset value beginning 15 days after purchase. You may also
exchange shares of any Portfolio for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC,
the transaction will not be subject to the CDSC. However, when you redeem the
shares acquired through the exchange, the redemption may be subject to the CDSC,
depending upon when you originally purchased the shares, using the schedule of
any Portfolio into or from which you have exchanged your shares that would
result in your paying the highest CDSC applicable to your class of shares. For
purposes of computing the CDSC, the length of time you have owned your shares
will be measured from the date of original purchase and will not be affected by
any exchange. (If you exchange your shares for shares of the Cash Fund, the
period when you hold shares of the Cash Fund will be included in calculating the
length of time you have owned the shares subject to the CDSC; alternatively,
Mentor Distributors may elect not to include the length of time you hold shares
of the Cash Fund, in which case any CDSC payable on redemption of your shares
will be reduced by the amount of any payment collected by the Cash Fund under
its distribution plan in respect of those shares. Contact Mentor Distributors
for information.)
To exchange your shares, simply complete an Exchange Authorization Form and
send it to The Mentor Funds, c/o BFDS, 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling or
writing Mentor Distributors. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. Mentor Distributors'
procedures for telephonic transactions are described above under "How to Sell
Shares."
27

<PAGE>
The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask your investment dealer or
Mentor Distributors for a prospectus relating to the Cash Fund. Shares of
certain of the Portfolios may not available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where Mentor Distributors or the Trustees
believe doing so would be in the best interests of a Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult Mentor
Distributors before requesting an exchange by calling 1-800-382-0016. See the
Statement of Additional Information to find out more about the exchange
privilege.
Exchanges to and from the Mentor Growth, Strategy, and Short-Duration
Income Portfolios are not available at the date of this Prospectus (although
exchanges AMONG those Portfolios are currently available). Consult Mentor
Distributors as to the availability of such exchanges in the future.
DISTRIBUTIONS AND TAXES
Dividends, if any, are declared daily and paid monthly for the Quality
Income, Short-Duration Income, and Municipal Income Portfolios. Any dividends
for the other Portfolios are declared and paid as follows: quarterly for the
Income and Growth Portfolio; semi-annually for the Capital Growth Portfolio; and
annually for the Growth, Strategy, and Global Portfolios. Each Portfolio will
distribute its net capital gain, if any, at least annually. All dividends and
distributions of net capital gain will be invested in additional shares of the
same class of a Portfolio unless a shareholder requests in writing to receive
the dividend or distribution in cash.
Each Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to you as ordinary income, except that any distributions of net capital
gain will be taxed as long-term capital gain, regardless of how long you have
held the shares (although the loss on a sale of shares held for six months or
less will be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year The Mentor Funds will notify
you of the amount and tax status of distributions paid to you by your Portfolio
for the preceding year.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. You should consult your tax adviser to determine the
precise effect of an investment in a Portfolio on your particular tax situation.
To permit the Quality Income and Short-Duration Income Portfolios to
maintain more stable monthly distributions, each of those Portfolios may from
time to time pay out less than the entire amount of net investment income earned
in any particular period. Any such amount retained by a Portfolio would be
available to stabilize future distributions. As a result, the distributions paid
by either Portfolio for any particular period may be more or less than the
amount of net investment income actually earned by the Portfolio during that
period.
MUNICIPAL INCOME PORTFOLIO. Distributions designated by the Portfolio as
"exempt-interest dividends" are not generally subject to federal income tax. The
Portfolio may engage in investment activities that produce taxable
28

<PAGE>
income, the distribution of which will be taxable to shareholders as described
below. If you receive Social Security and railroad retirement benefits, you
should consult your tax adviser to determine what effect, if any, an investment
in the Portfolio may have on the taxation of your benefits. In addition, an
investment in the Portfolio may result in liability for federal alternative
maximum tax and for state and local taxes, both for individual and corporate
shareholders.
MANAGEMENT OF THE MENTOR FUNDS
The Trustees of The Mentor Funds are responsible for generally overseeing
the conduct of its business. COMMONWEALTH ADVISORS, INC. (formerly, Cambridge
Investment Advisors, Inc.) acts as investment manager of each of the Portfolios
other than the Growth, Short-Duration Income, Global, and Strategy Portfolios.
CHARTER ASSET MANAGEMENT, INC. acts as investment manager to the Growth
Portfolio; COMMONWEALTH INVESTMENT COUNSEL, INC. acts as investment manager to
the Short-Duration Income Portfolio; MENTOR PERPETUAL ADVISORS, L.C. acts as
investment manager to the Global Portfolio; WELLESLEY ADVISORS, INC. acts as
investment manager to the Strategy Portfolio. Each of the investment advisers,
except Mentor Perpetual, is a wholly-owned subsidiary of Mentor Investment
Group, Inc. (formerly Investment Management Group, Inc.) ("Mentor"), which is a
wholly-owned subsidiary of Wheat First Butcher Singer, Inc. ("WFBS"). WFBS,
through other subsidiaries, also engages in securities brokerage, investment
banking, and related businesses. Mentor Perpetual is owned equally by Mentor and
Perpetual plc, a diversified financial services holding company. Each of the
investment advisers is located at 901 East Byrd Street, Richmond, Virginia.
Each of the Portfolios pays management fees to its manager at the annual
rates described above under "Summary of Portfolio Expenses -- Annual Portfolio
Operating Expenses", except that the Global Portfolio pays fees equal to 1.10%
of its average daily net assets up to and including $75 million and 1.00% of the
average daily net assets of the Portfolio in excess of $75 million. The advisory
fees paid by the Growth, Capital Growth, Income and Growth, and Global
Portfolios are higher than those paid by many other mutual funds. An investment
manager may from time to time voluntarily waive some or all of its investment
advisory fees and may terminate any such voluntary waiver of some or all of its
investment advisory fees at any time in its sole discretion.
Commonwealth Advisors was incorporated under the laws of Virginia in 1991.
All of its directors and officers serve as directors or officers of other
investment advisory firms affiliated with WFBS. Commonwealth Advisors has served
as investment adviser to each of the Portfolios identified above since their
inception; however, prior to April 12, 1995, all investment decisions for each
of the Portfolios were made by sub-advisers to those Portfolios. For certain of
the Portfolios, Commonwealth Advisors now furnishes a continuous investment
program. All of the investment advisory personnel of Commonwealth Advisors have
substantial experience in the investment advisory field and provide advisory
services to other mutual funds in the Mentor family.
Charter is a registered investment adviser with total assets under
management exceeding $254 million. Charter provides investment management and
advisory services to a wide variety of individual and institutional clients. Mr.
Theodore W. Price is primarily responsible for the day-to-day management of the
Growth Portfolio. Mr. Price has been Chief Investment Officer of Charter since
January 1992. Prior to that time, he served as Senior Vice President of Mentor.
He has thirty years of investment management experience.
Commonwealth Investment Counsel currently has assets under management in
excess of $3.2 billion, and serves as investment adviser to Cash Resource Trust
and IMG Institutional Trust, both open-end investment companies, and Mentor
Income Fund, Inc., a closed-end investment company. P. Michael Jones, Senior
Vice President and Director of Investment Research of Commonwealth Investment
Counsel, and Charles W. Grant and
29

<PAGE>
Stephen Henderson, Managing Director and Associate Vice President, respectively,
of Commonwealth Investment Counsel, are primarily responsible for the day-to-day
management of the Mentor Short-Duration Income Portfolio and the Quality Income
Portfolio. Messrs. Jones, Grant, and Henderson are also portfolio managers at
Commonwealth Advisors. Mr. Jones has eight years of investment management
experience. He served previously as Senior Vice President of Ryland Capital
Management, Inc. and as Vice President of Alliance Capital Management. Mr. Grant
has fourteen years of investment management experience. He served previously as
President and Chief Investment Officer of Ryland Capital Management, Inc. Mr.
Henderson, who is Portfolio Manager at Commonwealth Investment Counsel, has six
years of investment management experience. John G. Davenport is a Managing
Director of Commonwealth Investment Counsel and a portfolio manager at
Commonwealth Advisors; he is primarily responsible for the day-to-day management
of the Capital Growth Portfolio. Mr. Davenport has eleven years of investment
management experience. He served previously as Director of Equity Research at
Lowe, Brockenbrough, Tierney & Tattersall.
Mentor Perpetual is a newly organized investment advisory firm owned
equally by Perpetual plc and Mentor. The Perpetual organization currently serves
as investment adviser for assets of more than $6.0 billion. Its clients include
28 unit investment trusts and other public investment pools for over 150
clients, including private individuals, charities, pension plans, and life
assurance companies. Mr. Scott A. McGlashan, a Director of Perpetual Portfolio
Management Ltd., is primarily responsible for the day-to-day management of the
Global Portfolio. He has over twelve years of investment management experience.
Wellesley is a newly organized investment advisory firm. Each of its
directors and officers serves as director or officer of other investment
advisory firms affiliated with WFBS. Mr. Donald R. Hays, President of Wellesley,
is primarily responsible for the day-to-day management of the Strategy
Portfolio. Mr. Hays has been a Managing Director of Wheat, First Securities,
Inc. since 1984. He has twenty-five years of investment management experience.
THE SUB-ADVISERS
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT INC. ("Van Kampen") serves as
sub-adviser to the Municipal Income Portfolio. Van Kampen, located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, was incorporated in 1990 and
commenced operations in 1992. Van Kampen currently provides investment advice to
a wide variety of individual, institutional, and investment company clients. Van
Kampen is a wholly-owned subsidiary of Van Kampen American Capital, Inc., which,
in turn, is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is indirectly controlled by Clayton & Dubilier Associates IV Limited
Partnership, the general partners of which are Joseph L. Rice, III, B. Charles
Ames, William A. Barby, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe, and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc., a New York-based private investment firm. As of March 31,
1995, Van Kampen, together with its affiliates, managed or supervised
approximately $51.7 billion of assets.
David C. Johnson and William V. Grady are co-managers of the Municipal
Income Portfolio. Mr. Johnson is First Vice President of Van Kampen. Mr. Johnson
joined Van Kampen American Capital in 1989 and has served as portfolio manager
of the Municipal Income Portfolio since that time. Mr. Grady is Vice President
of Van Kampen, which he joined in 1992. He is portfolio manager for several
national and specialty state portfolios. He was previously associated with
Municipal Bond Investors Assurance Corporation where he structured insured
tax-exempt financings for two years, and was employed by CIGNA Investments Inc.
from 1984-1990 as a portfolio manager and research analyst. For its services as
sub-adviser, Commonwealth Advisors pays Van Kampen a fee at the annual rate of
0.30% of the Portfolio's average net assets.
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WELLINGTON MANAGEMENT COMPANY ("WMC") serves as sub-adviser to the Income
and Growth Portfolio. WMC, located at 75 State Street, Boston, Massachusetts
02109, is a professional investment counseling firm which provides investment
services to investment companies, employee benefit plans, endowments,
foundations, and other institutions and individuals. As of September 30, 1994,
WMC had discretionary investment management authority with respect to
approximately $82.0 billion in assets. WMC and its predecessor organizations
have provided investment advisory services to investment companies since 1933
and to investment counseling clients since 1960. For its services as
sub-adviser, Commonwealth Advisors pays WMC a fee at the annual rate expressed
as a percentage of the Portfolio's assets as follows: 0.325% on the first $50
million in assets, 0.275% on the next $150 million in assets, 0.225% on the next
$300 million in assets, and 0.200% on assets over $500 million.
Paul D. Kaplan, Senior Vice President of WMC, and Arnold C. Schneider III,
Senior Vice President of WMC, have served as portfolio managers to the Portfolio
since its inception in May 1993. Mr. Kaplan manages the fixed-income and U.S.
Government securities portion of the Portfolio, and Mr. Schneider manages the
equity securities portion of the Portfolio. Mr. Kaplan has been a portfolio
manager with WMC since 1982 and Mr. Schneider has been a portfolio manager with
WMC since 1987.
Subject to the general oversight of the Trustees, each Portfolio's
investment adviser or sub-adviser manages its respective Portfolio in accordance
with the stated policies of the Portfolio. Each makes investment decisions for a
Portfolio and places the purchase and sale orders for the Portfolios'
transactions. In addition, each pays the salaries of all officers and employees
who are employed by both it and The Mentor Funds. The Mentor Funds pays all
expenses not assumed by the investment advisers and sub-advisers, or Mentor,
including, among other things, Trustees' fees, auditing, accounting, legal,
custodial, investor servicing, and shareholder reporting expenses, and payments
under the Portfolios' Class B Plans.
In selecting broker-dealers, the investment adviser or sub-adviser may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the best overall terms available, a Portfolio's investment
adviser or sub-adviser may consider sales of shares of The Mentor Funds (and, if
permitted by law, of the other funds in the Mentor family) as a factor in the
selection of broker-dealers.
Until April 12, 1995, Scudder, Stevens & Clark served as sub-adviser to the
Perpetual Global Portfolio; Phoenix Investment Counsel, Inc. served as
sub-adviser to the Mentor Capital Growth Portfolio; and Pacific Investment
Management Company served as sub-adviser to the Mentor Quality Income Portfolio
(when that Portfolio was known as the Cambridge Government Income Portfolio).
OTHER SERVICES
ADMINISTRATIVE SERVICES. Mentor Investment Group, Inc., located at 901 East
Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain
administrative personnel and services necessary to operate each Portfolio, such
as legal and accounting services. Mentor provides these services to each of the
Portfolios at an annual rate of 0.10% of each Portfolio's average net assets.
SHAREHOLDER SERVICING PLAN. The Mentor Funds has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to Class A and Class B shares
of each Portfolio. Under the Service Plan, financial institutions will enter
into shareholder service agreements with the Portfolios to provide
administrative support services to their customers who are Portfolio
shareholders. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B shares
of the particular Portfolio or Portfolios. These administrative services may
include, but are not limited to, the following functions; providing office
space, equipment, telephone facilities,
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and various personnel, including clerical, supervisory, and computer personnel,
as necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries
regarding the Portfolios; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Portfolios reasonably request.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by a Portfolio's investment adviser, a
sub-adviser, and/or Mentor, or affiliates thereof, for providing administrative
support services to holders of Class A or Class B shares of the Portfolios.
These payments will be made directly by a Portfolio's investment adviser,
sub-adviser, and/or Mentor and will not be made from the assets of any of the
Portfolios.
GENERAL
The Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Agreement and Declaration of Trust of The Mentor Funds,
which is governed by Massachusetts law, is on file with the Secretary of State
of the Commonwealth of Massachusetts.
The Mentor Funds is an open-end, diversified, series management investment
company with an unlimited number of authorized shares of beneficial interest.
Shares of The Mentor Funds may, without shareholder approval, be divided into
two or more series of shares representing separate investment portfolios. Any
such series of shares may be further divided without shareholder approval into
two or more classes of shares having such preferences and special or relative
rights and privileges as the Trustees determine. The Mentor Funds' shares are
currently divided into ten series, eight of which are being offered by this
Prospectus. Each series issues shares of two classes, Class A and Class B. Each
share has one vote, with fractional shares voting proportionally. Shares of each
series will vote together as a single series except when required by law or
determined by the Trustees. Shares of each Portfolio are freely transferable,
are entitled to dividends as declared by the Trustees, and, if the Portfolio
were liquidated, would receive the net assets of that Portfolio. The Mentor
Funds may suspend the sale of shares at any time and may refuse any order to
purchase shares. Although The Mentor Funds is not required to hold annual
meetings of its shareholders, shareholders have the right to call a meeting to
elect or remove Trustees, or to take other actions as provided in the Agreement
and Declaration of Trust.
In June, 1995, Mentor Growth Fund, Mentor Strategy Fund, and Mentor
Short-Duration Income Fund, series of shares of Mentor Series Trust, a
Massachusetts business trust, were reorganized as the Mentor Growth Portfolio,
Mentor Strategy Portfolio, and Mentor Short-Duration Income Portfolio,
respectively.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as custodian for each Portfolio, except that State Street
Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts 02266 serves as
custodian for the Global Portfolio. Boston Financial Data Services, Inc. is
transfer agent and dividend disbursing agent for the Portfolios. The Trust's
independent auditors are KPMG Peat Marwick LLP, One Boston Place, Boston,
Massachusetts 02108.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the Portfolios. A Portfolio's "yield" is calculated by
dividing the Portfolio's annualized net investment income per share during a
recent 30-day period by the maximum public offering price per share on the last
day of that period. "Total return" for the life of a Portfolio through the most
recent calendar quarter represents the actual rate of return on an investment of
$1,000 in the Portfolio reflecting (in the case of Class B shares) the deduction
of any applicable
32

<PAGE>
CDSC. Total return may also be presented for other periods or based on
investment at reduced sales charge levels or at net asset value. Any quotation
of total return or yield for a Portfolio's shares not reflecting a CDSC would be
reduced if such sales charges were reflected. Quotations of yield or total
return for a period when an expense limitation was in effect will be greater
than if the limitation had not been in effect. A Portfolio's performance may be
compared to various indices. See the Statement of Additional Information for
more information. Information may be presented in advertisements about a
Portfolio describing the background and professional experience of the
Portfolio's investment adviser, sub-adviser, or any portfolio manager.
All data is based on a Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Portfolio, and
the Portfolio's operating expenses. Investment performance also often reflects
the risks associated with a Portfolio's investment objective and policies. These
factors should be considered when comparing a Portfolio's investment results to
those of other mutual funds and other investment vehicles.
As permitted by applicable law, performance information for a Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
33

<PAGE>
APPENDIX
MOODY'S INVESTORS SERVICE, INC., LONG-TERM MUNICIPAL DEBT 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 because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment 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 great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Bonds
which are Ba are judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD AND POOR'S CORPORATION LONG-TERM MUNICIPAL DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely
34

<PAGE>
have some quality and protective characteristics, these are outweighed by large
uncertainties of major risk exposure to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from "A" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM LOAN RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
STANDARD AND POOR'S CORPORATION MUNICIPAL NOTE RATINGS
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
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 carrying this rating have a satisfactory
degree of assurance for timely payment.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1 -- Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2 -- Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1 -- This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 -- Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
35

<PAGE>
THE MENTOR FUNDS
PROSPECTUS
AN OPEN-END MANAGEMENT
INVESTMENT COMPANY
(Bullet) Mentor Growth Portfolio
(Bullet) Mentor Capital Growth Portfolio
(Bullet) Mentor Strategy Portfolio
(Bullet) Mentor Income and Growth Portfolio
(Bullet) Mentor Perpetual Global Portfolio
(Bullet) Mentor Quality Income Portfolio
(Bullet) Mentor Municipal Income Portfolio
(Bullet) Mentor Short-Duration Income Portfolio
May 30, 1995
[logo]

<PAGE>
THE MENTOR FAMILY OF FUNDS
NEW ACCOUNT FORM
AND SHAREOWNER OPTIONS FORM

(mentor logo)

<PAGE>
USE THE ATTACHED FORM
TO ESTABLISH YOUR
MENTOR FAMILY OF FUNDS ACCOUNT

<PAGE>

NEW ACCOUNT FORM AND
SHAREOWNER OPTIONS FORM

TYPE OF ACCOUNT

Use this one form to open any ONE of the following types of accounts. Please
check the appropriate one below.

( ) Individual Account, Complete 1. ( ) Joint Account, Complete 1
and 2. ( ) Custodial Account, (Gift to a Minor), Complete 3.
( ) Trust Account, Complete 4. ( ) Corporate (or Organization)
Account, Complete 5.

( ) Revise Existing Account _________________________________
Number

1. __________________________________ _____ -_____ -_______
Name Social Security Number

2. __________________________________ _____ -_____ -_______
Name Social Security Number

SHAREOWNER EMPLOYMENT INFORMATION
This information is required in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers.
_____________________________________________________
Occupation of Shareowner or Custodian
_____________________________________________________
Employer's Name
_____________________________________________________
Employer's Address
_____________________________________________________
City State ZIP Code
_____________________________________________________
Occupation of Co-Shareowner
_____________________________________________________
Employer's Name
_____________________________________________________
Employer's Address
_____________________________________________________
City State ZIP Code

3. ______________________________________ as custodian for
Custodian's Name (only one custodian permitted)
___________________________________________________
Minor's Name (only one minor permitted)
____-____-____
Minor's Social Security Number
Under the _____ Uniform Gifts or _____ Uniform Transfers to Minors
State State
Act ________/____________/__________
Minor's Birthdate
4. _______________________ ______________________________
Name of Trustee Name of Trust
_______________________________________ _____/_____/______
Name of Second Trustee (if any) Date of Trust
________________________________________________________
Trust's Taxpayer Identification Number
5. _______________________________________________________
Name of Corporation (or other entity)
_______________________________________________________
Taxpayer Identification Number
Business Type:
____Corporation _____Partnership _____Organization
____Fiduciary _____Other ______________________
Specify other type

(Please attach a certified copy of your corporate resolution)

MAILING ADDRESS OF ACCOUNT
All the information requested is needed to open your account.
_________________________________________ _________________
Street Address or Box Number Apartment Number
_________________________________________ ________ ________
City State ZIP Code
(_____) ________________ (______)__________________
Area Code Daytime Phone Area Code Evening Phone

FUND SELECTION AND INITIAL INVESTMENT
( ) Next to the Fund name(s), indicate the amount you're investing in the
Fund. MINIMUM PER FUND: $1,000
( ) Be sure to check how you want your Dividend and Capital Gains
distributions handled: automatically reinvested to buy more shares or sent
to you by check.
( ) Indicate the TOTAL amount you're investing at this time.

<TABLE>
<CAPTION>
CLASS
FUND CHOICE A B BL AMOUNT REINVEST CASH
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends ( ) ( )
Growth Portfolio ( ) ( ) ( ) $ Capital Gains ( ) ( )
Dividends ( ) ( )
Capital Growth ( ) ( ) ( ) $ Capital Gains ( ) ( )
Portfolio
Dividends ( ) ( )
Quality Income ( ) ( ) ( ) $ Capital Gains ( ) ( )
Portfolio
Dividends ( ) ( )
Municipal ( ) ( ) ( ) $ Capital Gains ( ) ( )
Income Portfolio
Dividends ( ) ( )
Income and ( ) ( ) ( ) $ Capital Gains ( ) ( )
Growth Portfolio
Dividends ( ) ( )
Perpetual Global ( ) ( ) ( ) $ Capital Gains ( ) ( )
Portfolio
Dividends ( ) ( )
Short-Duration ( ) ( ) ( ) $ Capital Gains ( ) ( )
Income Portfolio
Dividends ( ) ( )
Strategy Portfolio ( ) ( ) ( ) $ Capital Gains ( ) ( )
</TABLE>

TOTAL $__________________

( ) Check enclosed for total purchase above made payable to The Mentor Funds.
( ) Other payment method

TELEPHONE EXCHANGE/
TELEPHONE REDEMPTION

I elect the following privileges as described in the prospectus:
Telephone Exchange: ( ) Yes Telephone Redemptions: ( ) Yes
( ) No ( ) No

These privileges will automatically apply if neither box is checked.

By establishing these services and signing this form,
I acknowledge that:

I authorize Boston Financial Data Services, Inc. to accept and act upon
telephoned instructions to (1) exchange shares I own in any Mentor Fund(s) for
shares of any other Mentor Fund(s) or (2) redeem shares I own in any Mentor
Fund(s).

I understand that exchanges can be made only between accounts having identical
registrations.

( ) LETTER OF INTENT

I understand that through accumulated investments I can reduce my sales charges
on Class A shares. I plan to invest over a 13-month period in Class A shares of
one or more of the Funds in The Mentor Funds an aggregate amount of at least:
( ) $50,000 (applies only to equity funds)
( ) $10,000 ( ) $250,000 ( ) $500,000 ( ) $1,000,000 (and above)
If the amount indicated is not invested within 13 months, reduced sales charge
do not apply.
( ) I am already investing under an existing statement of intention.

RIGHTS OF ACCUMULATION

( ) I own Class A shares of more than one Fund in The Mentor Funds, which may
entitle me to a reduced sales charge. My shareholder account numbers are:
_______________________ _______________________ ________________________
( ) The registration of some of my shares differs. Their account numbers are:
_______________________ _______________________ ________________________
BE SURE TO COMPLETE THE REVERSE SIDE

<PAGE>

( ) SYSTEMATIC INVESTMENT PLAN
VIA ACH

Check the box above and complete this section; then check the box next to Bank
Account Information and complete that section too.

I authorize State Street Bank & Trust Co. (service agent for The Mentor Funds),
to withdraw money from my bank account to buy more shares for my account(s) in
the Fund(s) listed below.

FUND AMOUNT ($100 minimum)
( ) ____________________ $ ____________________
( ) ____________________ $ ____________________

Please note: This service takes approximately 15 days to establish and will be
done on or about the 15th of each month.

( ) SYSTEMATIC WITHDRAWAL
PLAN VIA CHECK

You must have a minimum of $10,000 in your mutual fund account to qualify for
this optional service.

(Class B shares withdrawals will not be subject to the applicable CDSC up to 10%
of account value at the time of plan inception.)

Check the box above and complete this section.

I authorize State Street Bank & Trust Co. (service agent for The Mentor Funds),
to redeem shares from my account(s) in the Fund(s) listed below and mail a check
for the amount specified to the name and address on the account. State Street
Bank & Trust Co., is to do this on the 15th of each month. If the 15th falls on
a weekend or holiday, the transaction will take place the next business day.

FUND AMOUNT ($100 minimum)
( ) ____________________ $ ____________________
( ) ____________________ $ ____________________

Please send my Systematic Withdrawal Check to
( ) Mailing Address of Account
( ) Other*

Please note: This service takes approximately two (2) weeks to
establish.

*Signature guarantee required

( ) BANK ACCOUNT INFORMATION

Complete this section only if you are signing-up for ( ) Telephone
Redemption, ( ) Systematic Investment Plan, or ( ) Systematic
Withdrawal Plan.
__________________________________________________________________
Bank Name ABA Number
__________________________________________________________________
Bank Address
__________________________________________________________________
City State ZIP Code
__________________________________________________________________
Name(s) on Bank Account
__________________________________________________________________
Bank Account Number
_________Checking _________ Savings

Please attach a check (marked "VOID") or a deposit ticket from this bank
account.

SIGNATURES

This New Account Form must be signed for an account to be
opened. The signatures required for the various types of accounts
are: ( ) Individual Account, the individual's
( ) Joint Account, both shareowners'
( ) Custodial Account (Gift to a Minor), the custodian's
( ) Corporate (or Organization) Account, an officer's (and the
officer's title must be included)

By signing this New Account Form below, I assure that:

( ) I have received and read the prospectus for each of the Funds in which I am
investing, and I understand that the prospectus terms are incorporated into
this form by reference.
( ) I authorize The Mentor Funds, their affiliates and agents, to act on any
instructions believed to be genuine for any service authorized on this form.
I agree they will not be liable for any resulting loss or expense.
( ) I am of legal age in my state and have the authority and legal capacity to
purchase mutual fund shares.
( ) I understand that I may terminate the Telephone Redemption, Systematic
Investment Plan, and/or Systematic Withdrawal Plan at any time by writing to
Boston Financial Data Services.
( ) I understand that I will receive 30 days' written notice from Boston
Financial Data Services, Transfer Agent, before any service on this form is
terminated.
( ) I certify, under penalties of perjury, that:
1. The Social Security or Taxpayer Identification Number shown on this form
is correct. (If I fail to give the correct number or to sign this form,
The Mentor Funds may reject, restrict, or redeem my investment. I may
also be subject to IRS Backup Withholding of a percentage of all
distributions and redemptions.)
2. I am NOT currently subject to IRS Backup Withholding because (a) I have
not been notified of it or (b) notification has been revoked. (Cross out
"NOT" if you are currently subject to Backup Withholding.)

I agree that neither Mentor Investment Group, Inc. Mentor Distributors, Inc.,
Boston Financial Data Services, The Mentor Funds, nor any of their affiliates
will be responsible for the authenticity of any instructions given and shall be
fully indemnified and held harmless from any and all direct liabilities, losses,
or cost resulting from acting upon such transactions.

Shareowner (or Custodian) Date

Co-Shareowner Date

Corporate Officer or Trustee Date

Title of Corporate Officer or Trustee Date

DEALER INFORMATION
To be completed by Customer Account Representative:

Financial Institution Name

Address

City State ZIP Code

Dealer Number (If applicable)

Representative's Code Number

Representative's Full Name

Representative's Branch Office

Representative's Phone Number

MAILING INFORMATION
Send this completed form to:
The Mentor Funds
c/o Boston Financial Data Services
P.O. Box 8507
Boston, MA 02266
If you have any questions please call 1-800-382-0016

MENTOR DISTRIBUTORS, INC., Distributor

<PAGE>

THE MENTOR FUNDS

STATEMENT OF ADDITIONAL INFORMATION

DATED MAY 30, 1995

The Mentor Funds (the "Trust") is a diversified, open-end series
investment company. This Statement of Additional Information is not a
prospectus and should be read in conjunction with the prospectus of the
Trust dated May 30, 1995 and the prospectus of Mentor Balanced Portfolio
dated May 30, 1995. A copy of either prospectus can be obtained upon
request by writing to Mentor Distributors, Inc., the Trust's distributor,
at P.O. Box 1357, Richmond, Virginia 23286-0109, or by calling Mentor
Distributors at 1-800-382-0016.

This Statement is in three parts. Part I contains information with
respect to the Mentor/Cambridge Growth Portfolio, Mentor Capital Growth
Portfolio, Mentor Quality Income Portfolio, Mentor Municipal Income
Portfolio, Mentor Income and Growth Portfolio, and Mentor Perpetual Global
Portfolio. Shares of the Mentor/Cambridge Growth Portfolio currently are
not being offered to the public. Part II contains information with respect
to the Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor Short-
Duration Income Portfolio, and Mentor Balanced Portfolio, which are the
successors to Mentor Growth Fund, Mentor Strategy Fund, Mentor Short-
Duration Income Fund, and Mentor Balanced Fund, respectively, each of which
was previously a series of shares of Mentor Series Trust, a diversified,
open-end series investment company. Part III provides general information
with respect to the Trust and all of the Portfolios.

Table of Contents

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
MENTOR/CAMBRIDGE GROWTH PORTFOLIO . . . . . . . . . . . . . . . . . . . . 5
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . 11
CERTAIN INVESTMENT TECHNIQUES . . . . . . . . . . . . . . . . . . . . 13
INVESTMENT ADVISORY SERVICES . . . . . . . . . . . . . . . . . . . . . 38
MANAGEMENT FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ADMINISTRATIVE SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 40
SHAREHOLDER SERVICING PLAN . . . . . . . . . . . . . . . . . . . . . . 41
BROKERAGE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 42
HOW TO BUY SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
DETERMINING NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . 48
REDEMPTIONS IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . . 49
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . 54
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
TRANSFER AGENT SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 55
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 55
YIELD AND TAX-EQUIVALENT YIELD . . . . . . . . . . . . . . . . . . . . 57
PERFORMANCE COMPARISONS . . . . . . . . . . . . . . . . . . . . . . . . 59
SHAREHOLDER LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 65
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 66

INTRODUCTION

The Mentor Funds (formerly Cambridge Series Trust) was established as a
Massachusetts business trust on January 20, 1992. As of the date of this
Statement, the Trust consists of the following ten portfolios
(collectively, the "Portfolios" and each individually, the "Portfolio"):
Mentor/Cambridge Growth Portfolio (the "Mentor/Cambridge Growth
Portfolio"); Mentor Capital Growth Portfolio (the "Capital Growth
Portfolio"); Mentor Quality Income Portfolio (the "Quality Income
Portfolio"); Mentor Municipal Income Portfolio (the "Municipal Income
Portfolio"); Mentor Income and Growth Portfolio (the "Income and Growth
Portfolio"); Mentor Perpetual Global Portfolio (the "Global Portfolio");
Mentor Growth Portfolio (the "Growth Portfolio"); Mentor Strategy Portfolio
(the "Strategy Portfolio"); Mentor Short-Duration Income Portfolio (the
"Short-Duration Income Portfolio"); and Mentor Balanced Portfolio (the
"Balanced Portfolio"). With the exception of the Balanced Portfolio, which
has only one class of shares, each Portfolio has two classes of shares of
beneficial interest, Class A and Class B shares.

PART I

THE FOLLOWING INFORMATION RELATES TO THE MENTOR/CAMBRIDGE GROWTH, CAPITAL
GROWTH, QUALITY INCOME, MUNICIPAL INCOME, INCOME AND GROWTH, AND THE GLOBAL
PORTFOLIOS, EXCEPT WHERE OTHERWISE NOTED.

INVESTMENT RESTRICTIONS

The following investment restrictions are fundamental and may not be
changed without approval by the holders of a majority of the outstanding
shares of a Portfolio:

1. The Portfolios will not issue senior securities except that a
Portfolio (other than the Municipal Income Portfolio) may borrow money
directly or through reverse repurchase agreements in amounts of up to
one-third of the value of its net assets, including the amount
borrowed; and except to the extent that a Portfolio may enter into
futures contracts. The Municipal Income Portfolio may borrow money
from banks for temporary purposes in amounts of up to 5% of its total
assets. The Portfolios will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the Portfolio by enabling it to meet redemption requests
when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Portfolios will not purchase any
securities while any borrowings in excess of 5% of its total assets
are outstanding. During the period any reverse repurchase agreements
are outstanding, the Quality Income Portfolio will restrict the
purchase of portfolio securities to money market instruments maturing
on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse
repurchase agreements. Notwithstanding this restriction, the
Portfolios may enter into when-issued and delayed delivery
transactions.

2. The Portfolios will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are
necessary for clearance of purchases and sales of securities. The
deposit or payment by a Portfolio of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.

3. The Portfolios will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases the Portfolios
may pledge assets having a value of 10% of assets taken at cost. For
purposes of this restriction, (a) the deposit of assets in escrow in
connection with the writing of covered put or call options and the
purchase of securities on a when-issued basis; and (b) collateral
arrangements with respect to (i) the purchase and sale of stock
options (and options on stock indexes) and (ii) initial or variation
margin for futures contracts, will not be deemed to be pledges of a
Portfolio's assets. Margin deposits for the purchase and sale of
futures contracts and related options are not deemed to be a pledge.

4. The Portfolios will not lend any of their respective assets except
portfolio securities up to one-third of the value of total assets.
(The Municipal Income Portfolio will not lend portfolio securities.)
This shall not prevent a Portfolio from purchasing or holding U.S.
government obligations, money market instruments, variable amount
demand master notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by a
Portfolio's investment objective, policies and limitations or
Declaration of Trust. The Municipal Income Portfolio will not make
loans except to the extent the obligations the Portfolio may invest in
are considered to be loans.

5. The Portfolios (other than the Quality Income Portfolio) will not
invest more than 10% of the value of their net assets in restricted
securities; the Quality Income Portfolio will not invest more than 15%
of the value of its net assets in restricted securities.

6. None of the Portfolios will invest in commodities, except to the
extent that the Portfolios may engage in transactions involving
futures contracts or options on futures contracts, and except to the
extent the securities the Municipal Income Portfolio invests in are
considered interests in commodities or commodities contracts or to the
extent the Portfolio exercises its rights under agreements relating to
such municipal securities.

7. None of the Portfolios will purchase or sell real estate, including
limited partnership interests, except to the extent the securities the
Income and Growth Portfolio and Municipal Income Portfolio may invest
in are considered to be interests in real estate or to the extent the
Municipal Income Portfolio exercises its rights under agreements
relating to such municipal securities (in which case the Portfolio may
liquidate real estate acquired as a result of a default on a
mortgage), although the Portfolios may invest in securities of issuers
whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real
estate.

8. With respect to 75% of the value of its respective total assets, a
Portfolio will not purchase securities issued by any one issuer (other
than cash or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase
agreements collateralized by such securities), if as a result more
than 5% of the value of its total assets would be invested in the
securities of that issuer. A Portfolio will not acquire more than 10%
of the outstanding voting securities of any one issuer.

9. A Portfolio will not invest 25% or more of the value of its respective
total assets in any one industry (other than securities issued by the
U.S. Government, its agencies or instrumentalities). As described in
the Trust's Prospectus, the Municipal Income Portfolio may from time
to time invest more than 25% of its assets in a particular segment of
the municipal bond market; however, that Portfolio will not invest
more than 25% of its assets in industrial development bonds in a
single industry except as described in the Trust's Prospectus.

10. A Portfolio will not underwrite any issue of securities, except as a
Portfolio may be deemed to be an underwriter under the Securities Act
of 1933 in connection with the sale of securities in accordance with
its investment objective, policies, and limitations.

In addition, the following practices are contrary to the current policy of
each of the Portfolios (except as otherwise noted), and may be changed
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.

1. The Portfolios will not invest more than 15% of the value of their
respective net assets in aliquot securities, including repurchase
agreements providing for settlement more than seven days after notice;
over-the-counter options; certain restricted securities not determined
by the Trustees to be liquid; and non-negotiable fixed income time
deposits with maturities over seven days.

2. The Portfolios will limit their respective investments in other
investment companies to no more than 3% of the total outstanding
voting stock of any investment company, invest no more than 5% of
total assets in any one investment company, or invest more than 10% of
total assets in investment companies in general. The Portfolios will
purchase securities of closed-end investment companies only in open
market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of
assets. It should be noted that investment companies incur certain
expenses such as management fees, and therefore any investment by a
Portfolio in shares of another investment company would be subject to
duplicative expenses.

3. Except for the Municipal Income Portfolio, no Portfolio will invest
more than 5% of the value of its respective total assets in securities
of issuers which have records of less than three years of continuous
operations, including the operation of any predecessor.

The Municipal Income Portfolio will not invest more than 5% of its total
assets in industrial development bonds where the payment of principal and
interest is the responsibility of companies with less than three years of
operating history.

4. A Portfolio will not purchase or retain the securities of any issuer
if the officers and Trustees of the Trust, the investment adviser, or
sub-adviser own individually more than 1/2 of 1% of the issuer's
securities or together own more than 5% of the issuer's securities.

5. A Portfolio will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase
the securities of issuers which invest in or sponsor such programs and
except pursuant to the exercise by the Municipal Income Portfolio of
its rights under agreements relating to municipal securities

6. A Portfolio will not enter into transactions for the purpose of
engaging in arbitrage.

7. A Portfolio will not purchase securities of a company for the purpose
of exercising control or management, except to the extent that
exercise by the Municipal Income Portfolio of its rights under
agreements related to municipal securities would be deemed to
constitute such control or management.

None of the Portfolios (except for the Quality Income Portfolio) borrowed
money (including through use of reverse repurchase agreements) or loaned
portfolio securities in excess of 5% of the value of its net assets during
the last fiscal year, and no Portfolio (except for the Quality Income
Portfolio) has the intention of doing so in the coming fiscal year.

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

The Portfolios (1) will limit the aggregate value of the assets underlying
covered call options or put options written by a Portfolio to not more than
25% of its net assets, (2) will limit the premiums paid for options
purchased by a Portfolio to 5% of its net assets, (3) will limit the margin
deposits on futures contracts entered into by a Portfolio to 5% of its net
assets, and (4) will limit investment in warrants to 5% of its net assets
to meet certain state registration requirements. No more than 2% will be
warrants which are not listed on the New York or American Stock Exchange.
Also, the Mentor/Cambridge Growth Portfolio, Capital Growth Portfolio, and
Income and Growth Portfolio will limit their investment in restricted
securities to 5% of total assets. (If state requirements change, these
restrictions may be revised without shareholder notification.)

MENTOR/CAMBRIDGE GROWTH PORTFOLIO

Below is information concerning the Mentor/Cambridge Growth Portfolio.
Shares of this Portfolio currently are not being offered by the Trust for
sale to the public. Except for the sections "How to Buy Shares" in this
Statement and in the Trust's Prospectus, the information contained in the
Trust's Prospectus and in Part I and III of this Statement applies to the
Mentor/Cambridge Growth Portfolio, except where otherwise noted.

The investment objective of the Portfolio is growth of capital through
professional management and diversification of investments in securities it
believes to have potential of capital appreciation. The Portfolio will be
invested primarily in securities which Commonwealth Advisors, Inc., the
Portfolio's investment adviser, believes offer the potential for capital
appreciation. The Portfolio invests primarily in common stocks but can
invest in any securities with potential for capital growth. The investment
objective of the Portfolio is a fundamental policy and may not be changed
without shareholder approval.

In seeking to obtain capital appreciation, the Portfolio may trade to some
degree in securities for the short term. To this extent, the Portfolio
will be engaged in trading operations based on short-term market
considerations as distinct from long-term investment based upon fundamental
valuation of securities. However, the Portfolio will emphasize fundamental
research in attempting to identify under-valued situations which are
anticipated will appreciate over the longer term.

In seeking to achieve its objective, it will be the Portfolio's policy to
invest primarily in securities which it believes will offer the potential
for increasing the Portfolio's total asset value. While it is anticipated
that most investments will be in common stocks of companies with above-
average growth prospects, investments may also be made to a limited degree
in other common stocks and in convertible securities, such as bonds and
preferred stocks. There may be times when a significant portion of the
Portfolio's assets may be held temporarily in cash or defensive-type
securities, depending upon Commonwealth Advisor's analysis of business and
economic conditions and the outlook for security prices. For these
purposes, defensive-type securities include high-grade debt securities
(rated "A"or above); securities issued by the U.S. Government, its agencies
or instrumentalities; and high-quality money market instruments, including
repurchase agreements. Some of the factors Commonwealth Advisors will
consider in making investments for the Portfolio are patterns of increasing
growth in sales and earnings, the development of new or improved products
or services, favorable outlooks for growth in the industry, the probability
of increased operating efficiencies, emphasis on research and development,
cyclical conditions, or other signs that a company is expected to show
greater than average capital appreciation and earnings growth.

PART II

THE FOLLOWING INFORMATION RELATES TO THE GROWTH, STRATEGY, SHORT-DURATION
INCOME, AND BALANCED PORTFOLIOS, EXCEPT WHERE OTHERWISE NOTED. THESE
PORTFOLIOS ARE THE SUCCESSORS TO MENTOR GROWTH FUND, MENTOR STRATEGY FUND,
MENTOR SHORT-DURATION INCOME FUND, AND MENTOR BALANCED FUND, RESPECTIVELY,
EACH OF WHICH WAS PREVIOUSLY A SERIES OF MENTOR SERIES TRUST.

INVESTMENT RESTRICTIONS

As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without approval by the holders of a majority of the
outstanding shares of that Portfolio, a Portfolio may not:

1. Issue any securities which are senior to the Portfolio's shares as
described herein and in the relevant prospectus, except that each of
the Portfolios other than the Growth Portfolio and the Strategy
Portfolio may borrow money to the extent contemplated by Restriction 4
below.

2. Purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of
transactions). (Margin payments in connection with transactions in
futures contracts, options, and other financial instruments are not
considered to constitute the purchase of securities on margin for this
purpose.)

3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open, it owns an equal amount of
such securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the
same issue as, and equal in amount to, the securities sold short
("short sale against-the-box"), and unless not more than 25% of the
Portfolio's net assets (taken at current value) is held as collateral
for such sales at any one time.

4. (Growth Portfolio and Strategy Portfolio) Borrow money or pledge its
assets except that a Portfolio may borrow from banks for temporary or
emergency purposes (including the meeting of redemption requests which
might otherwise require the untimely disposition of securities) in
amounts not exceeding 10% (taken at the lower of cost or market value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings; provided that a Portfolio will not
purchase additional portfolio securities when such borrowings exceed
5% of its total assets. (Collateral or margin arrangements with
respect to options, futures contracts, or other financial instruments
are not considered to be pledges.)

(all other Portfolios) Borrow more than 33 1/3% of the value of its
total assets less all liabilities and indebtedness (other than such
borrowings) not represented by senior securities.

5. Act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities
laws.

6. Purchase any security if as a result the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years
old or (in the case of Growth Portfolio) in equity securities for
which market quotations are not readily available.

7. (as to the Growth Portfolio only) Purchase any security if as a result
the Portfolio would then hold more than 10% of any class of securities
of an issuer (taking all common stock issues of an issuer as a single
class, all preferred stock issues as a single class, and all debt
issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.

8. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) more than 5%
of the Portfolio's total assets (taken at current value) would then be
invested in securities of a single issuer, or (ii) more than 25% of
the Portfolio's total assets (taken at current value) would be
invested in a single industry; provided that the restriction set out
in (i) above shall apply, in the case of each Portfolio other than the
Growth Portfolio, only as to 75% of such Portfolio's total assets.

9. Invest in securities of any issuer if, to the knowledge of the Trust,
any officer or Trustee of the Trust or of Charter, Commonwealth or
Wellesley, as the case may be, owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and Trustees
who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.

10. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell
securities which are secured by real estate and securities of
companies that invest or deal in real estate (or, in the case of any
Portfolio other than the Growth Portfolio, real estate or limited
partnership interests). (For purposes of this restriction,
investments by a Portfolio in mortgage-backed securities and other
securities representing interests in mortgage pools shall not
constitute the purchase or sale of real estate or interests in real
estate or real estate mortgage loans.)

11. Make investments for the purpose of exercising control or management.

12. (as to the Growth Portfolio only) Participate on a joint or a joint
and several basis in any trading account in securities.

13. (as to the Growth Portfolio only) Purchase any security restricted as
to disposition under federal securities laws if as a result more than
5% of the Portfolio's total assets (taken at current value) would be
invested in restricted securities.

14. (as to the Growth Portfolio only) Invest in securities of other
registered investment companies, except by purchases in the open
market involving only customary brokerage commissions and as a result
of which not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.

15. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common
stocks of companies that invest in or sponsor such programs.

16. (as to the Growth Portfolio only) Make loans, except through (i)
repurchase agreements (repurchase agreements with a maturity of longer
than 7 days together with other illiquid assets being limited to 10%
of the Portfolio's assets,) and (ii) loans of portfolio securities
(limited to 33% of the Portfolio's total assets).

17. (as to the Growth Portfolio only) Purchase foreign securities or
currencies except foreign securities which are American Depository
Receipts listed on exchanges or otherwise traded in the United States
and certificates of deposit, bankers' acceptances and other
obligations of foreign banks and foreign branches of U.S. banks if,
giving effect to such purchase, such obligations would constitute less
than 10% of the Trust's total assets (at current value).

18. (as to the Growth Portfolio only) Purchase warrants if as a result the
Portfolio would then have more than 5% of its total assets (taken at
current value) invested in warrants.

19. (as to each Portfolio other than the Growth Portfolio) Acquire more
than 10% of the voting securities of any issuer.

20. (as to each Portfolio other than the Growth Portfolio) Make loans,
except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of its total
assets (taken at current value), or through the lending of its
portfolio securities with respect to not more than 25% of its total
assets.

In addition, it is contrary to the current policy of each of the
Portfolios, other than the Growth Portfolio, which policy may be changed
without shareholder approval, to:
1. Invest in warrants (other than warrants acquired by the Portfolio as
a part of a unit or attached to securities at the time of purchase)
if as a result such investment (valued at the lower of cost or market
value) would exceed 5% of the value of the Portfolio's net assets,
provided that not more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York or American Stock
Exchanges.

2. Purchase or sell commodities or commodity contracts, except that
a Portfolio may purchase or sell financial futures contracts,
options on financial futures contracts, and futures contracts,
forward contracts, and options with respect to foreign
currencies, and may enter into swap transactions.

3. Purchase securities restricted as to resale if as a result (i)
more than 10% of the Portfolio's total assets would be invested
in such securities or (ii) more than 5% of the Portfolio's total
assets (excluding any securities eligible for resale under Rule
144A under the Securities Act of 1933) would be invested in such
securities.

4. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale,
and (c) repurchase agreements maturing in more than seven days,
if, as a result, more than 15% of the Portfolio's net assets
(taken at current value) would then be invested in the aggregate
in securities described in (a), (b), and (c) above.

5. Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary
brokerage commissions and as a result of which not more than 5%
of its total assets (taken at current value) would be invested in
such securities, or except as part of a merger, consolidation, or
other acquisition.

6. Purchase puts, calls, straddles, spreads, or any combination
thereof (other than futures contracts, options on futures
contracts or indices, and options on foreign currencies), if, by
reason of such purchase, the value of its aggregate investment
therein will exceed 5% of its total assets.

7. Invest in real estate limited partnerships.

All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above as
fundamental or to the extent designated as such in a Prospectus, the other
investment policies described in this Statement or in the Prospectus are
not fundamental and may be changed by approval of the Trustees. As a
matter of policy, the Trustees would not materially change a Portfolio's
investment objective without shareholder approval.

The Investment Company Act of 1940 (the "1940 Act") provides that a
"vote of a majority of the outstanding voting securities" of the Portfolio
means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.

Notwithstanding the provisions of clauses 3 and 16 above, the Growth
Portfolio has no intention during the coming year to make short sales of
securities or to maintain a short position in any security.
Notwithstanding the provisions of clause 14 above, the Growth Portfolio has
no intention during the coming year to invest in the securities of other
registered investment companies.

Shares of beneficial interest in the Mentor Balanced Portfolio have been
registered only in the Commonwealth of Virginia. These shares may not be
offered or sold in any other state without being registered or exempt from
registration.

PART III

THE FOLLOWING INFORMATION RELATES TO ALL OF THE PORTFOLIOS OF THE TRUST,
EXCEPT WERE OTHERWISE NOTED.

All of the information with respect to the fees, expenses and performance
of the portfolios is based on a portfolio's fiscal year end. The
Mentor/Cambridge Growth, Capital Growth, Quality Income, Municipal Income,
Income and Growth, and Global Portfolios each have a september 30 fiscal
year end. The Growth, Strategy, Short-Duration Income, and Balanced
Portfolios each have a December 31 fiscal year end. Certain information
with respect to certain Portfolios is given for partial fiscal years.
Information concerning the commencement of operations of each of the
Portfolios, with the exception of the Mentor/Cambridge Growth Portfolio, is
contained in the Trust's Prospectus in the Section "Financial Highlights."
For the Mentor/Cambridge Growth Portfolio, information for 1992 includes
information from April 29, 1992 through September 30, 1992.

MANAGEMENT OF THE TRUST

Officers and Trustees

The officers and Trustees are listed below with their addresses, principal
occupations, and present positions, including any positions held with
affiliated persons or Mentor Distributors, Inc.

<TABLE>

POSITIONS WITH
NAME AND ADDRESS THE TRUST PRINCIPAL OCUPATIONS DURING PAST FIVE YEARS

<S> <C> <C>
Daniel J. Ludeman(1)(2) Chairman and Trustee Chairman and Chief Executive Officer since July 1991,
901 East Byrd Street Mentor Investment Group, Inc.; Managing Director of
Richmond, Virginia 23219 Wheat, First Securities, Inc. since August 1989;
Managing Director of Wheat First Butcher Singer, Inc.
since June 1991; Director, Mentor Income Fund, Inc.;
Chairman and Trustee, Cash Resource Trust and IMG
Institutional Trust.

Peter J. Quinn, Jr.(1)(2) Trustee President, Commonwealth Advisors, Inc., and Mentor
901 E. Byrd Street Distributors, Inc.; Director, Mentor Investment
Richmond, Virginia 23219 Group, Inc.; Managing Director, Wheat First Butcher
Singer, Inc.; formerly, Senior Vice
President/Director of Mutual Funds, Wheat First
Butcher Singer, Inc..

Stanley F. Pauley Trustee Chairman and Chief Executive Officer, E.R. Carpenter
P. O. Box 27205 Company Incorporated; Trustee, Cash Resource Trust
Richmond, Virginia 23261 and IMG Institutional Trust.

Louis W. Moelchert, Jr. Trustee Vice President of Business and Finance, University of
University of Richmond Richmond; Trustee, Cash Resource Trust and IMG
Richmond, Virginia 23173 Institutional Trust.

Thomas F. Keller Trustee Dean, Fuqua School of Business, Duke University;
Duke University Trustee, Cash Resource Trust and IMG Institutional
Durham, North Carolina Trust.
27706
<PAGE>
Arnold H. Dreyfuss Trustee Retired. Formerly, Chairman and Chief Executive
5100 Cary Street Road Officer, Hamilton Beach/Proctor-Silex, Inc. Trustee,
Richmond, Virginia 23225 Cash Resource Trust and IMG Institutional Trust.

Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company. Trustee, Cash
2235 Staples Mill Road Resource Trust and IMG Institutional Trust.
Richmond, Virginia 23230

Paul F. Costello President Managing Director, Mentor Investment Group, Inc.;
901 East Byrd Street Mentor Distributors, Inc.; President, Cash Resource
Richmond, Virginia 23219 Trust, Mentor Income Fund, Inc., and IMG
Institutional Trust; Senior Vice President,
Commonwealth Advisors, Inc. formerly, President,
Mentor Series Trust; Director, President and Chief
Executive Officer, First Variable Life Insurance
Company; President and Chief Financial Officer,
Variable Investors Series Trust; President and
Treasurer, Atlantic Capital & Research, Inc.; Vice
President and Treasurer, Variable Stock Fund, Inc.,
Monarch Investment Series Trust, and GEICO Tax
Advantage Series Trust; Vice President, Monarch Life
Insurance Company, GEICO Investment Services Company,
Inc., Monarch Investment Services Company, Inc., and
Springfield Life Insurance Company.

Terry L. Perkins Treasurer Vice President, Mentor Investment Group, Inc.;
901 East Byrd Street Treasurer, Cash Resource Trust; Treasurer, Mentor
Richmond, Virginia 23219 Income Fund, Inc.; formerly, Treasurer and
Comptroller, Ryland Capital Management, Inc.;
Treasurer, Mentor Series Trust.

John M. Ivan Secretary Managing Director since October 1992, Director of
901 East Byrd Street Compliance since October 1992, Senior Vice President
Richmond, Virginia 23219 from 1990 to October 1992, and Assistant General
Counsel since 1985, Wheat, First Securities, Inc.;
Clerk, Cash Resource Trust, IMG Institutional Trust;
formerly, Clerk, Mentor Series Trust.

</TABLE>

(1) This Trustee is deemed to be an "interested person" of the Trust as defined
in the Investment Company Act of 1940.

(2) Members of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.

PRINCIPAL HOLDERS OF SECURITIES

The officers and Trustees of the Trust own as a group less than 1% of the
outstanding Class A and B shares of each Portfolio. To the knowledge of
the Trust, no person owns more than 5% of the outstanding shares of any
Portfolio as of March 10, 1995, except that Bank of New York, as Trustee

for the Wheat First Butcher Singer 401(k) Plan, owned of record 865,425
(5.53%) of the shares of the Growth Portfolio and Wheat First Butcher
Singer Foundation owed beneficially 218,504 (92.04%) of the shares of the
Balanced Portfolio.

The Trust's Agreement Declaration of Trust provides that the Trustees will
not be liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.

CERTAIN INVESTMENT TECHNIQUES

Set forth below is information concerning certain investment techniques in
which one or more of the Portfolios may engage, and certain of the risks
they may entail. Certain of the investment techniques may not be available
to a Portfolio. See "Investment objectives and policies" in the Trust's
Prospectus and "Investment objective and policies" in the Portfolio
prospectuses for a description of the investment techniques generally
applicable to each Portfolio.

Options

A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes
in market prices.

Covered call options. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of
premiums than it would realize on its securities alone. Such option
transactions may also be used as a limited form of hedging against a
decline in the price of securities owned by the Portfolio.

A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times
while obligated as a writer, either owns the underlying securities (or
comparable securities satisfying the cover requirements of the securities
exchanges), or has the right to acquire such securities through immediate
conversion of securities.

In return for the premium received when it writes a covered call option, a
Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option
during the life of the option. The Portfolio retains the risk of loss
should the price of such securities decline. If the option expires
unexercised, the Portfolio realizes a gain equal to the premium, which may
be offset by a decline in price of the underlying security. If the option
is exercised, the Portfolio realizes a gain or loss equal to the difference
between the Portfolio's cost for the underlying security and the proceeds
of sale (exercise price minus commissions) plus the amount of the premium.

A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may
enter into closing purchase transactions in order to free itself to sell
the underlying security or to write another call on the security, realize a
profit on a previously written call option, or protect a security from
being called in an unexpected market rise. Any profits from a closing
purchase transaction may be offset by a decline in the value of the
underlying security. Conversely, because increases in the market price of
a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from a closing purchase transaction
is likely to be offset in whole or in part by unrealized appreciation of
the underlying security owned by the Portfolio.

Covered put options. A Portfolio may write covered put options in order to
enhance its current return. Such options transactions may also be used as
a limited form of hedging against an increase in the price of securities
that the Portfolio plans to purchase. A put option gives the holder the
right to sell, and obligates the writer to buy, a security at the exercise
price at any time before the expiration date. A put option is "covered" if
the writer segregates cash and high-grade short-term debt obligations or
other permissible collateral equal to the price to be paid if the option is
exercised.

In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio
assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current market value,
resulting in a potential capital loss unless the security later appreciates
in value.

A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction
may be partially or entirely offset by the premium received on the
terminated option.

Purchasing put and call options. A Portfolio may also purchase put options
to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise
price regardless of any decline in its market price. In order for a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs that the Portfolio must pay. These costs will reduce any
profit the Portfolio might have realized had it sold the underlying
security instead of buying the put option.

A Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the
Portfolio, as holder of the call option, is able to buy the underlying
security at the exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be profitable, the
market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs. These costs
will reduce any profit the Portfolio might have realized had it bought the
underlying security at the time it purchased the call option.

A Portfolio may also purchase put and call options to enhance its current
return.

Options on foreign securities. The Trust may, on behalf of a Portfolio,
purchase and sell options on foreign securities if in the opinion of its
investment advisor the investment characteristics of such options,
including the risks of investing in such options, are consistent with the
Portfolio's investment objectives. It is expected that risks related to
such options will not differ materially from risks related to options on
U.S. securities. However, position limits and other rules of foreign
exchanges may differ from those in the U.S. In addition, options markets
in some countries, many of which are relatively new, may be less liquid
than comparable markets in the U.S.

Risks involved in the sale of options. Options transactions involve
certain risks, including the risks that a Portfolio's investment adviser or
sub-adviser will not forecast interest rate or market movements correctly,
that a Portfolio may be unable at times to close out such positions, or
that hedging transactions may not accomplish their purpose because of
imperfect market correlations. The successful use of these strategies
depends on the ability of a Portfolio's investment adviser or sub-adviser
to forecast market and interest rate movements correctly.

An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were
to exist, it would be impossible to enter into a closing transaction to
close out an option position. As a result, a Portfolio may be forced to
continue to hold, or to purchase at a fixed price, a security on which it
has sold an option at a time when its investment adviser or sub-adviser
believes it is inadvisable to do so.

Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict
the Trust's use of options. The exchanges have established limitations on
the maximum number of calls and puts of each class that may be held or
written by an investor or group of investors acting in concert. It is
possible that the Trust and other clients of the Portfolios' investment
adviser or sub-advisers may be considered such a group. These position
limits may restrict the Trust's ability to purchase or sell options on
particular securities.

Options which are not traded on national securities exchanges may be closed
out only with the other party to the option transaction. For that reason,
it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.

Government regulations, particularly the requirements for qualification as
a "regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.

Futures Contracts

In order to hedge against the effects of adverse market changes each
Portfolio that may invest in debt securities may buy and sell futures
contracts on debt securities of the type in which the Portfolio may invest
and on indexes of debt securities. In addition, each Portfolio that may
invest in equity securities may purchase and sell stock index futures to
hedge against changes in stock market prices. A Portfolio may also, to the
extent permitted by applicable law, buy and sell futures contracts and
options on futures contracts to increase the Portfolio's current return.
All such futures and related options will, as may be required by applicable
law, be traded on exchanges that are licensed and regulated by the
Commodity Futures Trading Commission (the "CFTC").

Futures on Debt Securities and Related Options. A futures contract on a
debt security is a binding contractual commitment which, if held to
maturity, will result in an obligation to make or accept delivery, during a
particular month, of securities having a standardized face value and rate
of return. By purchasing futures on debt securities -- assuming a "long"
position -- a Portfolio will legally obligate itself to accept the future
delivery of the underlying security and pay the agreed price. By selling
futures on debt securities -- assuming a "short" position -- it will
legally obligate itself to make the future delivery of the security against
payment of the agreed price. Open futures positions on debt securities
will be valued at the most recent settlement price, unless that price does
not, in the judgment of persons acting at the direction of the Trustees as
to the valuation of the Trust's assets, reflect the fair value of the
contract, in which case the positions will be valued by the Trustees or
such persons.

Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions that may result
in a profit or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, a Portfolio may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous to the Portfolio to do so. A clearing corporation associated
with the exchange on which futures are traded assumes responsibility for
such closing transactions and guarantees that a Portfolio's sale and
purchase obligations under closed-out positions will be performed at the
termination of the contract.

Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short"
position in the futures market by selling contracts for the future delivery
of debt securities held by the Portfolio (or securities having
characteristics similar to those held by the Portfolio) in order to hedge
against an anticipated rise in interest rates that would adversely affect
the value of the Portfolio's portfolio securities. When hedging of this
character is successful, any depreciation in the value of portfolio
securities may substantially be offset by appreciation in the value of the
futures position.

On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the
Trust expects to purchase for the Portfolio particular securities when it
has the necessary cash, but expects the rate of return available in the
securities markets at that time to be less favorable than rates currently
available in the futures markets. If the anticipated rise in the price of
the securities should occur (with its concomitant reduction in yield), the
increased cost to the Portfolio of purchasing the securities may be offset,
at least to some extent, by the rise in the value of the futures position
taken in anticipation of the subsequent securities purchase.

Successful use by a Portfolio of futures contracts on debt securities is
subject to its investment adviser's or sub-adviser's ability to predict
correctly movements in the direction of interest rates and other factors
affecting markets for debt securities. For example, if a Portfolio has
hedged against the possibility of an increase in interest rates which would
adversely affect the market prices of debt securities held by it and the
prices of such securities increase instead, the Portfolio will lose part or
all of the benefit of the increased value of its securities which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it
may have to sell securities to meet daily margin maintenance requirements.
The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.

A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to
options on securities except that options on futures contracts give the
purchaser the right, in return for the premium paid, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option. As with options on securities, the holder
or writer of an option may terminate his position by selling or purchasing
an option of the same series. There is no guarantee that such closing
transactions can be effected. A Portfolio will be required to deposit
initial margin and maintenance margin with respect to put and call options
on futures contracts written by it pursuant to brokers' requirements, and,
in addition, net option premiums received will be included as initial
margin deposits. See "Margin Payments" below. Compared to the purchase or
sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to a Portfolio because the maximum
amount at risk is the premium paid for the options plus transactions costs.
However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to a Portfolio when
the purchase or sale of the futures contracts would not, such as when there
is no movement in the prices of debt securities. The writing of a put or
call option on a futures contract involves risks similar to those risks
relating to the purchase or sale of futures contracts.

Index Futures Contracts and Options. A Portfolio may invest in debt index
futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units
of a specified debt index at a specified future date at a price agreed upon
when the contract is made. A unit is the current value of the index.
(Debt index futures in which the Portfolios are presently expected to
invest are not now available, although such futures contracts are expected
to become available in the future.) A stock index futures contract is a
contract to buy or sell units of a stock index at a specified future date
at a price agreed upon when the contract is made. A unit is the current
value of the stock index.

The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index is
composed of 100 selected common stocks, most of which are listed on the New
York Stock Exchange. The S&P 100 Index assigns relative weightings to the
common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100
Index, contracts are to buy or sell 100 units. Thus, if the value of the
S&P 100 Index were $180, one contract would be worth $18,000 (100 units x
$180). The stock index futures contract specifies that no delivery of the
actual stocks making up the index will take place. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement
being the difference between the contract price and the actual level of the
stock index at the expiration of the contract. For example, if a Portfolio
enters into a futures contract to buy 100 units of the S&P 100 Index at a
specified future date at a contract price of $180 and the S&P 100 Index is
at $184 on that future date, the Portfolio will gain $400 (100 units x gain
of $4). If the Portfolio enters into a futures contract to sell 100 units
of the stock index at a specified future date at a contract price of $180
and the S&P 100 Index is at $182 on that future date, the Portfolio will
lose $200 (100 units x loss of $2).

A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures.

In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts
with respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of
the Portfolio's securities.

Options on index futures contracts are similar to options on securities
except that options on index futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the holder
would assume the underlying futures position and would receive a variation
margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash based on the difference between the exercise
price of the option and the closing level of the index on which the futures
contract is based on the expiration date. Purchasers of options who fail
to exercise their options prior to the exercise date suffer a loss of the
premium paid.

As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios which may purchase and sell index
futures contracts may purchase and sell call and put options on the
underlying indexes themselves to the extent that such options are traded on
national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and
the writer undertakes the obligation to sell or buy (as the case may be),
units of an index at a stated exercise price during the term of the option.
Instead of giving the right to take or make actual delivery of securities,
the holder of an index option has the right to receive a cash "exercise
settlement amount". This amount is equal to the amount by which the fixed
exercise price of the option exceeds (in the case of a put) or is less than
(in the case of a call) the closing value of the underlying index on the
date of the exercise, multiplied by a fixed "index multiplier".

A Portfolio may purchase or sell options on stock indices in order to close
out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.

Compared to the purchase or sale of futures contracts, the purchase of call
or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index
involves risks similar to those risks relating to the purchase or sale of
index futures contracts.

Margin Payments. When a Portfolio purchases or sells a futures contract,
it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage
of the amount of the futures contract. This amount is known as "initial
margin". The nature of initial margin is different from that of margin in
security transactions in that it does not involve borrowing money to
finance transactions. Rather, initial margin is similar to a performance
bond or good faith deposit that is returned to a Portfolio upon termination
of the contract, assuming a Portfolio satisfies its contractual
obligations.

Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract
fluctuates. For example, when a Portfolio sells a futures contract and the
price of the underlying debt security rises above the delivery price, the
Portfolio's position declines in value. The Portfolio then pays the broker
a variation margin payment equal to the difference between the delivery
price of the futures contract and the market price of the securities
underlying the futures contract. Conversely, if the price of the
underlying security falls below the delivery price of the contract, the
Portfolio's futures position increases in value. The broker then must make
a variation margin payment equal to the difference between the delivery
price of the futures contract and the market price of the securities
underlying the futures contract.

When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.

Special Risks of Transactions in Futures Contracts and Related Options

Liquidity risks. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange
or board of trade will exist for any particular contract or at any
particular time. If there is not a liquid secondary market at a particular
time, it may not be possible to close a futures position at such time and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin. However, in the
event financial futures are used to hedge portfolio securities, such
securities will not generally be sold until the financial futures can be
terminated. In such circumstances, an increase in the price of the
portfolio securities, if any, may partially or completely offset losses on
the financial futures.

In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The
ability to establish and close out positions in such options will be
subject to the development and maintenance of a liquid secondary market.
It is not certain that such a market will develop. Although a Portfolio
generally will purchase only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any
particular time. In the event no such market exists for particular
options, it might not be possible to effect closing transactions in such
options with the result that a Portfolio would have to exercise the options
in order to realize any profit.

Hedging risks. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device.
One risk arises because of the imperfect correlation between movements in
the prices of the futures contracts and options and movements in the
underlying securities or index or movements in the prices of a Portfolio's
securities which are the subject of a hedge. A Portfolio's investment
adviser or sub-adviser will, however, attempt to reduce this risk by
purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in
its judgment, correlate closely with movements in the prices of the
underlying securities or index and the Portfolio's portfolio securities
sought to be hedged.

Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to its investment adviser's or sub-adviser's
ability to predict correctly movements in the direction of the market. It
is possible that, where a Portfolio has purchased puts on futures contracts
to hedge its portfolio against a decline in the market, the securities or
index on which the puts are purchased may increase in value and the value
of securities held in the portfolio may decline. If this occurred, the
Portfolio would lose money on the puts and also experience a decline in
value in its portfolio securities. In addition, the prices of futures, for
a number of reasons, may not correlate perfectly with movements in the
underlying securities or index due to certain market distortions. First,
all participants in the futures market are subject to margin deposit
requirements. Such requirements may cause investors to close futures
contracts through offsetting transactions which could distort the normal
relationship between the underlying security or index and futures markets.
Second, the margin requirements in the futures markets are less onerous
than margin requirements in the securities markets in general, and as a
result the futures markets may attract more speculators than the securities
markets do. Increased participation by speculators in the futures markets
may also cause temporary price distortions. Due to the possibility of
price distortion, even a correct forecast of general market trends by a
Portfolio's investment adviser or sub-adviser may still not result in a
successful hedging transaction over a very short time period.

Other Risks. Portfolios will incur brokerage fees in connection with their
futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks,
those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and related options,
unanticipated changes in interest rates or stock price movements may result
in a poorer overall performance for the Portfolio than if it had not
entered into any futures contracts or options transactions. Moreover, in
the event of an imperfect correlation between the futures position and the
portfolio position which is intended to be protected, the desired
protection may not be obtained and the Portfolio may be exposed to risk of
loss.

Forward Commitments

A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward
commitments") if the Portfolio holds, and maintains until the settlement
date in a segregated account, cash or high-grade debt obligations in an
amount sufficient to meet the purchase price, or if the Portfolio enters
into offsetting contracts for the forward sale of other securities it owns.
Forward commitments may be considered securities in themselves, and involve
a risk of loss if the value of the security to be purchased declines prior
to the settlement date, which risk is in addition to the risk of decline in
the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolios rely on the dealer to consummate the sale.
The dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price.

Although a Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery
pursuant to options contracts it has entered into, a Portfolio may dispose
of a commitment prior to settlement if its investment adviser or sub-
adviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.

Repurchase Agreements

A Portfolio may enter into repurchase agreements. A repurchase agreement
is a contract under which the Portfolio acquires a security for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such
security at a fixed time and price (representing the Portfolio's cost plus
interest). It is the Trust's present intention to enter into repurchase
agreements only with member banks of the Federal Reserve System and
securities dealers meeting certain criteria as to creditworthiness and
financial condition established by the Trustees of the Trust and only with
respect to obligations of the U.S. government or its agencies or
instrumentalities or other high quality short term debt obligations.
Repurchase agreements may also be viewed as loans made by a Portfolio which
are collateralized by the securities subject to repurchase. Each
Portfolio's investment adviser or sub-adviser will monitor such
transactions to ensure that the value of the underlying securities will be
at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. If the seller defaults, a
Portfolio could realize a loss on the sale of the underlying security to
the extent that the proceeds of sale including accrued interest are less
than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, a Portfolio may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if a
Portfolio is treated as an unsecured creditor and required to return the
underlying collateral to the seller's estate.

Loans of Portfolio Securities

A Portfolio may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government
securities, cash, or cash equivalents adjusted daily to have market value
at least equal to the current market value of the securities loaned; (2)
the Portfolio may at any time call the loan and regain the securities
loaned; (3) a Portfolio will receive any interest or dividends paid on the
loaned securities; and (4) the aggregate market value of securities of any
Portfolio loaned will not at any time exceed one-third (or such other limit
as the Trustee may establish) of the total assets of the Portfolio. In
addition, it is anticipated that a Portfolio may share with the borrower
some of the income received on the collateral for the loan or that it will
be paid a premium for the loan. Before a Portfolio enters into a loan, its
investment adviser or sub-adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower. The risks in
lending portfolio securities, as with other extensions of credit, consist
of possible delay in recovery of the securities or possible loss of rights
in the collateral should the borrower fail financially. Although voting
rights or rights to consent with respect to the loaned securities pass to
the borrower, a Portfolio retains the right to call the loans at any time
on reasonable notice, and it will do so in order that the securities may be
voted by a Portfolio if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. A
Portfolio will not lend portfolio securities to borrowers affiliated with
the Portfolio.

Collateralized mortgage obligations; other mortgage-related securities

Collateralized mortgage obligations or "CMOs" are debt obligations or pass-
through certificates collateralized by mortgage loans or mortgage pass-
through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the
Federal National Mortgage Association ("FNMA"), or the Federal Home Loan
Mortgage Corporation ("FHLMC"), but they also may be collateralized by
whole loans or private pass-through certificates (such collateral
collectively hereinafter referred to as "Mortgage Assets"). CMOs may be
issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans.

In a CMO, a series of bonds or certificates is generally issued in multiple
classes. Each class of CMOs is issued at a specific fixed or floating rate
coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on most classes of the CMOs on a
monthly, quarterly, or semi-annual basis. The principal of and interest on
the mortgage assets may be allocated among the several classes of a series
of a CMO in innumerable ways. In a CMO, payments of principal, including
any principal prepayments, on the mortgage assets are applied to the
classes of the series in a pre-determined sequence.

Residual interests. Residual interests are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans. The cash flow
generated by the mortgage assets underlying a series of mortgage securities
is applied first to make required payments of principal of and interest on
the mortgage securities and second to pay the related administrative
expenses of the issuer. The residual generally represents the right to any
excess cash flow remaining after making the foregoing payments. Each
payment of such excess cash flow to a holder of the related residual
represents income and/or a return of capital. The amount of residual cash
flow resulting from a series of mortgage securities will depend on, among
other things, the characteristics of the mortgage assets, the coupon rate
of each class of the mortgage securities, prevailing interest rates, the
amount of administrative expenses, and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on residual
interests may be extremely sensitive to prepayments on the related
underlying mortgage assets in the same manner as an interest-only class of
stripped mortgage-backed securities. In addition, if a series of mortgage
securities includes a class that bears interest at an adjustable rate, the
yield to maturity on the related residual interest may also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. In certain circumstances, there may be little or no
excess cash flow payable to residual holders. The Portfolio may fail to
recoup fully its initial investment in a residual.

Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals
currently may not have the liquidity of other more established securities
trading in other markets. Residuals may be subject to certain restrictions
on transferability.

Foreign Securities

A Portfolio may invest in foreign securities and in certificates of deposit
issued by United States branches of foreign banks and foreign branches of
United States banks.

Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and
possible consequent illiquidity, greater volatility in price, the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation of assets, nationalization, or other adverse
political or economic developments. Foreign companies may not be subject
to auditing and financial reporting standards and requirements comparable
to those which apply to U.S. companies. Foreign brokerage commissions and
other fees are generally higher than in the United States. It may be more
difficult to obtain and enforce a judgment against a foreign issuer.

In addition, to the extent that a Portfolio's foreign investments are not
United States dollar-denominated, the Portfolio may be affected favorably
or unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.

In determining whether to invest in securities of foreign issuers, the
investment adviser or sub-adviser of a Portfolio seeking current income
will consider the likely impact of foreign taxes on the net yield available
to the Portfolio and its shareholders. Income received by a Portfolio from
sources within foreign countries may be reduced by withholding and other
taxes imposed by such countries. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes. It is impossible
to determine the effective rate of foreign tax in advance since the amount
of a Portfolio's assets to be invested in various countries is not known,
and tax laws and their interpretations may change from time to time and may
change without advance notice. Any such taxes paid by a Portfolio will
reduce its net income available for distribution to shareholders.

Foreign Currency Transactions

A Portfolio may engage in currency exchange transactions to protect against
uncertainty in the level of future foreign currency exchange rates. A
Portfolio may engage in both "transaction hedging" and "position hedging".

When it engages in transaction hedging, a Portfolio enters into foreign
currency transactions with respect to specific receivables or payables of
the Portfolio generally arising in connection with the purchase or sale of
its portfolio securities. A Portfolio will engage in transaction hedging
when it desires to "lock in" the U.S. dollar price of a security it has
agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or
interest payment in a foreign currency. By transaction hedging a Portfolio
will attempt to protect against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the applicable
foreign currency during the period between the date on which the security
is purchased or sold or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.

A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell
foreign currency futures contracts.

For transaction hedging purposes a Portfolio may also purchase exchange-
listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures
contract gives a Portfolio the right to assume a short position in the
futures contract until expiration of the option. A put option on currency
gives a Portfolio the right to sell a currency at an exercise price until
the expiration of the option. A call option on a futures contract gives a
Portfolio the right to assume a long position in the futures contract until
the expiration of the option. A call option on currency gives a Portfolio
the right to purchase a currency at the exercise price until the expiration
of the option. A Portfolio will engage in over-the-counter transactions
only when appropriate exchange-traded transactions are unavailable and
when, in the opinion of its investment adviser or sub-adviser, the pricing
mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations.

When it engages in position hedging, a Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values
of the foreign currencies in which securities held by the Portfolio are
denominated or are quoted in their principle trading markets or an increase
in the value of currency for securities which a Portfolio expects to
purchase. In connection with position hedging, a Portfolio may purchase
put or call options on foreign currency and foreign currency futures
contracts and buy or sell forward contracts and foreign currency futures
contracts. A Portfolio may also purchase or sell foreign currency on a
spot basis.

The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values
of those securities between the dates the currency exchange transactions
are entered into and the dates they mature.

It is impossible to forecast with precision the market value of a
Portfolio's portfolio securities at the expiration or maturity of a forward
or futures contract. Accordingly, it may be necessary for a Portfolio to
purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security or securities
being hedged is less than the amount of foreign currency a Portfolio is
obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may
be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security or securities of a
Portfolio if the market value of such security or securities exceeds the
amount of foreign currency the Portfolio is obligated to deliver.

To offset some of the costs to a Portfolio of hedging against fluctuations
in currency exchange rates, the Portfolio may write covered call options on
those currencies.

Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these
techniques tend to minimize the risk of loss due to a decline in the value
of the hedged currency, they tend to limit any potential gain which might
result from the increase in the value of such currency.

A Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts,
and by purchasing and selling foreign currency forward contracts.

Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract as agreed by the parties, at a price set at the time
of the contract. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. The contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades. A foreign currency
futures contract is a standardized contract for the future delivery of a
specified amount of a foreign currency at a future date at a price set at
the time of the contract. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated by the
CFTC, such as the New York Mercantile Exchange.

Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a
given month. Forward contracts may be in any amounts agreed upon by the
parties rather than predetermined amounts. Also, forward foreign exchange
contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin
or other deposit.

At the maturity of a forward or futures contract, a Portfolio may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase
or sale of an offsetting contract. Closing transactions with respect to
forward contracts are usually effected with the currency trader who is a
party to the original forward contract. Closing transactions with respect
to futures contracts are effected on a commodities exchange; a clearing
corporation associated with the exchange assumes responsibility for closing
out such contracts.

Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally
purchase or sell foreign currency futures contracts and related options
only on exchanges or boards of trade where there appears to be an active
secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or option
or at any particular time. In such event, it may not be possible to close
a futures or related option position and, in the event of adverse price
movements, a Portfolio would continue to be required to make daily cash
payments of variation margin on its futures positions.

Foreign Currency Options. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's investment adviser or sub-adviser believes that a liquid
secondary market exists for such options. There can be no assurance that a
liquid secondary market will exist for a particular option at any specific
time. Options on foreign currencies are affected by all of those factors
which influence exchange rates and investments generally.

The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency
options, investors may be disadvantaged by having to deal in an odd lot
market (generally consisting of transactions of less than $1 million) for
the underlying foreign currencies at prices that are less favorable than
for round lots.

There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Available quotation information is generally representative of very
large transactions in the interbank market and thus may not reflect
relatively smaller transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are
closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying
markets that cannot be reflected in the U.S. options markets.

Settlement Procedures. Settlement procedures relating to a Portfolio
investments in foreign securities and to a Portfolio's foreign currency
exchange transactions may be more complex than settlements with respect to
investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For
example, settlement of transactions involving foreign securities or foreign
currency may occur within a foreign country, and the Portfolio may be
required to accept or make delivery of the underlying securities or
currency in conformity with any applicable U.S. or foreign restrictions or
regulations, and may be required to pay any fees, taxes or charges
associated with such delivery. Such investments may also involve the risk
that an entity involved in the settlement may not meet its obligations.

Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should a

Portfolio desire to resell that currency to the dealer.

Zero-Coupon Securities

Zero-coupon securities in which a Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity,
and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from
their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. As a
result, the net asset value of shares of a Portfolio investing in zero-
coupon securities may fluctuate over a greater range than shares of other
mutual Portfolios investing in securities making current distributions of
interest and having similar maturities.

Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term
bonds or notes and their unmatured interest coupons which have been
separated by their holder, typically a custodian bank or investment
brokerage firm. A number of securities firms and banks have stripped the
interest coupons from the underlying principal (the "corpus") of U.S.
Treasury securities and resold them in custodial receipt programs with a
number of different names, including Treasury Income Growth Receipts
("TIGRS") and Certificates of Accrual on Treasuries ("CATS"). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof.

In addition, the Treasury has facilitated transfers of ownership of zero-
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as
"STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." Under the STRIPS program, a Portfolio will be able to have
its beneficial ownership of U.S. Treasury zero-coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificates or other evidences of ownership of the underlying U.S.
Treasury securities.

When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The
principal or corpus is sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does
not receive any rights to periodic cash interest payments. Once stripped
or separated, the corpus and coupons may be sold separately. Typically,
the coupons are sold separately or grouped with other coupons with like
maturity dates and sold in such bundled form. Purchasers of stripped
obligations acquire, in effect, discount obligations that are economically
identical to the zero-coupon securities issued directly by the obligor.

Zero-coupon securities allow an issuer to avoid the need to generate cash
to meet current interest payments. Even though zero-coupon securities do
not pay current interest in cash, a Portfolio is nonetheless required to
accrue interest income on them and to distribute the amount of that
interest at least annually to shareholders. Thus, a Portfolio could be
required at times to liquidate other investments in order to satisfy its
distribution requirement.

No more than 5% of the net assets of the Income and Growth Portfolio will
be invested in CATS, TIGRS or STRIPS.

When-Issued and Delayed Delivery Transactions

The Portfolios may engage in when-issued and delayed delivery transactions.
These transactions are arrangements in which a Portfolio purchases
securities with payment and delivery scheduled for a future time. A
Portfolio engages in when-issued and delayed delivery transactions only for
the purpose of acquiring portfolio securities consistent with its
investment objective and policies, not for investment leverage, but a
Portfolio may sell such securities prior to settlement date if such a sale
is considered to be advisable. No income accrues to the Portfolios on
securities in connection with such transactions prior to the date the
Portfolios actually take delivery of securities. In when-issued and
delayed delivery transactions, a Portfolio relies on the seller to complete
the transaction. The seller's failure to complete the transaction may
cause a Portfolio to miss a price or yield considered to be advantageous.

These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a
month or more after entering into these transactions, and the market values
of the securities purchased may vary from the purchase prices. No fees or
other expenses, other than normal transaction costs, are incurred.
However, liquid assets of a Portfolio sufficient to make payment for the
securities to be purchased are segregated at the trade date. These
securities are marked to market daily and are maintained until the
transaction is settled. As a matter of policy, the Portfolios, other than
the Municipal Income Portfolio, do not intend to engage in when-issued and
delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of their respective assets.

Bank Instruments

The Portfolios may invest in the instruments of banks and savings and loans
whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit,
demand and time deposits, savings shares, and bankers' acceptances.
However, the above-mentioned instruments are not necessarily guaranteed by
those organizations. In addition to domestic bank obligations, such as
certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances, the Portfolios may invest in:

(bullet) Eurodollar Certificates of Deposit ("ECDs") issued by foreign branches
of U.S. or foreign banks;

(bullet) Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;

(bullet) Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the U.S.; and

(bullet) Yankee Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-
denominated certificates of deposit issued by U.S. branches of foreign
banks and held in the U.S.

Restricted Securities

The Portfolios may invest in restricted securities. Restricted securities
are any securities in which each Portfolio may otherwise invest pursuant to
its investment objective and policies but which are subject to restriction
on resale under federal securities law.

The ability of the Board of Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive, safe-harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under the Rule. The
Trust, on behalf of the Portfolios, believes that the Staff of the SEC has
left the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination of the Trust's
Board of Trustees. The Board of Trustees considers the following criteria
in determining the liquidity of certain restricted securities.

(bullet) the frequency of trades and quotes for the security;

(bullet) the number of dealers willing to purchase or sell the security and
the number of other potential buyers;

(bullet) dealer undertakings to make a market in the security; and

(bullet) the nature of the security and the nature of the marketplace trades.

Lower-Grade Securities

In normal circumstances, at least 80% of the Municipal Income Portfolio's
total assets will be invested in investment-grade tax-exempt municipal
securities and up to 20% of the Municipal Income Portfolio's total assets
may be invested in lower-grade tax-exempt municipal securities. The amount
of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate
issuers with publicly traded securities, and the market for tax-exempt
municipal securities is considered to be generally less liquid than the
market for corporate debt obligations and the market for investment grade
tax-exempt municipal securities. Liquidity relates to the ability of a
Portfolio to sell a security in a timely manner at a price which reflects
the value of that security. Further, municipal securities in which the
Municipal Income Portfolio may invest include special obligation bonds,
lease obligations, participation certificates and variable rate
instruments. The market for such securities may be particularly less
liquid. The relative illiquidity of some of the Municipal Income
Portfolio's securities may adversely affect the ability of the Municipal
Income Portfolio to dispose of such securities in a timely manner and at a
price which reflects the value of such security in the Trust's judgment.
Although the issuer of some such municipal securities may be obligated to
redeem such securities at face value, such redemption could result in
capital losses to the Municipal Income Portfolio to the extent that such
municipal securities were purchased by the Municipal Income Portfolio at a
premium to face value. The market for less liquid securities tends to be
more volatile than the market for more liquid securities, and market values
of relatively illiquid securities may be more susceptible to change as a
result of adverse publicity and investor perceptions than are the market
values of higher grade, more liquid securities.

The Municipal Income Portfolio's net asset value will change with changes
in the value of its portfolio securities. Because the Municipal Income
Portfolio will invest primarily in fixed income municipal securities, the
Municipal Income Portfolio's net asset value can be expected to change as
general levels of interest rates fluctuate. When interest rates decline,
the value of a portfolio invested in fixed income securities can be
expected to rise. Conversely, when interest rates rise, the value of a
portfolio invested in fixed income securities can be expected to decline.
Net asset value and market value may be volatile due to the Municipal
Income Portfolio's investment in lower-grade and less liquid municipal
securities. Volatility may be greater during periods of general economic
uncertainty.

To the extent that there is no established retail market for some of the
securities in which the Municipal Income Portfolio may invest, there may be
relatively inactive trading in such securities and the ability of the Trust
to accurately value such securities may be adversely affected. During
periods of reduced market liquidity and in the absence of readily available
market quotations for securities held in the Municipal Income Portfolio,
the responsibility of the Trust to value the Municipal Income Portfolio's
securities becomes more difficult and the Trust's judgment may play a
greater role in the valuation of the Municipal Income Portfolio's
securities due to the reduced availability of reliable objective data. To
the extent that the Municipal Income Portfolio invests in illiquid
securities and securities which are restricted as to resale, the Municipal
Income Portfolio may incur additional risks and costs. Illiquid and
restricted securities are particularly difficult to dispose of. When
determining whether municipal leases purchased by the Municipal Income
Portfolio will be classified as a liquid or illiquid security, the Board of
Trustees has directed the sub-adviser to consider the following factors:
the frequency of trades and quotes for the security; the volatility of
quotations and trade prices for the security; the number of dealers willing
to purchase or sell the security and the number of potential purchases;
dealer undertaking to make a market in the security; the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer); the rating of the security and the financial condition and
prospects of the issuer of the security; whether the lease can be
terminated by the lessee; the potential recovery, if any, from a sale of
the leased property upon termination of the lease; the lessee's general
credit strength (e.g., its debt, administrative, economic and financial
characteristics and prospects); the likelihood that the lessee will
discontinue appropriating funding for the leased property because the
potential property is no longer deemed essential to its operations (e.g.,
the potential for an "event of nonappropriation"); any credit enhancement
or legal recourse provided upon an event of nonappropriation or other
termination of the lease; and such other factors as may be relevant to the
Portfolio's ability to dispose of the security.

Lower-grade tax-exempt municipal securities generally involve greater
credit risk than higher-grade municipal securities. A general economic
downturn or a significant increase in interest rates could severely disrupt
the market for lower-grade tax-exempt municipal securities and adversely
affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower-grade tax-exempt municipal
securities to repay principal and to pay interest, to meet projected
financial goals and to obtain additional financing may be adversely
affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the lower-
grade tax-exempt municipal securities in the Municipal Income Portfolio
and, thus, the Portfolio's net asset value. The secondary market prices of
lower-grade tax-exempt municipal securities are less sensitive to changes
in interest rates than are those for higher rated tax-exempt municipal
securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investors'
perceptions, whether or not based on rational analysis, may also affect the
value and liquidity of lower-grade tax-exempt municipal securities.

Yields on the Municipal Income Portfolio's securities can be expected to
fluctuate over time. In addition, periods of economic uncertainty and
changes in interest rates can be expected to result in increased volatility
of the market prices of the lower-grade tax-exempt municipal securities in
the Municipal Income Portfolio's portfolio and, thus, in the net asset
value of the Portfolio. Net asset value and market value may be volatile
due to the Municipal Income Portfolio's investment in lower-grade and less
liquid municipal securities. Volatility may be greater during periods of
general economic uncertainty. The Municipal Income Portfolio may incur
additional expenses to the extent it is required to seek recovery upon a
default in the payment of interest or a repayment of principal on its
portfolio holdings, and the Municipal Income Portfolio may be unable to
obtain full recovery thereof. In the event that an issuer of securities
held by the Municipal Income Portfolio experiences difficulties in the
timely payment of principal or interest, and such issuer seeks to
restructure the terms of its borrowings, the Municipal Income Portfolio may
incur additional expenses and may determine to invest additional capital
with respect to such issuer or the project or projects to which the
Municipal Income Portfolio's securities relate. Recent and proposed
legislation may have an adverse impact on the market for lower-grade tax-
exempt municipal securities. Recent legislation requires federally-insured
savings and loan associations to divest their investments in lower-grade
bonds. Other legislation has, from time to time, been proposed which, if
enacted, could have an adverse impact on the market for lower-grade tax-
exempt municipal securities.

The Municipal Income Portfolio will rely on the sub-adviser's judgment,
analysis, and experience in evaluating the creditworthiness of an issue.
In this evaluation, the sub-adviser will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The sub-adviser also may consider,
although it does not rely primarily on, the credit ratings of Standard &
Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's"),
in evaluating tax-exempt municipal securities. Such ratings evaluate only
the safety of principal and interest payments, not market value risk.
Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings,
the sub-adviser continuously monitors the issuers of tax-exempt municipal
securities held in the Municipal Income Portfolio. The Municipal Income
Portfolio may, if deemed appropriate by the sub-adviser, retain a security
whose rating has been downgraded below B- by S&P or below B3 by Moody's, or
whose rating has been withdrawn.

Because issuers of lower-grade tax-exempt municipal securities frequently
choose not to seek a rating of their municipal securities, the sub-adviser
will be required to determine the relative investment quality of many of
the municipal securities in the Municipal Income Portfolio. Further,
because the Municipal Income Portfolio may invest up to 20% of its total
assets in these lower-grade municipal securities, achievement by the
Municipal Income Portfolio of its investment objective may be more
dependent upon the sub-adviser's investment analysis than would be the case
if the Municipal Income Portfolio were investing exclusively in higher-
grade municipal securities. The relative lack of financial information
available with respect to issuers of municipal securities may adversely
affect the sub-adviser's ability to successfully conduct the required
investment analysis.

Dollar Rolls and Reverse Repurchase Agreements

A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls
involving mortgage-related securities, the mortgage-related securities that
are purchased typically will be of the same type and will have the same or
similar interest rate and maturity as those sold, but will be supported by
different pools of mortgages. The Portfolio forgoes principal and interest
paid during the roll period on the securities sold in a dollar roll, but it
is compensated by the difference between the current sales price and the
price for the future purchase as well as by any interest earned on the
proceeds of the securities sold. A Portfolio could also be compensated
through the receipt of fee income.

A Portfolio may also enter into reverse repurchase agreements in which the
Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that
the Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement,
while it will be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous if the interest
cost to the Portfolio of the reverse repurchase transaction is less than
the cost of otherwise obtaining the cash.

Dollar rolls and reverse repurchase agreements involve the risk that the
market value of the securities that the Portfolio is obligated to
repurchase under the agreement may decline below the repurchase price. In
the event a Portfolio's counterparty under a dollar roll or reverse
repurchase agreement becomes bankrupt or insolvent, the Portfolio's use of
the proceeds of the agreement may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities.

When effecting reverse repurchase agreements, liquid assets of the
Portfolio, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date. These
securities are marked to market daily and are maintained until the
transaction is settled.

The Portfolios that may not use such transactions for leveraging purposes
will segregate cash, U.S. Government securities or other high grade debt
obligations in an amount sufficient to meet their purchase obligations
under the transactions. These Portfolios will also maintain asset coverage
of at least 300% for all outstanding firm commitments, dollar rolls and
other borrowings.

Since, as noted above, the counterparty is required to deliver a similar,
but not identical, security to a Portfolio, the security which a Portfolio
is required to buy under the dollar roll may be worth less than an
identical security. Finally, there can be no assurance that the a
Portfolio's use of the cash that it receives from a dollar roll will
provide a return that exceeds borrowing costs.

Convertible Securities

A Portfolio may invest in convertible securities. Convertible securities
are fixed income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option
of the holder during a specified time period. Convertible securities may
take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for a variety of investment
strategies.

A Portfolio will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in its
investment adviser's or sub-adviser's opinion, the investment
characteristics of the underlying common shares will assist the Portfolio
in achieving its investment objectives. Otherwise, the Portfolio may hold
or trade convertible securities. In selecting convertible securities for
the Portfolio, the Portfolio's investment adviser or sub-adviser evaluates
the investment characteristics of the convertible security as a fixed
income instrument and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the Portfolio's investment
adviser or sub-adviser considers numerous factors, including the economic
and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.

Warrants

A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the
market value of the optioned common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging from less than a year to
twenty years or may be perpetual. However, most warrants have expiration
dates after which they are worthless. In addition, if the market price of
the common stock does not exceed the warrant's exercise price during the
life of the warrant, the warrant will expire as worthless. Warrants have
no voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or
decrease in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock. Warrants acquired in units or attached to securities may be deemed
to be without value for purposes of a Portfolio's policy.

Swaps, Caps, Floors and Collars

A Portfolio may enter into interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. A Portfolio expects
to enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date. A Portfolio would use these transactions as
hedges and not as speculative investments and would not sell interest rate
caps or floors where it does not own securities or other instruments
providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by a Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles
the purchaser to receive payments on a notional principal amount from the
party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap
and a floor that preserves a certain return within a predetermined range of
interest rates or values.

A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying,
as the case may be, only the net amount of the two payments. A Portfolio
will not enter into any swap, cap, floor or collar transaction unless, at
the time of entering into such transaction, the unsecured long-term debt of
the counterparty, combined with any credit enhancements, is rated at least
A by S&P or Moody's or has an equivalent rating from a NRSRO or is
determined to be of equivalent credit quality by the Portfolio's investment
adviser or sub-adviser. If there is a default by the counterparty, a
Portfolio may have contractual remedies pursuant to the agreements related
to the transaction. As a result, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.

High Yield, High Risk Debt Securities

A Portfolio may invest a portion of its assets in securities rated Baa/BBB
or lower and in unrated securities of equivalent quality in the investment
adviser's or sub-adviser's judgment. A Portfolio may invest in debt
securities which are rated as low as C by Moody's or D by S&P. Such
securities may be in default with respect to payment of principal or
interest.

Below investment grade securities (rated below Baa by Moody's and below BBB
by S&P) or unrated securities of equivalent quality in the investment
adviser's or sub-adviser's judgment, carry a high degree of risk (including
the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of
principal and income, and may be less liquid, than securities in the higher
rating categories and are considered speculative. The lower the ratings of
such debt securities, the greater their risks render them like equity
securities. See the Appendix to the Prospectus for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.

An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have a greater adverse impact on the value of
such obligations than on higher quality debt securities. During an
economic downturn or period of rising interest rates, highly leveraged
issues may experience financial stress which could adversely affect their
ability to service their principal and interest payment obligations.
Prices and yields of high yield securities will fluctuate over time and,
during periods of economic uncertainty, volatility of high yield securities
may adversely affect a Portfolio's net asset value. In addition,
investments in high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.

The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market. A thin trading market may
limit the ability of a Portfolio to accurately value high yield securities
in its portfolio and to dispose of those securities. Adverse publicity and
investor perceptions may decrease the values and liquidity of high yield
securities. These securities may also involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties.

Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these
reasons, it is the policy of the investment adviser or sub-adviser not to
rely exclusively on ratings issued by established credit rating agencies,
but to supplement such ratings with its own independent and on-going review
of credit quality. The achievement of a Portfolio's investment objective
by investment in such securities may be more dependent on the investment
adviser's or sub-adviser's credit analysis than is the case for higher
quality bonds. Should the rating of a portfolio security be downgraded,
the investment adviser or sub-adviser will determine whether it is in the
best interest of a Portfolio to retain or dispose of such security.

Prices for below investment-grade securities may be affected by legislative
and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this
type of security. Also, recent legislation restricts the issuer's tax
deduction for interest payments on these securities. Such legislation may
significantly depress the prices of outstanding securities of this type.

Indexed Securities

A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities
have maturities of three years or less.

Indexed securities differ from other types of debt securities in which a
Portfolio may invest in several respects. First, the interest rate or,
unlike other debt securities, the principal amount payable at maturity of
an indexed security may vary based on changes in one or more specified
reference instruments, such as an interest rate compared with a fixed
interest rate or the currency exchange rates between two currencies
(neither of which need be the currency in which the instrument is
denominated). The reference instrument need not be related to the terms of
the indexed security. For example, the principal amount of a U.S. dollar
denominated indexed security may vary based on the exchange rate of two
foreign currencies. An indexed security may be positively or negatively
indexed; that is, its value may increase or decrease if the value of the
reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a
multiple of the percentage change (positive or negative) in the value of
the underlying reference instrument(s).

Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price
changes in response to changes in interest rates, the principal amount of
indexed securities may decrease as a result of changes in the value of
reference instruments. Further, in the case of certain indexed securities
in which the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero, and any further declines in the value
of the security may then reduce the principal amount payable on maturity.
Finally, indexed securities may be more volatile than the reference
instruments underlying indexed securities.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage
in proxy hedging. Proxy hedging is often used when the currency to which
the Portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Portfolio's securities
are or are expected to be denominated, and to buy U.S. dollars. The amount
of the contract would not exceed the value of the Portfolio's securities
denominated in linked currencies. For example, if the investment adviser
or sub-adviser considers that the Austrian schilling is linked to the
German deutschemark (the "D-mark"), the Portfolio holds securities
denominated in schillings and investment adviser or sub-adviser believes
that the value of schillings will decline against the U.S. dollar, the
investment adviser or sub-adviser may enter into a contract to sell D-marks
and buy dollars.

Eurodollar Instruments

A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time
to time. Eurodollar futures contracts enable purchasers to obtain a fixed
rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate
swaps and fixed income instruments are linked.

INVESTMENT ADVISORY SERVICES

Commonwealth Advisors, Inc. (formerly Cambridge Investment Advisors,
Inc.) serves as investment adviser to the Mentor/Cambridge Growth, Capital
Growth, Quality Income, Income and Growth, and Municipal Income Portfolios.
Cambridge has entered into sub-advisory arrangements with respect to
certain of the Portfolios. Van Kampen/American Capital Management, Inc.
("Van Kampen") serves as sub-adviser to the Municipal Income Portfolio;
Wellington Management Company ("WMC") serves as sub-adviser to the Income
and Growth Portfolio. Each of these sub-advisers has complete discretion
to purchase and sell portfolio securities for its respective Portfolio
within the particular Portfolio's investment objective, restrictions, and
policies. Charter Asset Management, Inc. ("Charter") serves as investment
adviser and administrator to the Growth Portfolio. Wellesley Advisors,
Inc. ("Wellesley") serves as investment adviser to the Strategy Portfolio.
Commonwealth Investment Counsel, Inc. ("Commonwealth") serves as investment
adviser to the Balanced and Short-Duration Income Portfolios. Mentor
Perpetual Advisors, L.C. ("Mentor Perpetual") serves as investment adviser
to the Global Portfolio. Mentor Investment Group, Inc. ("Mentor")
(formerly Investment Management Group, Inc.) serves as administrator to all
of the Portfolios. Each of Cambridge, Charter, Commonwealth, and Wellesley
is a wholly-owned subsidiary of Mentor, which is a wholly-owned subsidiary
of Wheat First Butcher Singer, Inc. ("WFBS"). Mentor Perpetual is owned
equally by Mentor and Perpetual plc, a diversified financial services
holding company.

Subject to the supervision and direction of the Trustees, each
investment adviser and sub-adviser manages the applicable Portfolio in
accordance with the stated policies of that Portfolio and of the Trust.
Each makes investment decisions for the Portfolio and places the purchase
and sale orders for portfolio transactions. Mentor furnishes each of the
Portfolios with certain statistical and research data, clerical help, and
certain accounting, data processing, and other services required by the
Portfolios, assists in preparation of certain reports to shareholders of
the Portfolios, tax returns, and filings with the SEC and state Blue Sky
authorities, and generally assists in all aspects of the Portfolios'
operations. The investment advisers, sub-advisers, and Mentor, as the case
may be, bear all their expenses in connection with the performance of their
services and pay the salaries of all officers and employees who are
employed by them and the Trust.

Each Portfolio's investment adviser or sub-adviser provides the Trust
with investment officers who are authorized to execute purchases and sales
of securities. Investment decisions for the Trust and for the other
investment advisory clients of the investment advisers and sub-advisers and
their affiliates are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client
involved. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at
the same time. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling the security. In
some instances, one client may sell a particular security to another
client. It also sometimes happens that two or more clients simultaneously
purchase or sell the same security, in which event each day's transactions
in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the investment
adviser's or sub-adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or
more clients will have an adverse effect on other clients. In the case of
short-term investments, the Treasury area of Mentor handles purchases and
sales under guidelines approved by investment officers of the Trust. Each
investment adviser and sub-adviser employs professional staffs of portfolio
managers who draw upon a variety of resources for research information for
the Trust.

MANAGEMENT FEES

For performing its responsibilities, the investment adviser of each
Portfolio receives an annual management fee from each Portfolio (as
described in the relevant prospectus) which may then be paid in whole or in
part to a Portfolio's sub-adviser, if any.

During fiscal 1992, 1993, and 1994, the Portfolios paid the following in
investment advisory fees (reflecting fee waivers):

<TABLE>
1992 1993 1994
<S> <C> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . $58,221 $298,293 $410,955
Capital Growth Portfolio . . . . . . . . 92,507 535,270 590,693
Quality Income Portfolio . . . . . . . . -- 658,652 893,139
Municipal Income Portfolio . . . . . . . -- 4,130 387,074
Income and Growth Portfolio . . . . . . . -- 45,081 374,462
Global Portfolio . . . . . . . . . . . . -- -- 69,515
Growth Portfolio . . . . . . . . . . . . 811,189 1,105,694 1,327,384
Strategy Portfolio . . . . . . . . . . . -- 147,585 1,368,325
Short-Duration Income Portfolio . . . . . -- -- --
Balanced Portfolio . . . . . . . . . . . -- -- --
</TABLE>

During fiscal 1992, Commonwealth Advisors waived management fees in the
following amounts: Mentor/Cambridge Growth Portfolio, $3,881; Capital Growth
Portfolio, $6,167; Quality Income Portfolio, $145,774; Municipal Income
Portfolio, $64,430. During fiscal 1993, Commonwealth Advisors waived management
fees in the following amounts: Mentor/Cambridge Growth Portfolio, $18,450;
Capital Growth Portfolio, $35,435; Quality Income Portfolio, $230,311; Municipal
Income Portfolio, $374,138. During fiscal 1994, Commonwealth Advisors waived
management fees of $81,713 and $69,515 in respect of the Municipal Income
Portfolio and the Global Portfolio, respectively. Also during fiscal 1994,
Commonwealth waived management fees of $48,884 and $11,536 in respect of the
Short-Duration Income Portfolio and the Balanced Portfolio, respectively.

If in any year the aggregate expenses of a Portfolio (including investment
advisory fees but excluding interest, taxes, brokerage and distribution
fees, and extraordinary expenses) exceed the expense limitation of any
state having jurisdiction over that Portfolio, its investment adviser's
compensation may be reduced. The most stringent state expense limitation
applicable to the Trust presently requires reimbursement of expenses in any
year that such expenses exceed the sum of 2.5% of the first $30 million of
average daily net assets, 2.0% of the next $70 million of average daily net
assets, and 1.5% of average daily net assets over $100 million. If a
Portfolio's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the amount
of the excess, subject to an annual adjustment. If the expense limitation
is exceeded, the amount of expenses to be borne by an investment adviser or
sub-adviser will be limited, in any single fiscal year, by the amount of
the investment advisory fee.

ADMINISTRATIVE SERVICES

Mentor Investment Group, Inc. serves as administrator to each of the
Portfolios; prior to June 1, 1994, Cambridge Administrative Services
("CAS"), a subsidiary of Federated Advisers, provided administrative
services to the Mentor/Cambridge Growth, Capital Growth, Quality Income,
Municipal Income, and Income and Growth Portfolios.

During fiscal 1992, 1993, and 1994, the Portfolio's paid the following fees
for administrative services (reflecting fee waivers):

Mentor/Cambridge Growth Portfolio . . . . $4,662 $35,347 $57,626
Capital Growth Portfolio . . . . . . . . 7,397 68,158 92,278
Quality Income Portfolio . . . . . . . . -- 143,075 151,234
Municipal Income Portfolio . . . . . . . -- 62,849 97,653
Income and Growth Portfolio . . . . . . . -- 4,509 47,282
Global Portfolio . . . . . . . . . . . . -- -- 7,140
Strategy Portfolio . . . . . . . . . . . -- -- 29,422
Short-Duration Income Portfolio . . . . . -- -- --
Balanced Portfolio . . . . . . . . . . . -- -- --
</TABLE>

During fiscal 1992, CAS waived administrative fees in the following amounts:
Mentor/Cambridge Growth Portfolio, $5,051; Capital Growth Portfolio,
$8,013; Quality Income Portfolio, $30,370; Municipal Income Portfolio,
$13,423. During fiscal 1993, CAS waived administrative fees in the
following amounts: Mentor/Cambridge Growth Portfolio, $20,121; Capital
Growth Portfolio, $36,269; Quality Income Portfolio, $41,518; Municipal
Income Portfolio, $34,261; Income and Growth Portfolio, $3,005. Also
during fiscal 1993, Mentor waived $17,363 in administrative fees in
respect of the Strategy Portfolio. During fiscal 1994, CAS waived
administrative fees in the following amounts: Mentor/Cambridge Growth
Portfolio, $6,569; Quality Income Portfolio, $23,563; Income and Growth
Portfolio, $15,033; Global Portfolio, $530. Also during fiscal 1994,
Mentor waived administrative fees of $131,557, $9,776, and $2,307 in
respect of the Strategy, Short-Duration Income and Balanced Portfolios,
respectively. For fiscal 1994, the Growth, Strategy, and Balanced
Portfolios reimbursed amounts of $24,000, $21,507, and $6,905,
respectively, to Mentor for certain accounting and operation related costs
not covered by their respective administration arrangements.

SHAREHOLDER SERVICING PLAN

The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors (formerly Mentor Distributors, Inc.) with respect
to each Portfolio. Pursuant to the Service Plan, financial institutions
will enter into shareholder service agreements with the Portfolios to
provide administrative support services to their customers who from time to
time may be owners of record or beneficial owners of shares of one or more
Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding .25% of the average daily net assets of the Class A or Class B
shares of the particular Portfolio or Portfolios beneficially owned by the
financial institution's customers for whom it is holder of record or with
whom it has a servicing relationship. The Service Plan is designed to
stimulate financial institutions to render administrative support services
to the Portfolios and their shareholders. These administrative support
services include, but are not limited to, the following functions:
providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries regarding the Portfolios; assisting clients in changing dividend
options, account designations and addresses; and providing such other
services as the Portfolios reasonably request. Prior to June 1, 1995, the
Growth, Strategy, Short-Duration Income, and Balanced Portfolios were
parties to shareholder serving arrangements with Wheat, First Securities,
Inc. ("Wheat") pursuant to which each Portfolio made payments to Wheat at
the annual rate of 0.25% of the Portfolio's average net assets.

In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser, a sub-adviser,
and/or Mentor, or affiliates thereof, for providing administrative support
services to holders of Class A or Class B shares of the Portfolios. These
payments will be made directly by the investment adviser, a sub-adviser,
and/or Mentor, as applicable, and will not be made from the assets of any
of the Portfolios.

During fiscal 1994, the Portfolios incurred shareholder service fees under
their respective Service Plans as follows:

Mentor/Cambridge Growth Portfolio . . . . . . . . $128,423
Capital Growth Portfolio . . . . . . . . . . . . . 184,588
Quality Income Portfolio . . . . . . . . . . . . . 349,642
Municipal Income Portfolio . . . . . . . . . . . . 195,328
Income and Growth Portfolio . . . . . . . . . . . 124,821
Global Portfolio . . . . . . . . . . . . . . . . . 15,340
Growth Portfolio . . . . . . . . . . . . . . . . . 474,066
Strategy Portfolio . . . . . . . . . . . . . . . . 402,448
Short-Duration Income Portfolio . . . . . . . . . 24,442
Balanced Portfolio . . . . . . . . . . . . . . . . --

During 1994, Wheat waived $3,845 in shareholder service fees under its
agreement in respect of the Balanced Portfolio.

BROKERAGE TRANSACTIONS

Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different
brokers. A particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions
in foreign investments often involve the payment of fixed brokerage
commissions, which may be higher than those in the United States. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid by the Trust usually includes
an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or
discount retained by the underwriter or dealer. It is anticipated that
most purchases and sales of securities by funds investing primarily in
certain fixed-income securities will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, those funds would not ordinarily pay significant brokerage
commissions with respect to securities transactions.

It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive brokerage and research services (as defined in the
Securities Exchange Act of 1934, as amended (the "1934 Act")) from broker-
dealers that execute portfolio transactions for the clients of such
advisers and from third parties with which such broker-dealers have
arrangements. Consistent with this practice, each of the Portfolios'
investment adviser or sub-adviser receives brokerage and research services
and other similar services from many broker-dealers with which such
investment adviser or sub-adviser places a Portfolio's portfolio
transactions and from third parties with which these broker-dealers have
arrangements. These services include such matters as general economic and
market reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services and personal
computers utilized by the investment adviser's or sub-adviser's managers
and analysts. Where the services referred to above are not used exclusively by
the investment adviser or sub-adviser for research purposes, the investment
adviser or sub-adviser, based upon its own allocations of expected use, bears
that portion of the cost of these services which directly relates to its
non-research use. Some of these services are of value to the investment adviser
or sub-adviser and its affiliates in advising various of its clients (including
the Portfolios), although not all of these services are necessarily useful and
of value in managing the Portfolios. The management fee paid by a Portfolio is
not reduced because the Portfolio's investment adviser or sub-adviser or any of
their affiliates receive these services even though the investment adviser or
sub-adviser might otherwise be required to purchase some of these services for
cash.

A Portfolio's investment adviser or sub-adviser, as the case may be, places
all orders for the purchase and sale of portfolio investments for the
Portfolio and buys and sells investments for the Portfolio through a
substantial number of brokers and dealers investment adviser or sub-
adviser. The investment adviser or sub-adviser seeks the best overall
terms available for the Portfolio, except to the extent the investment
adviser or sub-adviser may be permitted to pay higher brokerage commissions
as described below. In doing so, the investment adviser or sub-adviser,
having in mind the Portfolio's best interests, considers all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security or other investment,
the amount of the commission, the timing of the transaction taking into
account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered
by the broker-dealer in other transactions.

As permitted by Section 28(e) of the 1934 Act, and by the Investment
Advisory and Management Agreements, a Portfolio's investment adviser or
sub-adviser may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the 1934 Act) to that
adviser an amount of disclosed commission for effecting securities
transactions on stock exchanges and other transactions for the Portfolio on
an agency basis in excess of the commission which another broker-dealer
would have charged for effecting that transaction. The investment
adviser's or sub-adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Trustees may
adopt from time to time. It is the position of the staff of the Securities
and Exchange Commission that Section 28(e) does not apply to the payment of
such greater commissions in "principal" transactions. Accordingly, the
investment adviser and sub-adviser will use its best efforts to obtain the
best overall terms available with respect to such transactions, as
described above.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to such other policies as the Trustees
may determine, an investment adviser or sub-adviser may consider sales of
shares of a Portfolio (and, if permitted by law, of the other funds in the
Mentor family funds) as a factor in the selection of broker-dealers to
execute portfolio transactions for a Portfolio.

The Trustees have determined that portfolio transactions for the Trust may
be effected through Mentor Distributors. The Trustees have adopted certain
policies incorporating the standards of Rule 17e-l issued by the SEC under
the 1940 Act which requires, among other things, that the commissions paid
to Mentor Distributors must be reasonable and fair compared to the
commissions, fees, or other remuneration received by other brokers in
connection with comparable transactions involving similar securities during
a comparable period of time. Mentor Distributors will not participate in
brokerage commissions given by the Trust to other brokers or dealers.
Over-the-counter purchases and sales are transacted directly with principal
market makers except in those cases in which better prices and executions
may be obtained elsewhere. The Trust will in no event effect principal
transactions with Mentor Distributors in over-the-counter securities in
which Mentor Distributors makes a market.

Under rules adopted by the SEC, Mentor Distributors may not execute
transactions for the Trust on the floor of any national securities
exchange, but may effect transactions for the Trust by transmitting orders
for execution and arranging for the performance of this function by members
of the exchange not associated with Mentor Distributors. Mentor
Distributors will be required to pay fees charged to those persons
performing the floor brokerage elements out of the brokerage COMPENSATION
IT RECEIVES FROM THR TRUST. THE TRUST HAS BEEN ADVISED BY MENTOR
DISTRIBUTORS THAT ON MOST TRANSACTIONS, THE FLOOR BROKERAGE GENERALLY
CONSTITUTES FROM 5% AND 10% OF THE TOTAL COMMISSIONS PAID.

During fiscal 1992, 1993, and 1994, the Portfolios paid brokerage
commissions on brokerage transactions as follows:

<TABLE>
1992 1993 1994
<S> <C> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . $40,377 $173,167 $159,585
Capital Growth Portfolio . . . . . . . . 75,352 334,227 195,086
Quality Income Portfolio . . . . . . . . -- -- --
Municipal Income Portfolio . . . . . . . -- -- --
Income and Growth Portfolio . . . . . . . -- 25,668 116,782
Global Portfolio . . . . . . . . . . . . -- -- 45,449
Growth Portfolio . . . . . . . . . . . . 160,521 275,570 374,267
Strategy Portfolio . . . . . . . . . . . -- 159,275 651,172
Short-Duration Income Portfolio . . . . . -- -- 1,307
Balanced Portfolio . . . . . . . . . . . -- -- 1,641
</TABLE>

For fiscal 1992, 1993, and 1994, Wheat, First Securities, Inc., an affiliate
of Mentor, Commonwealth Advisors, and Mentor Distributors, received for fiscal
1993 and 1994 brokerage commissions for services performed on behalf of
certain of the Portfolios, as follows:

<TABLE>
1992 1993 1994
<S> <C> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . $42,656 $ 3,297 $ 588
Capital Growth Portfolio . . . . . . . . -- 113,126 78,085
Income and Growth Portfolio . . . . . . . -- 4,303 22,606
Global Portfolio . . . . . . . . . . . . -- -- --
Growth Portfolio . . . . . . . . . . . . 35,821 71,806 34,881
Strategy Portfolio . . . . . . . . . . . -- 159,275 651,172
Short-Duration Income Portfolio . . . . . -- -- --
Balanced Portfolio . . . . . . . . . . . -- -- --

For fiscal 1994, the brokerage commissions paid by the Mentor/Cambridge Growth
Portfolio to Wheat amounted to 0.37% of the aggregate brokerage commissions paid
by the Portfolio and 0.18% of the aggregate dollar amount of transactions
involving payment of commissions by the Portfolio. For fiscal 1994, the
brokerage commissions paid by the Capital Growth Portfolio to Wheat amounted to
40.03% of the aggregate brokerage commissions paid by the Portfolio and 35.20%
of the aggregate dollar amount of transactions involving payment of commissions
by the Portfolio. For fiscal 1994, the brokerage commissions paid by the Income
and Growth Portfolio to Wheat amounted to 19.36% of the aggregate brokerage
commissions paid by the Portfolio and 11.81% of the aggregate dollar amount of
transactions involving payment of commissions by the Portfolio. For fiscal
1994, the brokerage commissions paid by the Growth Portfolio to Wheat amounted
to 9.00% of the aggregate brokerage commissions paid by the Portfolio and 10.00%
of the aggregate dollar amount of transactions involving payment of commissions
by the Portfolio. For fiscal 1994, the brokerage commissions paid by the
Strategy Portfolio to Wheat amounted to less than 1% of the aggregate brokerage
commissions paid by the Portfolio. For fiscal 1994, the Short-Duration Income
Portfolio and the Balanced Portfolio paid no brokerage commissions to Wheat.

HOW TO BUY SHARES

Except under certain circumstances described in the Trust's or an
individual Portfolio's prospectus, Class A shares of the Portfolios are
sold at their net asset value plus an applicable sales charge on days the
New York Stock Exchange is open for business. Class B shares of the
Portfolios are sold at their net asset value with no sales charge on days
the New York Stock Exchange is open for business. The procedure for
purchasing Class A and Class B shares of the Portfolios is explained in the
Prospectus under the section entitled "How to Buy Shares."

Dealers will be compensated on purchases of Class A shares in accordance
with the following schedule:

Amount of Purchase Dealer Commission
Less than $2 million 1.00%
$2 million but less than $3 million .80%
$3 million but less than $50 million .50%
$50 million but less than $100 million .25%
$100 million or more .15%

The above commission will be paid by the Distributor and not the Trust or its
shareholders.

DISTRIBUTION

Each of the Portfolios makes payments to Mentor Distributors in accordance
with its Distribution Plan adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Prior to June 1, 1995, each of the
Growth, Strategy, Short-Duration Income, and Balanced Portfolios made
payments under its plan to Wheat. During fiscal 1994, the Portfolios paid
fees pursuant to their respective Plans as follows: Mentor/Cambridge
Growth Portfolio, $253,834; Capital Growth Portfolio, $360,712; Quality
Income Portfolio, $511,073; Municipal Income Portfolio, $253,801; Income
and Growth Portfolio, $252,486; Global Portfolio, $20,749; Growth
Portfolio, $1,422,197; Strategy Portfolio, $1,207,346; and Short-Duration
Income Portfolio, $29,331. During 1994, Wheat waived 12b-1 fees of $11,536
in respect of the Balanced Portfolio.

During fiscal 1994, Mentor Distributors paid the following in commissions
in connection with distribution:

</TABLE>
<TABLE>
Class A Class B
<S> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . . . . $ 6,113 $191,694
Capital Growth Portfolio . . . . . . . . . . . 3,758 124,947
Quality Income Portfolio . . . . . . . . . . . 4,910 202,265
Municipal Income Portfolio . . . . . . . . . . 6,042 177,446
Income and Growth Portfolio . . . . . . . . . . 13,596 527,081
Global Portfolio . . . . . . . . . . . . . . . 12,357 159,754
</TABLE>

During fiscal 1994, Mentor Distributors incurred the following expenses
for marketing materials and promotional activities:
<TABLE>
Class A Class B
<S> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . . . . $39,544 $ 77,787
Capital Growth Portfolio . . . . . . . . . . . 53,456 111,497
Quality Income Portfolio . . . . . . . . . . . 81,758 211,265
Municipal Income Portfolio . . . . . . . . . . 67,963 125,197
Income and Growth Portfolio . . . . . . . . . . 48,208 117,228
Global Portfolio . . . . . . . . . . . . . . . 26,715 21,664
</TABLE>

During 1994, Wheat paid the following in commissions in connection with
distribution:

Growth Portfolio . . . . . . . . . . . . . . . $1,993,158
Strategy Portfolio . . . . . . . . . . . . . . 2,538,411
Short-Duration Income Portfolio . . . . . . . . 92,123
Balanced Portfolio . . . . . . . . . . . . . . --

During 1994, Wheat paid the following expenses for marketing materials
and other promotional activities:

Growth Portfolio . . . . . . . . . . . . . . . $264,166
Strategy Portfolio . . . . . . . . . . . . . . 224,874
Short-Duration Income Portfolio . . . . . . . . 4,017
Balanced Portfolio . . . . . . . . . . . . . . --

During fiscal 1994, Wheat received contingent deferred sales charges of
$321,429 and $108,534, respectively, in respect of the Growth Portfolio and
Strategy Portfolio, which each had only one class of shares outstanding
during such period.

DETERMINING NET ASSET VALUE

A Portfolio determines net asset value per share of each series of shares
once each day the New York Exchange (the "Exchange") is open. Currently,
the Exchange is closed Saturdays, Sundays and the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July,
Labor Day, Thanksgiving and Christmas. A Portfolio determines net asset
value as of the close of regular trading on the Exchange. However, equity
options held by a Portfolio are priced as of the close of trading at 4:10
p.m., and futures contracts on U.S. Government securities and index options
held by a Portfolio are priced as of their close of trading at 4:15 p.m.

Securities for which market quotations are readily available are valued at
prices which, in the opinion of the Trustees or a Portfolio's investment
adviser or sub-adviser most nearly represent the market values of such
securities. Currently, such prices are determined using the last reported
sale price or, if no sales are reported (as in the case of some securities
traded over-the-counter), the last reported bid price, except that certain
U.S. Government securities are stated at the mean between the last reported
bid and asked prices. Short-term investments having remaining maturities
of 60 days or less are stated at amortized cost, which approximates market
value. All other securities and assets are valued at their fair value
following procedures approved by the Trustees. Liabilities are deducted
from the total, and the resulting amount is divided by the number of shares
of the class outstanding.

Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at
fair value on the basis of valuations furnished by pricing services
approved by the Trustees, which determine valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.

If any securities held by a Portfolio are restricted as to resale, the
Portfolio's investment adviser or sub-adviser determines their fair values.
The fair value of such securities is generally determined as the amount
which a Portfolio could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The
valuation procedures applied in any specific instance are likely to vary
from case to case. However, consideration is generally given to the
financial position of the issuer and other fundamental analytical data
relating to the investment and to the nature of the restrictions on
disposition of the securities (including any registration expenses that
might be borne by the Portfolio in connection with such disposition). In
addition, specific factors are also generally considered, such as the cost
of the investment, the market value of any unrestricted securities of the
same class (both at the time of purchase and at the time of valuation), the
size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding
the issuer.

Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset
value of a Portfolio's shares are computed as of such times. Also, because
of the amount of time required to collect and process trading information
as to large numbers of securities issues, the values of certain securities
(such as convertible bonds, U.S. Government securities, and tax-exempt
securities) are determined based on market quotations collected earlier in
the day at the latest practicable time prior to the close of the Exchange.
Occasionally, events affecting the value of such securities may occur
between such times and the close of the Exchange which will not be
reflected in the computation of a Portfolio's net asset value. If events
materially affecting the value of such securities occur during such period,
then these securities will be valued at their fair value following
procedures approved by the Trustees.

Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the
Exchange is open). In addition, European or Far Eastern securities trading
generally or in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which
are not business days in New York and on which a Portfolio's net asset
value is not calculated. A Portfolio calculates net asset value per share,
and therefore effects sales, redemptions and repurchases of its shares, as
of the close of the Exchange once on each day on which the Exchange is
open. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities
used in such calculation. If events materially affecting the value of such
securities occur between the time when their price is determined and the
time when a Portfolio's net asset value is calculated, such securities will
be valued at fair value as determined in good faith by the Trustees.

REDEMPTIONS IN KIND

Although the Trust intends to redeem Class A and Class B shares in cash, it
reserves the right under certain circumstances to pay the redemption price
in whole or in part by a distribution of securities from the respective
Portfolio's investment portfolio. To the extent available, such securities
will be readily marketable. Redemptions in kind will be made in conformity
with applicable SEC rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner that the Trustees determine to be fair and equitable. The Trust has
elected to be governed by Rule 18f-1 of the Investment Company Act of 1940,
under which, with respect to each Portfolio, the Trust is obligated to
redeem Class A or Class B shares for any one shareholder in cash only up to
the lesser of $250,000 or 1% of the respective class's net asset value
during any 90-day period.

TAXES

Each Portfolio intends to qualify each year and elects to be taxed as a
regulated investment company under Subchapter M of the United States
Internal Revenue Code of 1986, as amended (the "Code").

As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital
gains that are distributed to shareholders. As a series of Massachusetts
business trust, a Portfolio will not under present law be subject to any
excise or income taxes in Massachusetts.

In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from
the sale or other dispositions of stock, securities, or foreign currencies,
and other income (including but not limited to gains from options, futures,
or forward contracts) derived with respect to its business of investing in
such stock, securities, or currencies; (b) derive less than 30% of its
gross income from the sale or other disposition of certain assets
(including stock or securities and certain options, futures contracts,
forward contracts, and foreign currencies) held less than three months; (c)
distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for such year; and (d) diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of its
total assets consists of cash and cash items, U.S. Government Securities,
securities of other regulated investment companies, and other securities
limited generally with respect to any one issuer to not more than 5% of the
value of its total assets and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any issuer or of two
or more issuers which the Portfolio controls and which are engaged in the
same, similar, or related trades or businesses. In order to receive the
favorable tax treatment accorded regulated investment companies and their
shareholders, moreover, a Portfolio must in general distribute at least 90%
of its interest, dividends, net short-term capital gain, and certain other
income each year.

If a Portfolio qualifies as a regulated investment company that is accorded
special tax treatment, the Portfolio will not be subject to federal income
tax paid to its shareholders in the form of dividends (including capital
gain dividends).

If a Portfolio failed to qualify as a regulated investment company accorded
special tax treatment in any taxable year, the Portfolio would be subject
to tax on its taxable income at corporate rates, and all distributions from
earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as
ordinary income. In addition, a Portfolio could be required to recognize
unrealized gains, pay substantial taxes and interest and make substantial
distributions before requalifying as a regulated investment company that is
accorded special tax treatment.

If a Portfolio fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain
net income for the one-year period ending October 31 (or later if the
Portfolio is permitted so to elect and so elects), plus any retained amount
from the prior year, the Portfolio will be subject to a 4% excise tax on
the undistributed amounts. A dividend paid to shareholders by a Portfolio
in January of a year generally is deemed to have been paid by the Portfolio
on December 31 of the preceding year, if the dividend was declared and
payable to shareholders of record on a date in October, November or
December of that preceding year. A Portfolio intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax.

Exempt-interest dividends. A Portfolio will be qualified to pay exempt-
interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of
the Portfolio's assets consists of obligations the interest on which is
exempt form federal income tax. Distributions that the Portfolio properly
designates as exempt-interest dividends are treated by shareholders as
interest excludable from their gross income for federal income tax purposes
but may be taxable for federal alternative minimum tax purposes and for
state and local purposes. If the Portfolio intends to be qualified to pay
exempt-interest dividends, the Portfolio may be limited in its ability to
enter into taxable transactions involving forward commitments, or
repurchase agreements, financial futures, and options contracts on
financial futures, tax-exempt bond indices, and other assets.

Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of a Portfolio paying exempt-
interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the
indebtedness, multiplied by the percentage of a Portfolio's total
distributions (not including distributions from net long-term capital
gains) paid to the shareholder that are exempt-interest dividends. Under
rules used by the Internal Revenue Service for determining when borrowed
funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase of shares may be considered to have been
made with borrowed funds even though such funds are not directly traceable
to the purchase of shares.

In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligaitons or bonds
or who are "related persons" of such substantial users.

A Portfolio which is qualified to pay exempt-interest dividends will inform
investors within 60 days of the Portfolio's fiscal year-end of the
percentage of its income distributions designated as tax-exempt. The
percentage is applied uniformly to all distributions made during the year.
The percentage of income designated as tax-exempt for any particular
distribution may be substantially different form the percentage of the
Portfolio's income that was tax-exempt during the period covered by the
distribution.

Hedging transactions. If a Portfolio engages in transactions, including
hedging transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
mark-to-market, straddle, wash sale, and short sale rules), the effect of
which may be to accelerate income to the Portfolio, defer losses to the
Portfolio, cause adjustments in the holding periods of the Portfolio's
securities, or convert short-term capital losses into long-term capital
losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders. A Portfolio will endeavor to
make any available elections pertaining to such transactions in a manner
believed to be in the best interests of the Portfolio.

Under the 30% of gross income test described above (see "Taxation of the
Portfolio"), the Portfolio will be restricted in selling assets held or
considered under Code rules to have been held for less than three months,
and in engaging in certain hedging transactions (including hedging
transactions in options and futures) that in some circumstances could cause
certain Portfolio assets to be treated as held for less than three months.

Certain of a Portfolio's hedging activities (including its transactions, if
any, in foreign currencies or foreign currency-denominated instruments) are
likely to produce a difference between its book income and its taxable
income. If a Portfolio's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the
extent of the Portfolio's remaining earnings and profits (including
earnings and profits arising from tax-exempt income), and thereafter as a
return of capital or as gain from the sale or exchange of a capital asset,
as the case may be. If a Portfolio's book income is less than its taxable
income, the Portfolio could be required to make distributions exceeding
book income to qualify as a regulated investment company that is accorded
special tax treatment.

Return of capital distributions. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" in any
taxable year, the excess distribution will be treated as a return of
capital to the extent of your tax basis in your shares, and thereafter as
capital gain. A return of capital is not taxable, but it reduces your tax
basis in your shares, thus reducing any loss or increasing any gain on a
subsequent taxable disposition by you or your shares.

Securities issued or purchased at a discount. A Portfolio's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the
Portfolio to accrue and distribute income not yet received. In order to
generate sufficient cash to make the requisite distributions, a Portfolio
may be required to sell securities in its portfolio that it otherwise would
have continued to hold.

Foreign currency-denominated securities and related hedging transactions.
A Portfolio's transactions in foreign currencies, foreign currency-
denominated debt securities and certain foreign currency options, futures
contracts, and forward contacts (and similar instruments) may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.

If more than 50% of a Portfolio's assets at year end consists of the debt
and equity securities of foreign corporations, the Portfolio may elect to
permit shareholders to claim a credit or deduction on their income tax
returns for their pro rata portion of qualified taxes paid by the Portfolio
to foreign countries. In such a case, shareholders will include in gross
income from foreign sources their pro rata shares of such taxes. A
shareholder's ability to claim a foreign tax credit or deduction in respect
of foreign taxes paid by the Portfolio may be subject to certain
limitations imposed by the Code, as a result of which a shareholder may not
get a full credit or deduction for the amount of such taxes. Shareholders
who do not itemize on their federal income tax returns may claim a credit
(but no deduction) for such foreign taxes.

Investment by a Portfolio in certain "passive foreign investment companies"
could subject the Portfolio to a U.S. federal income tax or other charge on
the proceeds from the sale of its investment in such a company; however,
this tax can be avoided by making an election to mark such investments to
market annually or to treat the passive foreign investment company as a
"qualified electing fund."

Sale or redemption of shares. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain or
loss realized upon a taxable disposition of shares will be treated as long-
term capital gain or loss if the shares have been held for more than 12
months, and otherwise as short-term capital gain or loss. However, if a
shareholder sells shares at a loss within six months of purchase, any loss
will be disallowed for federal income tax purposes to the extent of any
exempt-interest dividends received on such shares. In addition, any loss
(not already disallowed as provided in the preceding sentence) realized
upon a taxable disposition of shares held for six months or less will be
treated as long-term, rather than short-term, to the extent of any long-
term capital gain distributions received by the shareholder with respect to
the shares. All or a portion of any loss realized upon a taxable
disposition of Portfolio shares will be disallowed if other Portfolio
shares are purchased within 30 days before or after the disposition. In
such a case, the basis of the newly purchased shares will be adjusted to
reflect the disallowed loss.

Shares purchased through tax-qualified plans. Special tax rules apply to
investments though defined contribution plans and other tax-qualified
plans. Shareholders should consult their tax adviser to determine the
suitability of shares of a Portfolio as an investment through such plans
and the precise effect of an investment on their particular tax situation.

Backup withholding. A Portfolio generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other
distributions paid to any individual shareholder who fails to furnish the
Portfolio with a correct taxpayer identification number (TIN), who has
underreported dividends or interest income, or who fails to certify to the
Portfolio that he or she is not subject to such withholding. Shareholders
who fail to furnish their current TIN are subject to a penalty of $50 for
each such failure unless the failure is due to reasonable cause and not
wilful neglect. An individual's taxpayer identification number is his or
her social security number.

If a Portfolio invests in stock of certain foreign investment companies,
the Portfolio may be subject to U.S. federal income taxation on a portion
of any "excess distribution" with respect to, or gain from the disposition
of, such stock. The tax would be determined by allocating such
distribution or gain ratably to each day of a Portfolio's holding period
for the stock. The distribution or gain so allocated to any taxable year
of a Portfolio, other than the taxable year of the excess distribution or
disposition, would be taxed to the Portfolio at the highest ordinary income
rate in effect for such year, and the tax would be further increased by an
interest charge to reflect the value of the tax deferral deemed to have
resulted from the ownership of the foreign company's stock. Any amount of
distribution or gain allocated to the taxable year of the distribution or
disposition would be included in a Portfolio's investment company taxable
income and, accordingly, would not be taxable to the Portfolio to the
extent distributed by the Portfolio as a dividend to its shareholders.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and regulations. The Code and regulations are subject to change
by legislative or administrative actions. Dividends and distributions also
may be subject to state and federal taxes. Shareholders are urged to
consult their tax advisers regarding specific questions as to federal,
state or local taxes. The foregoing discussion relates solely to U.S.
federal income tax law. Non-U.S. investors should consult their tax
advisers concerning the tax consequences of ownership of shares of the
Portfolio, including the possibility that distributions may be subject to a
30% United States withholding tax (or a reduced rate of withholding
provided by treaty).

For a more complete discussion of shareholders' tax status, including a
discussion of the individual alternative minimum tax and the corporate
alternative minimum tax, see the section of the relevant prospectus in
respect of taxes.

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP, LOCATED AT ONE BOSTON PLACE, BOSTON, MASSACHUSETTS
02108, ARE THE TRUST'S INDEPENDENT AUDITORS, PROVIDING AUDIT SERVICES, TAX
RETURN REVIEW AND OTHER TAX CONSULTING SERVICES AND ASSISTANCE AND
CONSULTATION IN CONNECTION WITH THE REVIEW OF VARIOUS SECURITIES AND
EXCHANGE COMMISSION FILINGS. THE FINANCIAL HIGHLIGHTS INCLUDED IN THE
PROSPECTUS OF THE TRUST AND THE PORTFOLIO'S PROSPECTUSES, IF ANY, AND THE
FINANCIAL STATEMENTS INCORPORATED BY REFERENCE INTO SUCH PROSPECTUSES AND
INCLUDED IN THIS STATEMENT OF ADDITIONAL INFORMATION HAVE BEEN SO INCLUDED
AND INCORPORATED IN RELIANCE UPON THE REPORT OF KPMG PEAT MARWICK, THE
INDEPENDENT AUDITORS, GIVEN ON THE AUTHORITY OF SAID FIRM AS EXPERTS IN
AUDITING AND ACCOUNTING.

CUSTODIAN

INVESTORS FIDUCIARY TRUST COMPANY, LOCATED AT 127 WEST 10TH STREET, KANSAS
CITY, MISSOURI, IS THE CUSTODIAN OF EACH PORTFOLIO, EXCEPT THAT STATE
STREET BANK & TRUST COMPANY, P.O. BOX 8602, BOSTON, MASSACHUSETTS SERVES AS
CUSTODIAN TO THE GLOBAL PORTFOLIO. A CUSTODIAN'S RESPONSIBILITIES INCLUDE
GENERALLY SAFEGUARDING AND CONTROLLING A PORTFOLIO'S CASH AND SECURITIES,
HANDLING THE RECEIPT AND DELIVERY OF SECURITIES, AND COLLECTING INTEREST
AND DIVIDENDS ON A PORTFOLIO'S INVESTMENTS.

TRANSFER AGENT SERVICES

For a period of time following May 30, 1995, The Shareholder Services
Group, Inc. ("TSSG"), P.O. Box 9653, Providence, Rhode Island 02940, the
previous transfer and dividend agent of the Trust, will assist Boston
Financial Data Services, Inc. ("BFDS"), the Trust's current transfer and
dividend agent, in the performance of its duties to allow for transition.
Following the completion of the transfer of the Trust's books and records
to BFDS, TSSG will no longer have any transfer or dividend agent
responsibilities for the Trust. It is expected that this transition
process will be completed by September 1, 1995.

PERFORMANCE INFORMATION

The average annual total return for the one- and five- year periods (where
applicable) and for the life of the Portfolios are as follows:

Class A Shares 1 Year Since Inception

Mentor/Cambridge Growth Portfolio . . . -16.87% -0.84%
Capital Growth Portfolio . . . . . . . . -6.79% 0.68%
Quality Income Portfolio . . . . . . . . -7.97% 0.14%
Municipal Income Portfolio . . . . . . . -9.35% 4.42%
Income and Growth Portfolio . . . . . . 0.68% 4.30%
Global Portfolio . . . . . . . . . . . . -5.17% -5.17%

Class B Shares 1 Year Since Inception

Mentor/Cambridge Growth Portfolio . . . -12.48% 0.99%
Capital Growth Portfolio . . . . . . . . -2.00% 2.44%
Quality Income Portfolio . . . . . . . . -3.97% 1.66%
Municipal Income Portfolio . . . . . . . -5.34% 6.00%
Income and Growth Portfolio . . . . . . 5.66% 8.15%
Global Portfolio . . . . . . . . . . . . -1.21% -1.21%

Single Class Shares 1 Year 5 Year Since Inception

Growth Portfolio . . . . . . . . -8.9% 11.1% 12.46%
Strategy Portfolio . . . . . . . -8.1% -- -5.1%
Short-Duration Income Portfolio . -- -- 0.95%
Balanced Portfolio . . . . . . . -- -- -3.96%

THE ANNUAL TOTAL RETURN INFORMATION SHOWN ABOVE FOR THE GROWTH, STRATEGY,
SHORT-DURATION INCOME, AND BALANCED PORTFOLIOS REFLECTS VARIOUS SALES
CHARGES CURRENTLY NOT APPLICABLE TO THE PORTFOLIOS; ANNUAL TOTAL RETURN FOR
THESE PORTFOLIOS MAY VARY. The Growth, Strategy, Short-Duration, and
Balanced Portfolios are the successors to Mentor Growth Fund, Mentor
Strategy Fund, Mentor Short-Duration Income Fund, and Mentor Balanced Fund,
respectively, each of which was previously a series of shares of beneficial
interest of Mentor Series Trust. For fiscal 1994, none of the Mentor funds
bore a front-end sales charge, but Mentor Strategy Fund, Mentor Short-
Duration Income Fund, and Mentor Balanced Fund each was subject to a
maximum contingent deferred sales charge of 5%. Total Fund Operating
Expenses for the Mentor funds for fiscal 1994 were 2.01%, 2.19%, 1.29%
(annualized), and 0.50% (annualized) for Mentor Growth Fund, Mentor
Strategy Fund, Mentor Short-Duration Income Fund, and Mentor Balanced Fund,
respectively.

Total return for one-, five-, and ten-year periods (or for such shorter
periods as a Portfolio has been in operation) is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in the
Portfolio at the beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount. Total return
for a period of one year is equal to the actual return of the Portfolio
during that period. Total return calculations assume deduction of a
Portfolio's maximum contingent deferred sales charge, if applicable, and
reinvestment of all Portfolio distributions at net asset value on their
respective reinvestment dates.

At times, a Portfolio's investment adviser or sub-adviser may reduce its
compensation or assume expenses of the Portfolio in order to reduce the
Portfolio's expenses. The per share amount of any such fee reduction or
assumption of expenses during a Portfolio's past ten fiscal years (or for
the life of a Portfolio, if shorter) is reflected in the Trust's Prospectus
and the Portfolio Prospectuses. Any such fee reduction or assumption of
expenses would increase a Portfolio's yield and total return during the
period of the fee reduction or assumption of expenses.

Total return may be presented for other periods or without giving effect to
any contingent deferred sales charge. Any quotation of total return or
yield not reflecting the contingent deferred sales charge would be reduced
if the sales charges were reflected.

ALL DATA ARE BASED ON PAST PERFORMANCE AND DO NOT PREDICT FUTURE RESULTS.

YIELD AND TAX-EQUIVALENT YIELD

The thirty-day yield for both classes of shares of the Portfolios for the
period ending September 30, 1994, were as follows:

PORTFOLIO CLASS A CLASS B

Quality Income Portfolio 6.08% 5.73%
Municipal Income Portfolio 4.56% 4.11%
Income and Growth Portfolio 1.87% 1.57%

A Portfolio's yield is presented for a specified thirty-day period (the
"base period"). Yield is based on the amount determined by (i) calculating
the aggregate amount of dividends and interest earned by the Portfolio
during the base period less expenses accrued for that period, and (ii)
dividing that amount by the product of (A) the average daily number of
shares of the Portfolio outstanding during the base period and entitled to
receive dividends and (B) the net asset value per share on the last day of
the base period. The result is annualized on a compounding basis to
determine the yield. For this calculation, interest earned on debt
obligations held by a Portfolio is generally calculated using the yield to
maturity (or first expected call date) of such obligations based on their
market values (or, in the case of receivables-backed securities such as
GNMA's, based on costs). Dividends on equity securities are accrued daily
at their stated dividend rates.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a
Portfolio, the performance will be reduced for those shareholders paying
those fees.

The tax-equivalent yield for Class A shares of the Municipal Income
Portfolio for the thirty-day period ending September 30, 1994, was 7.55%.
The tax-equivalent yield for the Class B shares was 6.81% for the same
period.

The tax-equivalent yield for both classes of the Municipal Income Portfolio
is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that the Portfolio would have had to earn to equal its actual
yield, assuming a 39.6% tax rate (the maximum effective federal rate for
individuals) and assuming that income is 100% tax-exempt.

The Municipal Income Portfolio may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in the Portfolio's investment portfolio generally remains free from
federal regular income tax but may be subject to state and local taxes.
(Some portion of the Portfolio's income may be subject to federal
alternative minimum tax and state and local taxes.) Capital gains, if any,
are subject to federal, state and local tax. As the table below indicates,
a "tax-fee" investment is an attractive choice for investors, particularly
in times of narrow spreads between tax-free and taxable yields.

Taxable Yield Equivalent for 1994
Federal Income Tax Bracket:

15.00% 20.00% 31.00% 36.00% 39.60%

Joint Return $1-36,900 $36,901- $89,151- $140,001- Over $250,000
89,150 140,000 250,000

Single Return $1-22,100 $22,101- $53,501- $115,001- Over $250,000
53,500 115,000 250,000

Tax-Exempt
Yield Taxable Yield Equivalent

0.025 2.94% 3.47% 3.62% 3.91% 4.14%
3.00 3.53 4.17 4.35 4.69 4.97

3.50 4.12 4.86 5.07 5.47 5.79

4.00 4.71 5.56 5.80 6.25 6.62

4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28

5.50 6.47 7.64 7.97 8.59 9.11

6.00 7.06 8.33 8.70 9.38 9.93

6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59

7.50 8.82 10.42 10.87 11.72 12.42

8.00 9.41 11.11 11.59 12.50 13.25

8.50 10.00 11.81 12.32 13.28 14.07

Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent.

The table above is for illustrative purposes only. It is not an indicator
of past or future performance of the Portfolio.

PERFORMANCE COMPARISONS

The performance of Class A and Class B shares, where applicable, of each
Portfolio depends upon such variables as: portfolio quality; average
portfolio maturity; type of instruments in which the particular Portfolio
is invested; changes in the expenses of the Trust or Class A or Class B
shares of a particular Portfolio; and various other factors.

The performance of each Portfolio's Class A and Class B shares fluctuates
on a daily basis largely because net earnings and net asset value per share
fluctuate daily. Both net earnings and net asset value per share are
factors in the computation of yield and total return for each class of the
Portfolios.

Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio,
and other investment companies, performed in specified time periods.
Agencies whose reports are commonly used for such comparisons are set forth
below. From time to time, a Portfolio may distribute these comparisons to
its shareholders or to potential investors. THE AGENCIES LISTED BELOW
MEASURE PERFORMANCE BASED ON THEIR OWN CRITERIA RATHER THAN ON THE
STANDARDIZED PERFORMANCE MEASURES DESCRIBED IN THE PRECEDING SECTION.

LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified
period of time. From time to time, a Portfolio will quote its Lipper
ranking in advertising and sales literature.

MORNINGSTAR, INC. DISTRIBUTES MUTUAL FUND RATINGS TWICE A MONTH. THE
RATINGS ARE DIVIDED INTO FIVE GROUPS: HIGHEST, ABOVE AVERAGE, NEUTRAL,
BELOW AVERAGE, AND LOWEST. THEY REPRESENT A PORTFOLIO'S HISTORICAL
RISK/REWARD RATIO RELATIVE TO OTHER FUNDS WITH SIMILAR OBJECTIVES. THE
PERFORMANCE FACTOR IS A WEIGHTED-AVERAGE ASSESSMENT OF THE PORTFOLIO'S
3-YEAR, 5-YEAR, AND 10-YEAR TOTAL RETURN PERFORMANCE (IF AVAILABLE)
REFLECTING DEDUCTION OF EXPENSES AND SALES CHARGES. PERFORMANCE IS
ADJUSTED USING QUANTITATIVE TECHNIQUES TO REFLECT THE RISK PROFILE OF THE
PORTFOLIO. THE RATINGS ARE DERIVED FROM A PURELY QUANTITATIVE SYSTEM THAT
DOES NOT UTILIZE THE SUBJECTIVE CRITERIA CUSTOMARILY EMPLOYED BY RATING
AGENCIES SUCH AS STANDARD & POOR'S CORPORATION AND MOODY'S INVESTOR
SERVICE, INC.

WEISENBERGER'S MANAGEMENT RESULTS publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return
calculated by Weisenberger for periods such as year-to-date, 1-year, 3-
year, 5-year and 10-year performance. Mutual funds are ranked in general
categories (e.g., international bond, international equity, municipal bond,
and maximum capital gain). Weisenberger rankings do not reflect deduction
of sales charges or fees.

A Portfolio's shares also may be compared to the following indices:

DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by Dow Jones & Company, it is cited as
a principal indicator of market conditions.

STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's listed on its index. Taxes due on any of
these distributions are not included, nor are brokerage or other fees
calculated, in the Standard & Poor's figures.

CONSUMER PRICE INDEX is generally considered to be a measure of inflation.

CDA MUTUAL FUND GROWTH INDEX is a weighted performance average of other
mutual funds with growth of capital objectives.

LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.

SHEARSON LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly issued,
fixed-rate, non-convertible domestic bonds of companies in industry, public
utilities and finance. The average maturity of these bonds approximates
nine years. Tracked by Shearson Lehman Brothers Inc., the index calculates
total returns for one month, three month, twelve month and ten year periods
and year-to-date.

SHEARSON LEHMAN GOVERNMENT INDEX is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.

RUSSELL GROWTH 1000 (RUSSELL 1000 INDEX) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market
values between $20 million and $300 million that can be used to compare the
total returns of funds whose portfolios are invested primarily in growth
common stocks.

SHEARSON LEHMAN AGGREGATE BOND INDEX is a total return index measuring both
the capital price changes and income provided by the underlying universe of
securities, weighted by market value outstanding. The Aggregate Bond Index
is comprised of the Shearson Lehman Government Bond Index, Corporate Bond
Index, Mortgage-Backed Securities Index, and Yankee Bond Index. These
indices include: U.S. Treasury obligations, including bonds and notes;
U.S. agency obligations, including those of the Federal Farm Credit Bank,
Federal Land Bank, and the Bank for Cooperatives; foreign obligations; and
U.S. investment-grade corporate debt and mortgage-backed obligations. All
corporate debt included in the Aggregate Bond Index has a minimum S&P
rating of BBB, a minimum Moody's rating of Baa, or a minimum Fitch rating
of BBB.

SALOMON BROTHERS MORTGAGE-BACKED SECURITIES INDEX-15 YEARS includes the
average of all 15-year mortgage securities, which include Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal National Mortgage Association
(Fannie Mae), and Government National Mortgage Association (Ginnie Mae).

SHEARSON LEHMAN MUNICIPAL BOND INDEX is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market.
Returns and attributes for the Index are calculated semi-monthly using
approximately 21,000 municipal bonds, which are priced by Muller Data
Corporation.

From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of both classes of their shares
compared to similar funds or portfolios using certain indices, reporting
services, and financial publications. These may include the following:
Morgan Stanley Capital International World Index, The Morgan Stanley
Capital International EAFE (Europe, Australia, Far East) index, J.P. Morgan
Global Traded Bond Index, Salomon Brothers World Government Bond Index, and
the Standard & Poor's 500 Composite Stock Price Index (S&P 500). A
Portfolio also may compare its performance to the performance of unmanaged
stock and bond indices, including the total returns of foreign government
bond markets in various countries. All index returns are translated into
U.S. dollars. The total return calculation for these unmanaged indices may
assume the reinvestment of dividends and any distributions, if applicable,
may include withholding taxes, and generally do not reflect deductions for
administrative and management costs.

Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete
view of a particular Portfolio's performance before investing. Of course,
when comparing a Portfolio's performance to any index, conditions such as
composition of the index and prevailing market conditions should be
considered in assessing the significance of such comparisons. When
comparing portfolios using reporting services, or total return and yield,
investors should take into consideration any relevant differences in
portfolios, such as permitted portfolio compositions and methods used to
value portfolio securities and compute net asset value.

Advertisements and other sales literature for a Portfolio may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
a Portfolio based on monthly reinvestment of dividends over a specified
period of time.

From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank
products, including certificates of deposit and time deposits, and to
monthly market funds using the Lipper Analytical Service money market
instruments average.

Advertisements may quote performance information which does not reflect the
effect of the sales load.

Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the
descriptions appearing below. From time to time any or all of the
Portfolios may distribute evaluations by or excerpts from these
publications to its shareholders or to potential investors. The following
illustrates the types of information provided by these publications.

BUSINESS WEEK publishes mutual fund rankings in its Investment Figures of
the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all
distributions. They do not reflect deduction of any sales charges. Funds
are not categorized; they compete in a large universe of over 2,000 funds.
The source for rankings is data generated by Morningstar, Inc.

INVESTOR'S BUSINESS DAILY publishes mutual fund rankings on a daily basis.
The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds,
balanced funds, U.S. government funds, GNMA funds, growth and income funds,
corporate bond funds, etc. Performance periods for sector equity funds can
vary from 4 weeks to 39 weeks; performance periods for other fund groups
vary from 1 year to 3 years. Total return performance reflects changes in
net asset value and reinvestment of dividends and capital gains. The
rankings are based strictly on total return. They do not reflect deduction
of any sales charges Performance grades are conferred from A+ to E. An A+
rating means that the fund has performed within the top 5% of a general
universe of over 2000 funds; an A rating denotes the top 10%; an A- is
given to the top 15%, etc.

BARRON'S periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services.
The Lipper total return data reflects changes in net asset value and
reinvestment of distributions, but does not reflect deduction of any sales
charges. The performance periods vary from short-term intervals (current
quarter or year-to-date, for example) to long-term periods (five-year or
ten-year performance, for example). Barron's classifies the funds using
the Lipper mutual fund categories, such as Capital Appreciation Funds,
Growth Funds, U.S. Government Funds, Equity Income Funds, Global Funds,
etc. Occasionally, Barron's modifies the Lipper information by ranking the
funds in asset classes. "Large funds" may be those with assets in excess
of $25 million; "small funds" may be those with less than $25 million in
assets.

THE WALL STREET JOURNAL publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its
total return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking
is based on the one-year results. The rankings for any given category
appear approximately once per month.

FORTUNE magazine periodically publishes mutual fund rankings that have been
compiled for the magazine by Morningstar, Inc. Funds are placed in stock
or bond fund categories (for example, aggressive growth stock funds, growth
stock funds, small company stock funds, junk bond funds, Treasury bond
funds etc.), with the top-10 stock funds and the top-5 bond funds appearing
in the rankings. The rankings are based on 3-year annualized total return
reflecting changes in net asset value and reinvestment of distributions and
not reflecting sales charges. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.

MONEY magazine periodically publishes mutual fund rankings on a database of
funds tracked for performance by Lipper Analytical Services. The funds are
placed in 23 stock or bond fund categories and analyzed for five-year risk
adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to
E): the top 20% in each category receive an A, the next 20% a B, etc. To
be ranked, a fund must be at least one year old, accept a minimum
investment of $25,000 or less and have had assets of at least $25 million
as of a given date.

FINANCIAL WORLD publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized
as to type, e.g., balanced funds, corporate bond funds, global bond funds,
growth and income funds, U.S. government bond funds, etc. To compete,
funds must be over one year old, have over $1 million in assets, require a
maximum of $10,000 initial investment, and should be available in at least
10 states in the United States. The funds receive a composite past
performance rating, which weighs the intermediate - and long-term past
performance of each fund versus its category, as well as taking into
account its risk, reward to risk, and fees. An A+ rated fund is one of the
best, while a D- rated fund is one of the worst. The source for Financial
World rating is Schabacker investment management in Rockville, Maryland.

FORBES magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond
funds, municipal bond funds, etc. Data sources include Lipper Analytical
Services and CDA Investment Technologies. The ratings are based strictly
on performance at net asset value over the given cycles. Funds performing
in the top 5% receive an A+ rating; the top 15% receive an A rating; and so
on until the bottom 5% receive an F rating. Each fund exhibits two
ratings, one for performance in "up" markets and another for performance in
"down" markets.

KIPLINGER'S PERSONAL FINANCE MAGAZINE (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value
and reinvestment of dividends and capital gains and not reflecting
deduction of any sales charges. Funds are ranked by tenths: a rank of 1
means that a fund was among the highest 10% in total return for the period;
a rank of 10 denotes the bottom 10%. Funds compete in categories of
similar funds -- aggressive growth funds, growth and income funds, sector
funds, corporate bond funds, global governmental bond funds, mortgage-
backed securities funds, etc. Kiplinger's also provides a risk-adjusted
grade in both rising and falling markets. Funds are graded against others
with the same objective. The average weekly total return over two years is
calculated. Performance is adjusted using quantitative techniques to
reflect the risk profile of the fund.

U.S. NEWS AND WORLD REPORT periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre &
Co., a Boston research firm. Over 2000 funds are tracked and divided into
10 equity, taxable bond and tax-free bond categories. Funds compete within
the 10 groups and three broad categories. The OPI is a number from 0-100
that measures the relative performance of funds at least three years old
over the last 1, 3, 5 and 10 years and the last six bear markets. Total
return reflects changes in net asset value and the reinvestment of any
dividends and capital gains distributions and does not reflect deduction of
any sales charges. Results for the longer periods receive the most weight.

THE 100 BEST MUTUAL FUNDS YOU CAN BUY authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund
categories, and the 100 funds are determined by applying four criteria.
First, equity funds whose current management teams have been in place for
less than five years are eliminated. (The standard for bond funds is three
years.) Second, the author excludes any fund that ranks in the bottom 20
percent of its category's risk level. Risk is determined by analyzing how
many months over the past three years the fund has underperformed a bank CD
or a U.S. Treasury bill. Third, a fund must have demonstrated strong
results for current three-year and five-year performance. Fourth, the fund
must either possess, in Mr. Williamson's judgment, "excellent" risk-
adjusted return or "superior" return with low levels of risk. Each of the
100 funds is ranked in five categories: total return, risk/volatility,
management, current income and expenses. The rankings follow a five-point
system: zero designates "poor"; one point means "fair"; two points denote
"good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."

SHAREHOLDER LIABILITY

Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts
or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust
provides for indemnification out of a Portfolio's property for all loss and
expense of any shareholder held personally liable for the obligations of a
Portfolio. Thus the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Portfolio would be unable to meet its obligations.

Financial Statements

The Report of Independent Accountants and the financial statements for the
fiscal year ended September 30, 1994 in respect of the Cambridge Growth,
Capital Growth, Income and Growth, Quality Income, Municipal Income, and
Global Portfolios are incorporated herein by reference to the Annual Report of
Cambridge Series Trust, the predecessor to the Trust, dated September 30, 1994
(File Nos. 33-45315 and 811-6550). The Quality Income Portfolio was formerly
the Cambridge Government Portfolio. The Report of Independent Accountants and
the financial statements for the fiscal year ended December 31, 1994 in
respect of the Growth, Strategy, Short-Duration Income, and Balanced
Portfolios are incorporated herein by reference to the Annual Reports of
Mentor Series Trust dated December 31, 1994 (File Nos. 2-95278 and 811-04228).
The Growth, Strategy, Short-Duration Income, and Balanced Portfolios are the
successors to Mentor Growth Fund, Mentor Strategy Fund, Mentor Short-Duration
Income Fund, and Mentor Balanced Fund, respectively, each of which previously
was a series of shares of beneficial interest of Mentor Series Trust. You may
request a copy of any Annual Report free of charge by writing the Trust or by
calling 1-800-382-0016.

CAMBRIDGE GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
PERCENT OF MARKET
NET ASSETS SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS 96.72%
BASIC MATERIALS 8.65%
Air Products & Chemicals, Inc. 8,000 $ 374,000
Alco Standard Corporation 8,000 497,000
Consolidated Papers, Inc. 1,000 51,750
Kimberly Clark Corporation 8,000 470,000
Minerals Technologies, Inc. 10,500 311,063
Monsanto Company 5,000 401,875
Morton International, Inc. 7,500 206,250
Newell Company 28,000 623,000
Nucor Corporation 11,500 805,000
3,739,938

CAPITAL GOODS & CONSTRUCTION 5.37%
Automotive Industries* 14,400 349,200
Emerson Electric Company 8,900 530,663
General Electric Company 14,100 678,562
Grainger, Inc. 3,500 207,375
Magna International, Inc. 13,600 501,500
Trimas Corporation 2,500 56,875
2,324,175

CONSUMER CYCLICAL 18.62%
Ann Taylor Stores, Inc.* 5,700 205,200
Brinker International, Inc.* 21,300 511,200
CUC International, Inc.* 6,900 227,700
Duracell International, Inc. 3,500 159,688
Franklin Quest Company* 13,500 506,250
General Nutrition Companies, Inc.* 12,900 287,025
Harcourt General, Inc. 6,000 206,250
Heilig-Meyers Company 11,600 304,500
Home Depot, Inc. 19,300 810,600
International Game Technology 7,400 152,625
Kohl's Corporation* 3,000 145,500
Lone Star Steakhouse & Saloon,
Inc.* 2,000 50,750
Manpower, Inc. 26,500 725,438
McDonald' s Corporation 14,000 367,500
Office Depot, Inc.* 10,800 280,800
Promus Companies, Inc.* 21,000 706,125
Shaw Industries, Inc. 20,900 300,438
Starbucks Corporation* 9,000 207,562
Station Casinos, Inc.* 7,900 106,650
The Bombay Company, Inc.* 4,900 64,925
The Walt Disney Company 6,000 233,250
Tribune Company 4,400 237,600
Viacom, Inc.-Class A* 384 15,696
Viacom, Inc.-Class B* 2,909 115,633
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
CONSUMER CYCLICAL (CONTINUED)
Viacom, Inc.- Rights* 4,800 $ 6,300
Viking Office Products, Inc.* 18,800 568,700
WalMart Stores, Inc. 23,600 551,650
8,055,555

CONSUMER STAPLES 9.90%
Abbott Laboratories 4,100 128,638
Campbell Soup Company 10,800 426,600
Coca Cola Company 15,000 729,375
Conagra, Inc. 12,600 396,900
CPC International, Inc. 11,000 556,875
Gillette Company 7,000 495,250
Philip Morris Companies, Inc. 9,900 605,138
Procter & Gamble Company 11,000 655,875
UST, Inc. 10,000 286,250
4,280,901

ENERGY 1.82%
Enron Corporation 16,900 511,225
Mobile Corporation 3,000 237,375
Repsol SA~ 1,200 36,579
785,179

FINANCIAL 9.31%
Bankers Life Holding Corporation 7,200 169,200
Boatmen's Bancshares, Inc. 14,000 434,875
Conseco, Inc. 6,500 291,688
Equity Residential Properties Trust 7,500 238,125
Federal National Mortgage Association 4,000 315,000
First USA, Inc. 12,100 425,012
General RE Corporation 3,400 359,975
MBNA Corporation 23,500 543,438
MGIC Investment Corporation 19,900 599,488
Nationsbank Corporation 10,000 490,000
Western National Corporation 12,000 162,000
4,028,801

HEALTH 14.94%
American Medical Holdings, Inc.* 4,000 89,500
Columbia HCA Healthcare Corporation 12,500 543,750
Cordis Corporation* 7,600 400,900
Forest Laboratories, Inc.* 8,000 394,000
Foundation Health Corporation* 1,900 66,975
Idexx Laboratories, Inc.* 8,400 247,800
Integrated Health Services, Inc.* 16,000 568,000
</TABLE>

17
<PAGE>

CAMBRIDGE GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
HEALTH(CONTINUED)
Johnson & Johnson 6,000 $ 309,750
Medtronic, Inc. 10,600 560,475
Mid Atlantic Medical Services, Inc.* 9,400 282,000
Pfizer, Inc. 4,000 276,500
Schering Plough Corporation 11,800 837,800
United Healthcare Corporation 7,500 397,500
US Healthcare, Inc. 6,500 302,656
Value Health, Inc.* 14,500 696,000
Warner Lambert Company 6,100 489,525
6,463,131

TECHNOLOGY 18.95%
3COM Corporation* 7,200 269,100
ADC Telecommunications, Inc.* 7,400 296,925
Applied Materials, Inc.* 10,400 486,200
AT&T Corporation 7,900 426,600
Cisco Systems, Inc.* 6,000 164,250
Compaq Computer Corporation* 12,100 394,763
Compuware Corporation* 8,000 376,500
EMC Corporation* 20,000 402,500
First Data Corporation 7,600 381,900
General Motors Corporation - Class E 10,400 395,200
Intel Corporation 5,000 307,500
Linear Technology Corporation 8,000 354,500
Loral Corporation 3,000 118,125
Maxim Integrated Products, Inc.* 1,300 79,625
Microchip Technology , Inc.* 1,500 58,875
Microsoft Corporation* 8,000 449,000
Motorola, Inc. 10,800 569,700
Oracle Systems Corporation* 14,100 606,300
Parametric Technology Corporation* 14,000 465,500
Reynolds & Reynolds Company 10,000 251,250
Scientific Atlanta, Inc. 5,700 232,988
Silicon Graphics, Inc.* 23,000 592,250
Solectron Corporation* 3,500 92,313
Tellabs, Inc.* 10,000 425,000
8,196,864

TRANSPORTATION & SERVICES 3.69%
Conrail, Inc. 7,600 376,200
Kansas City Southern Industries, Inc. 5,800 205,175
Southwest Airlines Company 11,000 247,500
Union Pacific Corporation 6,700 359,288
Wisconsin Central Transport* 9,900 405,900
1,594,063
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
FOREIGN SECURITIES 5.47%
AAlberts Industries 400 $ 18,626
Amway Japan, Ltd.* 2,100 33,338
Atlas Copco AB 4,500 56,469
BBC Brown Boveri 40 34,485
BMW Bayerische Motoren 50 24,125
BPB Industries 5,500 26,191
British Petroleum Company 3,500 22,048
Broken Hill Proprietary* 1,400 20,347
Carter Holt Harvey 8,600 19,524
Cementos De Mexico ACP 1,400 12,575
Comercial Del Plata 3,000 10,446
Creative Technology, Ltd. 500 8,833
CRH PLC 10,000 54,644
DDI Corporation 10 87,229
Ericsson 2,000 106,262
Grupo Carso ADR~ 500 11,500
Hagemeyer NV 200 16,085
Honda Motors Company 4,000 66,633
Keiyo Company 3,000 58,152
Keppel Corporation 5,000 40,459
Koninklijke Van Ommeren 1,300 34,378
Kyocera Corporation 1,000 71,479
Maderas Y Sinteticos Sociedad 800 22,800
Malaysian Helicopter 2,760 8,558
Matsushita Electric 4,000 63,806
Metsa Serla `B' 400 19,241
Nokia AB 500 58,073
Noranda, Inc. 1,100 22,237
Philips Electronics 1,900 57,999
Polygram NV 400 17,315
Road Builder Holdings 3,000 19,541
Sanyo Sihinpan Finance Company 600 63,604
Sharp Corporation 3,000 53,306
SIAM City Bank, Ltd. 20,200 25,710
Siebe PLC 7,000 59,603
Siemens AG 100 40,939
STET Societa Finanz 13,600 42,078
Technology Resources Industries 6,900 28,259
Telecom Argentina 3,300 22,121
Telefonos De Mexico 700 43,750
TNT Limited 10,300 18,217
Tokio Marine & Fire Insurance 5,000 59,566
Tokyo Electron, Ltd. 2,000 63,806
Universal Robina Corporation 11,000 10,329
Veba AG 200 66,288
Vodagone Group PLC 19,800 61,660
</TABLE>
19

<PAGE>

CAMBRIDGE GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

SHARES OR
COMMON STOCKS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
Wai Kee Holdings 58,000 $16,663
Wai Kee Holdings-Warrants* 10,600 178
Western Mining Corporation 3,700 21,548
Wilson & Horton, Ltd. 4,000 18,307
WMX Technologies, Inc. 18,000 519,750
Woolwor ths, Ltd. 3,862 8,059
2,367,139

TOTAL COMMON STOCKS
(COST $38,688,583) 41,835,746

CORPORATE BOND 0.38%
Argosy Gaming Corporation,
12.00%, 6/1/01 (cost $150,000) $ 150,000 163,500

TOTAL INVESTMENTS
(COST $38,838,583) 97.10% 41,999,246

OTHER ASSETS LESS LIABILITIES 2.90% 1,257,440

NET ASSETS 100.00% $43,256,686
</TABLE>

* Non-income producing.
~ American Depository Receipts.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>

CAMBRIDGE CAPITAL GROWTH PORTFOLIO
Portfolio of Investments
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS SHARES VALUE
<S> <C> <C> <C>

COMMON STOCKS 81.70%
BASIC MATERIALS 4.42%
Akzo Nobel 5,000 $ 586,663
British Steel ORD 200,000 544,784
DuPont EI de Nemours & Company 17,000 986,000
Dutch State Mines 7,500 635,958
2,753,405

CAPITAL GOODS & CONST RUCTION 8.44%
Brown Boveri & Cie 800 689,709
Browning Ferris Indus tries, Inc. 30,000 952,500
Fluor Corporation 12,000 597,000
PPG Industries, Inc. 25,000 990,625
Raytheon Company 17,000 1,090,125
United Technologies Corporation 15,000 939,375
5,259,334

CONSUMER CYCLICAL 17.72%
Capital Cities/ABC 11,000 902,000
Carnival Corporation 25,000 1,096,875
Dayton-Hudson Corporation 12,500 956,250
Harcourt General, Inc. 22,500 773,438
Home Depot, Inc. 30,000 1,260,000
Marriott International, Inc. 31,500 909,562
May Department Stores Company 30,000 1,181,250
Mirage Resorts, Inc.* 48,000 1,032,000
Price Costco, Inc.* 50,000 803,125
Toys R Us, Inc.* 38,000 1,353,750
Whirlpool Corporation 15,000 770,625
11,038,875

CONSUMER STAPLES 11.85%
Abbott Laboratories 40,000 1,255,000
Amgen, Inc.* 15,000 798,750
Astra AB 37,500 898,590
Columbia/HCA Healthcare
Corporation 25,000 1,087,500
Merck & Company, Inc. 40,000 1,420,000
Philip Morris Companies, Inc. 14,000 855,750
Schering-Plough Corporation 15,000 1,065,000
7,380,590

ENERGY 9.60%
British Petroleum PLC , ADS~ 13,000 984,750
Chevron Corporation 25,000 1,040,625
Dresser Industries, Inc. 50,000 1,012,500
</TABLE>

<PAGE>

CAMBRIDGE CAPITAL GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
ENERGY (CONTINUED)
Enron Corporation 25,000 $ 756,250
Mobil Corporation 12,000 949,500
Royal Dutch Petroleum Company 8,500 912,688
Tidewater, Inc. 15,000 322,500
5,978,813

FINANCIAL 5.98%
American International Group, Inc. 15,000 1,333,125
Federal National Mortgage Association 20,000 1,575,000
U.S. Healthcare, Inc. 17,500 814,844
3,722,969

TECHNOLOGY 15.21%
Cirrus Logic, Inc.* 35,000 980,000
Computer Associates International,
Inc. 30,000 1,335,000
Ericsson Telecommunication Company 15,000 806,250
General Motors Corporation - Class E 23,000 874,000
Hewlett Packard Company 15,000 1,310,625
International Business Machines
Corporation 9,000 625,500
Parametric Technology Corporation* 28,300 940,975
Perkin-Elmer Corporation 15,000 470,625
Philips Electronics Holdings Company 35,000 1,063,125
Xerox Corporation 10,000 1,067,500
9,473,600

TRANSPORTATION & SERVICES 2.61%
CSX Corporation 10,000 685,000
Union Pacific Corporation 17,500 938,438
1,623,438

UTILITIES 3.91%
Ameritech Corporation 20,000 805,000
Royal PTT Nederland 22,500 677,781
Sprint Corporation 25,000 953,125
2,435,906

MISCELLANEOUS 1.96%
Eastman Kodak Company 7,500 388,125
ITT Corporation 10,000 833,750
1,221,875

TOTAL COMMON STOCKS (COST $49,335,346) 50,888,805
</TABLE>

<PAGE>

SHARES OR
PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
PREFERRED STOCKS 0.47%
Nokia AB (cost $202,825) $ 2,500 $ 290,363

GOVERNMENT BOND 3.14%
U.S. Treasury Note, 6.00%, 6/30/96
(cost $1,974,735) $1,975,000 1,958,726

SHORT-TERM INVESTMENTS 16.00%

COMMERCIAL PAPER 13.37%
Bellsouth Telecommunications, Inc.,
4.79%, 10/20/94 1,650,000 1,645,829
Exxon Imperial U.S., Inc.,
4.82%, 10/7/94 1,630,000 1,628,691
General Electric Company,
4.87%, 10/24/94 1,500,000 1,495,333
Johnson & Johnson, 4.90%, 10/24/94 745,000 742,668
Private Export Funding Corporation,
4.73%, 10/14/94 1,245,000 1,242,873
Private Export Funding Corporation,
4.72%, 10/20/94 225,000 224,439
Proctor & Gamble Corporation,
4.83%, 10/21/94 1,350,000 1,346,377
TOTAL COMMERCIAL PAPER 8,326,210

U.S. GOVERNMENT AGENCIES 2.63%
Federal Home Loan Mortgage
Corporation, 4.70%, 10/4/94 1,240,000 1,239,514
Federal National Mortgage Association,
4.76%, 10/26/94 400,000 398,678

TOTAL U.S. GOVERNMENT AGENCIES 1,638,192
TOTAL SHORT-TERM INVESTMENTS
(COST $9,964,402) 9,964,402

(COST $61,477,308) 101.31% 63,102,296

OTHER ASSETS LESS LIABILITIES (1.31%) (815,383)

NET ASSETS 100.00% $62,286,913
</TABLE>

* Non-income producing.
~ American Depository Receipts.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>

CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

PERCENT OF PRINCIPAL MARKET
NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
LONG-TERM INVESTMENTS 121.63%

U.S. GOVERNMENT AND
FEDERAL AGENCIES 94.08%
FEDERAL HOME LOAN
MORTGAGE CORPORATION 34.03%
6.00%, 1/15/20 $ 5,236,000 $ 4,707,478
10.00%, 3/1/21 1,548,772 1,651,316
6.75%, 5/15/21 3,000,000 2,669,040
9.50%, 12/1/22 776,622 811,080
6.00%, 11/14/24 (c) 13,000,000 11,208,444
CMO, IO, 9.98% - 11.66%,
7/15/06 - 1/15/16 23,277,819 4,806,943
CMO, REMIC, 8.50%, 6/25/19 1,976,636 2,003,815
IO, REMIC, 4.00% -7.00%,
12/15/08 -3/25/24 92,193,018 8,907,180
36,765,296

FEDERAL HOUSING AGENCY 3.65%
7.38%, 7/1/21 (a) 2,979,428 2,962,669
7.43%, 12/1/21 (a) 998,994 977,890
3,940,559
FEDERAL NATIONAL
MORTGAGE ASSOCIATION 0.46%
11.00%, 12/1/20 449,589 494,547

FEDERAL NATIONAL
MORTGAGE ASSOCIATION - REMIC 15.03%
8.00%, 1991 Class 155ZA, 2/25/17 4,085,083 4,092,722
6.15%, 1993 Class 160AG, 12/25/20 2,000,000 1,805,620
6.00%, 1991 Class 140D, 10/25/21 9,875,000 8,612,778
6.50%, 1993 Class 189PK, 3/25/22 2,000,000 1,730,620
16,241,740
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION 39.15%
12.00%, 12/15/12 - 5/15/15 3,178,281 3,607,349
11.50%, 2/15/13 - 6/20/19 643,805 712,580
10.50%, 5/20/14 - 6/20/19 2,815,070 3,033,890
11.00%, 1/15/16 - 6/15/21 3,130,421 3,459,694
6.50%, 11/15/23 1,487,152 1,298,462
6.00%, 8/20/24 - 9/20/24* 11,430,001 11,088,632
9.50%, 9/15/10 - 1/15/28 5,023,272 5,274,436
9.00%, 1/15/28 2,842,244 2,914,181
8.75%, 1/15/28 - 5/15/28 4,394,051 4,398,137
10.00%, 5/15/24 - 7/15/28 4,017,475 4,301,189
9.75%, 2/15/29 2,061,048 2,201,199
42,289,749

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
TREASURY SECURITIES 1.76%
U.S. Treasury Note, 6.38%, 1/15/009 $1,980,000 $1,898,93
TOTAL U.S. GOVERNMENT
AND FEDERAL AGENCIES 101,630,830
CORPORATE BONDS 10.14%
CONSUMER NON-DURABLES 3.20%
RJR Nabisco, Inc., 8.30%, 4/15/99 3,600,000 3,451,500

FINANCE 0.92%
Banesto Finance, 6.13%, 4/25/03 1,000,000 1,002,900

TRANSPORTATION 4.49%
American Airlines, 9.78%, 11/26/11 5,000,000 4,846,000

MISCELLANEOUS 1.53%
BR W Real Estate
Operating Company, 5.69%, 12/1/98
(3/24/94, $1,664,501) (a) (b) 1,668,672 1,652,508
TOTAL CORPORATE BONDS 10,952,908
COLLATERALIZED MORTGAGE OBLIGATIONS 15.19%
Prudential Home Mortgage
Securities Corporation,
Series 1992-34, 6.50%, 11/25/07 3,000,000 2,839,680
Prudential Home Mortgage
Securities Corporation,
Series 1992-46, 7.00%, 12/1/07 4,000,000 3,985,938
Prudential Home Mortgage
Securities Corporation,
Series 1993-15, 11.50%, 5/25/08 3,549,431 3,752,692
Resolution Trust Corporation,
Series 1992-C5, 6.90%, 5/25/22 (a) 1,679,665 1,633,471
Resolution T rust Corporation,
Series 1992-C1, 8.80%, 8/25/23 (a) 3,275,983 3,343,550
Sears Mortgage Securities Corporation,
Series 1992-9, 5.76%, 6/25/22 (a) 875,806 857,278

TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 16,412,609
MORTGAGES 2.22%
Chase Mortgage Finance
Corporation, IO, Series 1994-F , Class A,
2.50%, 3/25/25 10,511,000 817,892
Prudential Home Mortgage
Securities Corporation, IO, CMO,
Series 1993-63, 6.75%, 1/25/24 4,451,111 1,016,105
Residential Funding Mortgage
Securities, IO, 6.50%, 3/25/09 2,912,931 561,877
TOTAL MORTGAGES 2,395,874

</TABLE>
25

<PAGE>

CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
TOTAL LONG-TERM INVESTMENTS
(COST $136,708,288) $131,392,221
SHORT-TERM INVESTMENT 0.90%

United Missouri Bank,
Time Deposit, 3.77%,
10/3/94 $ 974,000 974,000

TOTAL SHORT-TERM INVESTMENTS
(COST $974,000) 974,000
TOTAL INVESTMENTS
(COST $137,682,288) 122.53% 132,366,221

OTHER ASSETS LESS LIABILITIES (22.53%) (24,336,572)

NET ASSETS 100.00% $108,029,649
</TABLE>

INVESTMENT ABBREVIATIONS
CMO - Collateralized Mortgage Obligation
IO - Interest Only Security
REMIC - Real Estate Mortgage Investment Conduit

* Government National Mortgage Association, 6.00%, 9/20/24 with a market
value of $9,390,015 was segregated as collateral for a reverse repurchase
agreement at September 30, 1994.

(a) Securities are valued based upon their fair value determined under
procedures approved by the Board of Trustees. At September 30, 1994, the fair
value of these securities was $11,427,366 (10.6% of net assets).

(b) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses after
the title of the restricted securities.

(c)At September 30, 1994 cost of securities purchased on a when-issued
basis totalled $11,456,250.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>

<TABLE>

CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

PERCENT OF PRINCIPAL MARKET
NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
LONG-TERM
MUNICIPAL SECURITIES 98.92%
CALIFORNIA 16.67%
California Educational
Facilities, College of
Osteopathic Medicine,
7.50%, 6/1/18 $ 985,000 $ 1,003,675
California State Revenue
Anticipation Bond, WTS, Series C,
5.75%, 4/25/96 3,000,000 3,041,550
Carson Improvement Board Act 1915,
Special Assessment District 92,
7.38%, 9/2/22 740,000 754,237
Los Angeles Convention,
Series A, 5.13%, 8/15/21 1,750,000 1,427,055
Los Angeles County
Metropolitan, 5.00%, 7/1/21 4,500,000 3,600,630
Orange County
Community Facilities District,
Series A, 7.35%, 8/15/18 300,000 343,602
San Francisco City Sewer
Revenue Refunding, 5.38%, 10/1/22 2,000,000 1,695,740

11,866,489

COLORADO 4.80%
Colorado HFA, SFM,
Series A-3, 7.00%, 11/01/24 655,000 661,857
Denver City & County
Airport Revenue, Series D,
7.75%, 11/15/13 1,000,000 997,880
Denver City & County
Airport Revenue, Series A,
8.50%, 11/15/23 1,700,000 1,750,830

3,410,567

DISTRICT OF COLUMBIA 3.94%
District of Columbia
Certificates of Partnership,
Participation Note,
7.30%, 1/1/13 1,000,000 1,012,130
District of Columbia Hospital
Revenue, Series A, 7.13%, 8/15/19 1,000,000 991,250
Metropolitan Washington,
General Airport Revenue,
Series A, 6.63%, 10/1/19 800,000 800,864

2,804,244

</TABLE>
27

<PAGE>

CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
FLORIDA 4.50%
Dade County, 6.50%, 10/1/26 $1,930,000 $ 1,950,921
Sarasota County, Health Facilities
Authority Revenue, 10.00%, 7/1/22 1,200,000 1,253,400

3,204,321

GEORGIA 2.90%
Cobb County Development
Authority Revenue Bonds,
Series 92A, 8.00%, 6/1/22 1,000,000 1,040,000
Monroe County
Development Authority PCR,
6.75%, 1/1/10 1,000,000 1,024,800

2,064,800

ILLINOIS 6.81%
Broadview T ax Increment Revenue,
Tax Allocation, 8.25%, 07/01/13 1,000,000 985,740
Chicago Heights Residential
Mortgage Revenue,
Series B, (effective yield-2.51%) (a),
6/1/09 3,465,000 1,215,591
Chicago O'Hare International
Airpor t Special Facilities
Revenue, 6.75%, 1/1/18 1,350,000 1,356,251
Illinois Health Facilities
Authority Revenue, 9.50%, 10/1/22 1,250,000 1,293,450

4,851,032

INDIANA 6.88%
Indiana Health Facilities
Hospital Revenue, 7.20%, 10/1/22 1,815,000 1,784,780
Indianapolis Public Improvement Bond,
Series D, 6.75%, 2/1/20 2,400,000 2,405,040
Indiana Transportation
Finance Authority, Series A,
(effective yield-1.50% - 1.70%) (a),
12/1/15 - 6/1/17 3,000,000 706,710

4,896,530

IOWA 0.95%
Student Loan Liquidity Corporation,
Student Loan Revenue,
Series C, 6.95%, 3/1/06 625,000 670,931

KENTUCKY 2.64%
Jefferson County, Hospital
Revenue, 9.05%, 10/1/08 500,000 518,750
</TABLE>

<PAGE>

<TABLE>

LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
KENTUCKY 2.64%
Kenton County Airport
Board Revenue, OID, 7.50%, 2/1/20 $ 1,400,000 $ 1,359,666
1,878,416

LOUISIANA 0.58%
Louisiana Public Facilities
Authority Revenue, 6.80%, 5/15/12 400,000 415,984

MAINE 1.39%
Maine State Housing Authority ,
Series C, 6.88%, 11/5/24 1,000,000 993,040

MASSACHUSETTS 2.54%
Massachusetts State Health
and Educational Facilities Authority ,
OID Revenue Bonds,
Series A, 6.00%, 10/1/23 2,000,000 1,296,000
Plymouth County,
Certificates of Partnership,
Participation Notes,
Series A, 7.00%, 4/1/22 500,000 513,755

1,809,755

MICHIGAN 1.94%
Michigan State Strategic Funding,
7.50%, 1/1/21 1,000,000 953,810
Romulus Community School,
Refunding, (effective yield-3.86%) (a),
5/1/20 2,385,000 429,896

1,383,706

MONTANA 0.66%
Montana State Resource
Recovery Revenue Bonds,
7.00%, 12/31/19 500,000 472,895

NEBRASKA 0.52%
Nebraska Finance Authority,
SFM, 10.02%, 9/15/24 400,000 372,500

NEVADA 0.72%
Henderson Local Improvement
District, Special Assessment,
Series A, 8.50%, 11/1/12 500,000 510,125
NEW JERSEY 2.63%
New Jersey Economic Development
Authority, Electric Energy Facilities
Revenue, 7.88%, 6/1/19 1,000,000 1,035,880
</TABLE>

<PAGE>

CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
NEW JERSEY (CONTINUED)
New Jersey Healthcare Facilities
Financing Authority, Refunding,
6.80%, 7/1/11 $ 825,000 $ 839,578
1,875,458

NEW YORK 8.84%

Refunding & Improvement, 8.00%, 1/1/20 1,000,000 977,730
Herkimer County, IDA, 8.00%, 1/1/09 1,000,000 1,041,160
New York City, Series H, 7.00%, 2/1/16 500,000 508,835
New York City, OID,
Series H, 7.10%, 2/1/12 300,000 308,400
New York City, OID,
Series H, 7.00%, 2/1/20 600,000 610,602
New York City, OID Refunding,
Series A, 6.25%, 8/1/21 600,000 559,464
New York, New York, Series A,
7.00%, 8/1/04 1,000,000 1,056,110
Onondaga County Residential
Recovery Agency Revenue Project,
7.00%, 5/1/15 1,225,000 1,234,237
6,296,538

OHIO 1.32%
Cleveland Airport Revenue, Series A,
6.00%, 1/1/24 1,000,000 938,510

OKLAHOMA 4.13%
Oklahoma City, Industrial and
Cultural Facilities Trust, 6.75%, 9/15/17 1,000,000 1,004,150
Tulsa, Municipal Airport Trust Revenue,
7.38%, 12/1/20 2,000,000 1,937,860
2,942,010

PENNSYLVANIA 7.56%
Delaware County Healthcare Authority,
Series A, 5.13%, 11/15/12 2,000,000 1,685,760
Lehigh County General Purpose
Authority Revenue, OID,
Series A, 6.60%, 7/15/22 1,000,000 924,820
Pennsylvania Economic
Development, 6.40%, 1/1/09 500,000 482,540
Pennsylvania HFA, SFM,
Series 4, 7.00%, 4/1/24 500,000 509,360
Pennsylvania Intergovernmental
Cooperative Authority,
Special Tax Revenue, 6.80%, 6/15/12 750,000 813,353
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 $ 1,000,000 $ 965,900
5,381,733
PUERTO RICO 1.22%
Puerto Rico, Commonwealth
Highway Transportation
Authority, Series T, 6.50%, 7/1/22 800,000 869,584

RHODE ISLAND 0.67%
West Warwick, Series A, G.O. Bonds,
6.80% - 7.30%, 7/15/98 - 7/15/08 475,000 480,564

TENNESSEE 2.26%
Memphis, Shelby County Airport
Authority Special Facilities
Revenue Refunding, 7.88%, 9/1/09 1,500,000 1,609,560

TEXAS 6.02%
Brazos Higher Education Authority
Student Loan Revenue, 7.10%,
11/1/04 1,000,000 1,012,820
Dallas-Fort Worth International
Airport Facility Revenue Bonds,
7.63%, 11/1/21 625,000 614,738
Dallas-Fort Worth International
Airport Facility Revenue
Bonds, 7.25%, 11/1/30 1,000,000 947,600
Leander Independent
School District Capital Appreciation
Refunding, (effective yield-3.92%)
(a), 8/15/15 3,995,000 969,227
Texas State Department
of Housing and Community Affairs
Refunding, Series C, 10.13%, 7/2/24 750,000 745,313

4,289,698

UTAH 0.36%
Bountiful Hospital Revenue,
9.50%, 12/15/18 250,000 257,370

WASHINGTON 0.60%
Washington State Housing
Finance Commission, SFM,
7.10%, 7/1/22 425,000 430,640

WEST VIRGINIA 4.73%
Harrison County,
Waste Disposal Revenue,
6.75%, 8/1/24 2,000,000 2,007,820
</TABLE>

<PAGE>

CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
WEST VIRGINIA (CONTINUED)
West Virginia State Hospital
Finance Authority Revenue,
9.70%, 1/1/18 $ 1,500,000 $1,359,090

3,366,910
OTHER 0.14%
Virgin Islands Public Finance
Authority Revenue Refunding
Series A, 7.25%, 10/1/18 100,000 101,642

TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $72,276,934) 70,445,552
SHORT-TERM MUNICIPAL SECURITIES 1.12%

CALIFORNIA
California Pollution Control, 3.60%,
VRDN 800,000 800,000

TOTAL SHORT-TERM
MUNICIPAL SECURITIES (COST $800,000) 800,000

TOTAL INVESTMENTS
(COST $73,076,934) 100.04% 71,245,552

OTHER ASSETS LESS LIABILITIES (0.04%) (31,798)

NET ASSETS 100.00% $ 71,213,754
</TABLE>

INVESTMENT ABBREVIATIONS
HFA - Housing Finance Authority
PFA - Public Financing Authority
IDA - Industrial Development Authority
SFM - Single Family Mortgage
OID - Original Issue Discount
PCR - Pollution Control Revenue
VRDN - Variable Rate Demand Note, rate shown represents current
interest rate at 9/30/94.

(a) Effective yield is the yield as calculated at time of purchase at which
the bond accretes on an annual basis until its maturity date.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>

CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

PERCENT OF MARKET
NET ASSETS SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS 62.17%
BASIC MATERIALS 14.16%
Aluminum Company of America 23,000 $1,949,249
Boise Cascade Corporation 19,700 581,150
Cleveland Cliffs, Inc. 1,700 65,875
Dekalb Genetics Corporation 900 26,100
Gaylord Container Corporation-
Warrants* 10,000 70,000
Georgia Pacific Corporation 3,000 229,500
International Paper Company 23,200 1,821,199
International Specialty Products,
Inc. 12,600 99,225
Kaiser Aluminum Corporation* 14,900 156,450
Norsk Hydro AS~ 19,300 711,688
Pichiney SA 12,000 863,000
Potlatch Corporation 2,700 111,375
Rayonier, Inc. 5,100 164,475
Rhone Poulenc SA~ 15,700 361,100
St. Lawrence Cement, Inc.* 25,000 223,580
Temple-Inland, Inc. 12,900 712,725
Willamette Industries, Inc. 9,500 486,875
8,633,566

CAPITAL GOODS & CONSTRUCTION 6.43%
American R E Partners 1,400 11,025
Ameron, Inc. 2,300 82,800
BE Aerospace, Inc.* 32,700 302,475
Black & Decker Corporation 32,000 700,000
Centex Construction Products,
Inc.* 18,200 227,500
Giant Cement Holding, Inc. 7,300 102,200
Honeywell, Inc. 900 31,050
Kaufman & Broad Home Corporation 20,900 284,762
Lafarge Corporation 2,400 48,300
National Gypsum Company* 8,100 307,800
Ryland Group, Inc. 5,700 90,488
Sequa Corporation* 18,100 486,437
Southdown, Inc.* 7,700 161,700
Standard Pacific Corporation 22,200 160,950
United T echnologies Corporation 400 25,050
USG Corporation* 16,600 342,375
Welbilt Corporation* 9,700 244,925
York International Corporation 7,500 312,188
3,922,025
</TABLE>

<PAGE>

<TABLE>

CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
CONSUMER CYCLICAL 3.51%
Borg-Warner Automotive, Inc. 4,000 $ 101,500
General Motors Corporation 27,900 1,307,812
Host Marriott Corporation* 17,400 171,825
Navistar International* 30,200 419,025
Servico, Inc.* 4,200 35,700
Valassis Communications, Inc. 6,600 102,300
2,138,162

CONSUMER STAPLES 4.35%
Davids, Ltd. 110,000 122,100
Fleming Companies, Inc. 13,900 324,913
Hills Stores Company* 10,000 213,750
Interstate Bakeries Corporation 19,000 247,000
Monk Austin, Inc. 11,800 172,575
Morningstar Group, Inc.* 15,200 106,400
Seagram Company, Ltd. 2,500 75,625
Standard Commercial Corporation 16,000 242,000
Universal Corporation 47,000 1,151,500
2,655,863

ENERGY 5.64%
Amerada Hess Corporation 2,600 120,900
Arethusa Off-Shore, Ltd.* 5,200 55,250
Atlantic Richfield Company 900 90,787
Burlington Resources, Inc. 200 7,500
Enserch Corporation 9,400 130,425
Gerrity Oil & Gas Corporation* 17,000 119,000
Gulf Canada Resources, Ltd.* 26,300 100,269
Home Oil Company* 13,200 181,500
Indresco, Inc. 2,200 28,875
Lone Star Technologies, Inc. 25,100 156,875
Maxus Energy Corporation* 61,900 278,550
Nabors Industries, Inc.* 15,000 91,875
Noble Drilling Corporation* 39,300 294,750
Nowsco Well Service, Ltd. 1,700 26,350
Petroleum Heat & Power Company 13,400 123,950
Phillips Petroleum Company 2,600 89,050
Ranchmen's Resources, Ltd.* 41,900 226,394
Santa Fe Energy Resources, Inc.* 10,000 92,500
Sonat Offshore Drilling, Inc. 22,400 445,200
U.S.X. Marathon Group, Inc. 18,000 319,500
Unocal Corporation 16,400 463,300
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
FINANCIAL 19.10%
ACE, Ltd. 32,500 $ 780,000
Aetna Life & Casualty Company 5,900 273,613
Alexander & Alexander Services, Inc. 18,600 362,700
American Express Company 9,200 279,450
Astoria Financial Corporation* 5,300 159,662
BankAmerica Corporation 31,338 1,382,756
California Federal Bank* 17,556 237,006
Capital Guaranty Corporation 22,800 350,550
Chase Manhattan Corporation 8,300 287,388
Chubb Corporation 12,300 874,837
CIGNA Corporation 8,900 548,463
Coast Savings Financial, Inc.* 8,800 156,200
Colonial Properties Trust 14,900 324,075
Enhance Financial Services Group, Inc. 10,400 198,900
Exel Limited 8,900 345,988
Federal National Mortgage Association 1,000 78,750
First Union Corporation 2,000 86,500
Firstfed Financial Corporation* 6,400 99,200
Gables Residential Trust 13,800 313,950
GP Financial Corporation 7,400 175,750
Holly Residential Properties 16,900 253,500
ITT Corporation 1,500 125,062
Keycorp 5,100 155,550
Koger Equity, Inc. REIT* 36,800 331,200
Lehman Brothers Holding, Inc. 24,840 366,390
Loews Corporation 1,200 106,050
Mellon Bank Corporation 2,400 135,000
National Bank of Canada 47,800 333,973
Newhall Land & Farming Company 3,100 45,725
Old Republic International Corporation 16,000 334,000
Policy Management Systems Corporation* 6,900 275,138
Reinsurance Group of America 3,600 82,800
Storage Equities, Inc. 21,300 319,500
Twentieth Century Industries* 37,000 471,750
U.S. Bank Corporation 3,200 81,600
Unidanmark A/S*~(b) 5,100 196,085
Union Bank 15,200 467,400
Unitrin, Inc. 5,200 250,900
11,647,361

TECHNOLOGY 3.51%
B.C.E., Inc. 25,400 911,225
Comsat Corporation 5,500 140,938
Cooper Industries, Inc. 7,600 305,900
</TABLE>

<PAGE>

CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
TECHNOLOGY (CONTINUED)
Digital Equipment Corporation* 2,000 $ 53,000
IDB Communications Group, Inc.* 28,900 260,100
Raychem Corporation 11,500 471,500
2,142,663

TRANSPORTATION & SERVICES 2.09%
Canadian Pacific, Ltd. 23,500 393,625
Canadian Pacific, Ltd.*
(2/14/94, $16,814) (a) 1,000 16,769
Continental Airlines, Inc.* 11,000 189,750
MESA Airlines, Inc.* 1,700 11,262
OMI Corporation* 18,400 117,300
Overseas Shipholding Group 5,000 108,750
Tidewater , Inc. 5,300 113,950
Trinity Industries, Inc. 8,500 269,874
Union Pacific Corporation 1,000 53,625
1,274,905

UTILITIES 0.43%
Central Maine Power Company 6,100 68,625
New York State Electric & Gas
Company 1,500 27,938
Niagra Mohawk Power 3,700 49,025
Telecom Italia Spa 11,000 30,972
Unicom Corporation 3,800 84,550
261,110

MISCELLANEOUS 2.95%
Brascan, Ltd. 19,200 276,000
CRSS, Inc. 2,900 32,988
Essex Property Trust, Inc. 15,500 279,000
Innkeepers U.S.A. T rust 9,000 87,188
Shurgard Storage Centers, Inc. 1,600 36,800
Sun Communities, Inc. 12,600 289,800
T ucker Properties Corporation 13,900 224,138
Unilab Corporation* 5,100 27,413
United Mobile Homes, Inc. 36,000 270,000
W.M.X. Technologies, Inc. 9,600 277,200
1,800,527
TOTAL COMMON STOCKS (COST
$36,159,724) 37,918,982

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
SHARES OR
PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
PREFERRED STOCKS 2.25%

BASIC MATERIALS 0.52%
Boise Cascade Corporation 9,000 $ 237,375
Reynolds Metals Company 1,500 80,812
318,187

CONSUMER STAPLES 0.04%
FHP International Corporation 800 21,900

FINANCIAL 1.16%
Glendale Federal Bank 21,700 707,963

TRANSPORTATION & SERVICES 0.53%
AMR Corporation (b) 5,000 205,000
UAL Corporation (b) 1,400 115,850
320,850
TOTAL PREFERRED STOCKS
(COST $1,150,737) 1,368,900

CORPORATE BONDS 7.86%

BASIC MATERIALS 0.36%
Aluminum Company of America,
5.75%, 2/1/01 $250,000 221,600

CAPITAL GOODS & CONSTRUCTION 0.15%
Lockheed Corporation, 6.75%,
3/15/03 100,000 90,219

CONSUMER CYCLICAL 1.04%
Circus Circus Enterprises, Inc.,
7.63%, 7/15/13 250,000 219,865
Sears Roebuck Company,
9.25%, 4/15/98 175,000 183,622
Time Warner Entertainment, Inc.,
8.88%, 10/1/12 250,000 230,187

633,674

CONSUMER STAPLES 0.34%
Gillette Company,
5.75%, 10/15/05 250,000 206,638

ENERGY 0.39%
Coastal Corporation,
8.13%, 9/15/02 250,000 239,820
</TABLE>

<PAGE>

CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

CORPORATE BONDS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
FINANCIAL 3.62%
American General Finance
Corporation,
5.88%, 7/1/00 $ 250,000 $ 226,650
Associates Corporation
of North America,
5.25%, 3/30/00 250,000 219,713
Bank of Boston,
6.63%, 2/1/04 250,000 222,420
Chase Manhattan Corporation,
7.75%, 11/1/99 250,000 246,210
Chrysler Financial Corporation,
6.63%, 8/15/20 250,000 231,413
Comerica Bank Inc.,
7.13%, 12/1/13 250,000 213,245
Dean W itter Discover,
6.25%, 3/15/00 100,000 91,837
Ford Motor Credit,
8.88%, 6/15/99 100,000 103,633
Great Western Financial,
6.38%, 7/1/00 250,000 226,750
Home Savings of Americas,
6.00%, 11/01/00 250,000 225,140
Toronto-Dominion Bank-NY,
6.13%, 11/1/08 250,000 201,107
2,208,118

UTILITIES 1.96%
Duke Power Company,
7.00%, 6/1/00 100,000 96,534
Florida Power & Light Company,
5.38%, 4/1/00 250,000 223,015
Long Island Lighting Company,
7.05%, 3/15/03 100,000 80,934
Pacific Gas & Electric Company,
5.93%, 10/8/03 250,000 216,515
Philadelphia Electric Company,
7.5%, 1/15/99 100,000 98,841
Southwestern Public Service Company,
6.88%, 12/1/99 250,000 241,443
Union Electric Company,
6.75%, 10/15/99 250,000 238,420

1,195,702
TOTAL CORPORATE BONDS (COST
$5,454,869) 4,795,771
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
GOVERNMENT BONDS 23.15%
Government National Mortgage
Association,
7.00%, 1/15/24 $ 2,474,696 $ 2,243,460
Government National Mortgage
Association,
6.50%, 9/15/23-4/15/24 1,484,365 1,296,489
U.S. Treasury Note,
4.75%, 9/30/98 2,000,000 1,837,060
U.S. Treasury Note,
5.75%, 8/15/03 2,000,000 1,763,680
U.S. Treasury Bond,
7.25%, 5/15/16 5,500,000 5,081,230
U.S. Treasury Bond,
7.50%, 11/15/16 2,000,000 1,895,980
TOTAL GOVERNMENT BONDS (COST
$15,179,888) 14,117,899

SHORT-TERM INVESTMENT 2.95%

REPURCHASE AGREEMENT
Lehman Brothers, Inc.
Dated 9/29/94, 4.85%, Due 10/3/94,
collateralized by $1,620,000,
U.S. Treasury Bond, 9.25%, 2/15/16 1,797,000 1,797,000

TOTAL SHORT-TERM INVESTMENTS
(COST $ 1,797,000) 1,797,000

TOTAL INVESTMENTS
(COST $59,742,218) 98.38% 59,998,552

OTHER ASSETS LESS LIABILITIES 1.62% 992,964

NET ASSETS 100.00% $60,991,516
</TABLE>

* Non-income producing.
~ American Depository Receipts.

REIT - Real Estate Investment Trust

(a) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933). Dates of acquisition and costs are set forth in
parentheses after the title of the restricted securities.

(b) These are securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>

CAMBRIDGE GLOBAL PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

PERCENT OF MARKET
NET ASSETS SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS 91.63%

AUSTRALIA 5.07%
Broken Hill Proprietary Company* 24,033 $ 349,286
Western Mining Corporation
Holdings, Ltd. ORD 36,450 212,278
Woodside Petroleum, Ltd. 79,500 294,150
855,714

CANADA 4.70%
Alcan Aluminum, Ltd. 7,300 192,456
Canadian Pacific, Ltd. 16,600 278,357
Rogers Communications, Inc.* 21,200 321,918
792,731

DENMARK 1.55%
FLS Industries A/S `B' 3,750 260,899

FRANCE 1.45%
Alcatel Alsthom (CGE)~ 13,200 244,200

GERMANY 6.14%
Hoechst AG 1,390 295,766
Mannesmann AG 1,100 273,530
Munich Reinsurance 155 271,097
Veba AG 590 195,552
1,035,945

GREAT BRITAIN 10.24%
Carlton Communications ORD 18,600 245,773
Enterprise Oil ORD 45,500 277,651
Lasmo PLC 129,857 313,281
Rio Tinto-Zinc Corporation ORD 19,700 272,888
Saint James Place 130,000 243,931
Waste Management International PLC* 30,600 261,998
Willis Corroon Group PLC 48,000 111,259
1,726,781

HONG KONG 1.66%
Hong Kong Telecom, Ltd. 69,000 137,961
Hutchison Whampoa, Ltd. 30,000 141,707
279,668
</TABLE>

<PAGE>

<TABLE>

COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
ITALY 4.71%
Instituto Mobilaire Italiano 4,000 $ 27,644
Instituto Nazionale ORD 112,000 166,635
Rinascente 39,000 124,410
Rinascente - Warrants* 10,400 0
Telecom Italia SPA 90,600 255,097
STET Societa Finanz 71,300 220,602
794,388

JAPAN 9.27%
Canon, Inc. 16,000 281,070
Hitachi, Ltd. 31,000 299,202
Kyocera Corporation 4,000 285,916
Matsushita Electric 8,000 127,612
NKS, Ltd. 2,000 15,063
Sony Corporation~ 500 29,188
Sony Corporation 4,000 232,610
Toshiba Corporation 39,000 293,337
1,563,998

SOUTH AFRICA 1.47%
Impala Platinum Holdings~ 10,400 248,430

SOUTH KOREA 2.95%
Goldstar (b) 13,400 298,150
Yukong, Ltd.* (b) 8,000 200,000
498,150

SWEDEN 5.93%
Astra AB A-F 7,000 167,737
Autoliv AB 8,900 267,324
SKF AB* 15,200 264,801
Volvo AB 16,500 300,665
1,000,527

SWITZERLAND 9.73%
Brown Boveri & CIE AG 295 254,330
CIBA Geigy AG Basel 480 271,410
Nestle Cham Et Vevey 302 274,204
SCHW Rueckversicherungs 600 291,728
SGS Societe Gen De Surveill 165 256,311
Sulzer AG* (Participation Certificate) 443 294,186
1,642,169

</TABLE>
41

<PAGE>

CAMBRIDGE GLOBAL PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994

<TABLE>
<CAPTION>
SHARES OR
COMMON STOCKS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C>
UNITED STATES 25.30%
Allegheny Ludlum Corporation 1,700 $ 36,550
Ambac, Inc. 7,600 281,200
American President Cos., Ltd. 12,200 308,050
Amway Asia Pacific, Ltd. 1,600 48,200
Boeing Company 4,700 202,688
Destec Energy , Inc.* 27,400 311,675
Enron Corporation 8,700 263,175
Exel, Ltd. ORD 7,400 287,675
General RE Corporation 2,220 235,043
Harnischfeger 1,300 34,287
LaFarge Corporation 13,800 277,725
MBIA, Inc. 5,200 310,050
Mid Ocean, Ltd. ORD* 10,800 273,375
Partnerre Holdings, Ltd. 12,600 275,625
Schlumberger, Ltd. 4,600 250,125
Thermo Electron Corporation* 2,700 123,863
United Healthcare Corporation 4,600 243,800
United Technologies Corporation 3,300 206,663
WMX Technologies, Inc. 10,300 297,412
4,267,181

VENEZUELA 1.46%
Venezolana De Prerredicidos*
(4/13/94, $260,293) (a) (b) 35,600 246,975
TOTAL COMMON STOCKS (COST $15,437,475) 15,457,756

CORPORATE BONDS 0.72%

CANADA 0.46%
Teck Corporation, 3.75%, 7/15/06~ $80,000 78,000

ITALY 0.16%
Mediobanca, 4.50%, 1/1/00* 25,852 26,620

MALAYSIA 0.10%
Telekom Malaysia Berhad,
4.00%, 10/3/04~ (a) (b)
(9/22/94, $170,000) 170,000 169,958
TOTAL CORPORATE BONDS (COST $260,604) 274,578

SHORT- TERM INVESTMENTS 8.59%
Federal Home Loan Bank, OID,
4.80%, 10/28/94 800,000 797,120
</TABLE>

<PAGE>

SHARES OR
SHORT-TERM PERCENT OF PRINCIPAL MARKET
INVESTMENTS (CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
REPURCHASE AGREEMENT
Donaldson, Lufkin, & Jenrette Securities Corporation
Dated 9/30/94, 4.80%, due 10/3/94,
collateralized by $473,000,
U.S. Treasury Bond, 12.75%, 11/15/10 $651,000 $ 651,000

TOTAL SHORT-TERM INVESTMENTS
(COST $1,448,120) 1,448,120

TOTAL INVESTMENTS
(COST $17,146,199) 100.94% 17,180,454

OTHER ASSETS LESS LIABILITIES (0.94%) (310,915)

NET ASSETS 100.00% $16,869,539
</TABLE>

* Non-income producing.
~ American Depository Receipts.

(a) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses after
the title of the restricted securities.

(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4 (2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>

CAMBRIDGE SERIES TRUST
Statements of Assets and Liabilities
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
CAMBRIDGE CAMBRIDGE CAMBRIDGE CAMBRIDGE
CAMBRIDGE CAPITAL GOVERNMENT MUNICIPAL INCOME AND CAMBRIDGE
GROWTH GROWTH INCOME INCOME GROWTH GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at market value* (Note 2) $41,999,246 $63,102,296 $132,366,221 $71,245,552 $59,998,552 $17,180,454
Cash 859,416 - - 130,404 - 2,344
Receivables
Investments sold 832,966 741,914 - - 904,135 -
Fund shares sold 11,126 42,470 34,094 23,324 200,362 94,816
Dividends and interest 95,051 139,759 1,170,752 1,348,724 439,641 28,360
Deferred organization expenses (Note 2) 9,039 11,351 33,502 10,468 9,964 45,295
Other assets - 5,101 - 4,496 - -
Total assets 43,806,844 64,042,891 133,604,569 72,762,968 61,552,654 17,351,269
LIABILITIES
Payables
Investments purchased 141,000 1,342,854 14,362,419 1,006,858 124,141 381,081
Reverse repurchase agreement (Note 2) - - 8,956,501 - - -
Fund shares redeemed 250,951 218,520 908,895 207,479 208,711 3,771
Dividends - - 274,254 177,981 - -
Forward contract payable (Note 7) - - - - - 14,160
Variation margin (Note 2) - - - 25,000 - -
Accrued administration expenses
(Note 4) 5,285 7,531 13,372 5,429 4,619 12,809
Accrued distribution expenses 21,847 53,090 43,523 24,552 9,555 9,723
Accrued expenses and other liabilities 131,075 133,983 1,015,956 101,915 214,112 60,186
Total liabilities 550,158 1,755,978 25,574,920 1,549,214 561,138 481,730
NET ASSETS $43,256,686 $62,286,913 $108,029,649 $71,213,754 $60,991,516 $16,869,539

Net Assets represented by: (Note 2)
Additional paid-in capital $42,915,639 $59,500,018 $124,898,930 $73,383,330 $59,544,077 $16,831,407
Undistributed net investment
income - - 165,284 - 75,944 -
Accumulated distributions in
excess of net investment income - (103,086) - (58,877) - -
Undistributed realized gain (loss)
on investment transactions (2,819,616) 1,264,435 (11,718,498) (631,634) 1,115,161 17,822
Net unrealized appreciation
(depreciation) of investments and
foreign currency related
transactions 3,160,663 1,625,546 (5,316,067) (1,479,065) 256,334 20,310
Net Assets $43,256,686 $62,286,913 $108,029,649 $71,213,754 $60,991,516 $16,869,539
NET ASSET VALUE PER SHARE
Class A Shares $14.68 $ 14.88 $ 12.75 $ 14.42 $ 15.27 $ 14.23
Class B Shares $14.53 $ 14.80 $ 12.76 $ 14.43 $ 15.28 $ 14.15
OFFERING PRICE PER SHARE
Class A $15.53 (a) $ 15.75(a) $ 13.39(b) $ 15.14(b) $ 16.16(a) $ 15.06(a)
Class B $14.53 $ 14.80 $ 12.76 $ 14.43 $ 15.28 $ 14.15
REDEMPTION PROCEEDS PER SHARE
Class A $14.68 $ 14.88 $ 12.75 $ 14.42 $ 15.27 $ 14.23
Class B (c) $14.38 $ 14.65 $ 12.63 $ 14.29 $ 15.13 $ 14.01
SHARES OUTSTANDING
Class A Shares 993,054 1,423,010 2,363,773 1,738,078 1,164,060 624,181
Class B Shares 1,974,036 2,778,026 6,103,595 3,198,229 2,828,735 564,671
Total Shares Outstanding 2,967,090 4,201,036 8,467,368 4,936,307 3,992,795 1,188,852
</TABLE>

* Investments at cost $38,838,583, $61,477,308, $137,682,288, $73,076,934,
$59,742,218, and $17,146,199 respectively.

(a) Computation of offering price: 100/94.50 of net asset value.

(b) Computation of offering price: 100/95.25 of
net asset value.

SEE NOTES TO FINANCIAL STATEMENTS.

44 45

<PAGE>

CAMBRIDGE SERIES TRUST
Statements of Operations

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1994 CAMBRIDGE CAMBRIDGE CAMBRIDGE CAMBRIDGE
CAMBRIDGE CAPITAL GOVERNMENT MUNICIPAL INCOME AND CAMBRIDGE
GROWTH GROWTH INCOME INCOME GROWTH GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO**
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 72,373 $ 498,408 $11,163,429* $5,211,568 $1,100,703 $ 41,716
Dividends (Net of withholding taxes)*** 525,699 1,152,741 - - 869,081 80,443

Total investment income (Note 2) 598,072 1,651,149 11,163,429 5,211,568 1,969,784 122,159
EXPENSES
Management fee (Note 4) 410,955 590,693 839,139 468,787 374,462 69,515
Distribution fees (Note 4) 253,834 360,712 511,023 253,801 252,486 20,749
Transfer agent fee 163,583 213,354 135,467 88,237 107,910 40,323
Shareholder services fees (Note 4) 128,423 184,588 349,642 195,328 124,821 15,340
Administration fee (Note 4) 64,195 92,278 174,797 97,653 62,315 7,670
Custodian fee 71,513 67,014 271,676 72,717 97,592 36,000
Registration fees 30,000 27,000 36,000 23,000 38,000 -
Shareholder reports 25,338 36,777 65,132 41,328 37,476 8,091
Organizational expenses 12,275 12,195 12,114 10,397 2,941 1,904
Professional fees 11,008 15,782 27,500 17,912 14,914 4,014
Directors' fees 7,180 7,180 7,180 7,180 7,180 3,590
Other 13,472 13,705 24,573 30,733 11,429 10,889

Total expenses 1,191,776 1,621,278 2,454,243 1,307,073 1,131,526 218,085
Deduct
Waiver of administration fee (Note 4) 6,569 - 23,563 - 15,033 530
Waiver of management fee (Note 4) - - - 81,713 - 69,515

Net Expenses 1,185,207 1,621,278 2,430,680 1,225,360 1,116,493 148,040

Net investment income (loss) (587,135) 29,871 8,732,749 3,986,208 853,291 (25,881)

REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss)
on investments (Note 2) (514,259) 1,128,751 (8,118,106) (527,018)(a) 1,523,312 17,822
Change in unrealized
appreciation (depreciation) (5,796,253) (2,465,351) (5,963,957) (7,578,461)(b) (248,910) 20,310(b)
Net realized and unrealized
gain (loss) on investments (6,310,512) (1,336,600) (14,082,063) (8,105,479) 1,274,402 38,132
Net increase (decrease) in net assets
resulting from operations $ (6,897,647) $(1,306,729) $(5,349,314) $(4,119,271) $2,127,693 $12,251
</TABLE>

* Net of interest expense ($7,680).

** For the period from March 29, 1994 (date of initial public investment)
to September 30, 1994.

***Withholding taxes were $1,534, $1,232, and $2,960 for the Capital Growth Port
folio, Income and Growth Portfolio and Global Portfolio respectively for the
year ended September 30, 1994. (a) Includes net realized gain on futures of
$167,132. (b) Includes unrealized appreciation on variation margin receivable
of $352,317 on Cambridge Municipal Income Portfolio and unrealized
depreciation on forward exchange contracts of $14,160 on Cambridge Global
Portfolio.

SEE NOTES TO FINANCIAL STATEMENTS.

46 47

<PAGE>

CAMBRIDGE SERIES TRUST
Statements of Changes in Net Assets

<TABLE>
<CAPTION>
CAMBRIDGE CAMBRIDGE CAMBRIDGE
GROWTH CAPITAL GROWTH GOVERNMENT INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1994 1993 1994 1993

<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (587,135) $ (370,213) $ 29,871 $ 362,476 $ 8,732,749 $ 10,265,188
Net realized gain (loss) on
investments (514,259) (1,548,366) 1,128,751 1,367,380 (8,118,106) (3,077,078)
Change in unrealized appreciation
(depreciation) of investments (5,796,253) 8,221,415 (2,465,351) 3,040,826 (5,963,957) (60,842)
Increase (decrease) in net assets
from operations (6,897,647) 6,302,836 (1,306,729) 4,770,682 (5,349,314) 7,127,268

DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A - - (87,466) (204,040) (2,342,783) (3,306,334)
Class B - - - (94,762) (5,799,239) (6,958,854)
Distributions in excess of
net investment income
Class A - (22,462) - - - (146,203)
Class B - - - (35,370) - (301,354)
Net realized gain on investments
Class A - - (241,102) - -
Class B - - (445,582) - -
Net decrease from distributions - (22,462) (774,150) (334,172) (8,142,022) (10,712,745)

CAPITAL SHARE TRANSACTIONS (NOTE 8)
Net proceeds from sale of shares 15,028,646 30,595,316 9,607,870 47,948,857 14,581,398 103,828,094
Reinvested distributions - 22,029 755,452 324,735 5,302,074 6,788,193
Cost of shares redeemed (19,651,657) (7,411,912) (34,385,554) (10,651,945) (73,488,727) (34,305,532)
Change in net assets from capital
share transactions (4,623,011) 23,205,433 (24,022,232) 37,621,647 (53,605,255) 76,310,755

Increase (decrease) in net assets (1 1,520, 658) 29,485,807 (26,103,111) 42,058,157 (67,096,591) 72,725,278

NET ASSETS
Beginning of period 54,777,344 25,291,537 88,390,024 46,331,867 175,126,240 102,400,962

End of period $ 43,256,686 $ 54,777,344 $ 62,286,913 $ 88,390,024 $108,029,649 $175,126,240

</TABLE>

48 49

<PAGE>

CAMBRIDGE SERIES TRUST
Statements of Changes in Net Assets (continued)

<TABLE>
<CAPTION>
CAMBRIDGE CAMBRIDGE CAMBRIDGE
MUNICIPAL INCOME INCOME AND GROWTH GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1994 1993** 1994*

<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 3,986,208 $ 3,527,864 $ 853,291 $ 114,097 $ (25,881)
Net realized gain (loss) on
investments (527,018) 435,238 1,523,312 258,659 17,822
Net unrealized appreciation
(depreciation) of investments (7,578,461) 5,587,476 (248,910) 505,244 20,310
Increase (decrease) in net assets
from operations (4,119,271) 9,550,578 2,127,693 878,000 12,251

DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (1,463,600) (1,450,546) (300,723) (50,722) -
Class B (2,444,169) (2,077,318) (476,423) (55,843) -
Distributions in excess of
net investment income
Class A - (57,691) - - -
Class B - (90,022) - - -
Net realized gain on investments
Class A (189,589) (3,927) (204,420) - -
Class B (340,533) (5,805) (470,138) - -
Net decrease from distributions (4,437,891) (3,685,309) (1,451,704) (106,565) -

CAPITAL SHARE T RANSACTIONS
Net proceeds from sale of shares 14,229,526 39,212,917 38,661,567 27,786,270 18,542,494
Reinvested distributions 2,491,222 1,918,307 1,370,230 98,283 -
Cost of shares redeemed (17,170,919) (9,841,523) (7,692,563) (679,695) (1,685,206)
Change in net assets from capital
share transactions (450,171) 31,289,701 32,339,234 27,204,858 16,857,288

Increase (decrease) in net assets (9,007,333) 37,154,970 33,015,223 27,976,293 16,869,539

NET ASSETS
Beginning of period 80,221,087 43,066,117 27,976,293 - -
End of period $ 71,213,754 $80,221,087 $60,991,516 $27,976,293 $ 16,869,539
</TABLE>

* For the period from March 29, 1994 (date of initial public investment) to
September 30, 1994.

** For the period from May 24, 1993 (date of initial public investment) to
September30, 1993.

SEE NOTES TO FINANCIAL STATEMENTS.

50 51

<PAGE>

CAMBRIDGE SERIES TRUST
Financial Highlights

Class A Shares CAMBRIDGE CAMBRIDGE
GROWTH PORTFOLIO CAPITAL GROWTH PORTFOLIO

YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE

NET ASSET VALUE, BEGINNING OF PERIOD $ 16.69 $ 14.14 $ 14.18 $ 15.26 $ 14.21 $ 14.18
Income from investment operations
Net investment income (loss) (0.11) (0.07) 0.03 0.09 0.14 0.08
Net realized and unrealized
gain (loss) on investments (1.90) 2.65 (0.07) (0.30) 1.02 0.03
Total from investment operations (2.01) 2.58 (0.04) (0.21) 1.16 0.11
Less distributions
Dividends from income - - - (0.04) (0.11) (0.08)
Distributions from capital gains - - - (0.13) - -
Distributions in excess of
net investment income - (0.03) - - - -
Total distributions - (0.03) - (0.17) (0.11) (0.08)
NET ASSET VALUE, END OF PERIOD $ 14.68 $ 16.69 $ 14.14 $ 14.88 $ 15.26 $ 14.21

Total Return (12.04%) 18.23% (0.28%) (1.37%) 8.21% 0.78%

Ratios/Supplemental Data

Net assets, end of period (in thousands) $ 14,579 $ 19,708 $ 11,464 $ 21,181 $ 31,360 $ 20,864

Ratio of expenses to average net assets 1.81% 1.66% 1.33% (a) 1.70% 1.49% 1.14%(a)

Ratio of expenses to average net assets
excluding waiver 1.82% 1.78% 1.72% (a) 1.70% 1.59% 1.43%(a)

Ratio of net investment income (loss)
to average net assets (0.65%) (0.49%) 0.59% (a) 0.53% 0.96% 1.54%(a)

Portfolio turnover rate 132% 137% 26% 149% 192% 61%
</TABLE>

*Reflects operations for the period from April 29, 1992 (date of initial public
investment) to September 30, 1992.

(a) Annualized.

52 53

<PAGE>

CAMBRIDGE SERIES TRUST
Financial Highlights

<TABLE>
<CAPTION>
Class A Shares (continued)
CAMBRIDGE CAMBRIDGE
GOVERNMENT INCOME PORTFOLIO MUNICIPAL INCOME PORTFOLIO

YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*

<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE

NET ASSET VALUE, BEGINNING OF PERIOD $ 14.04 $ 14.39 $ 14.30 $ 16.05 $ 14.76 $ 14.29
Income from investment operations
Net investment income 0.84 1.06 0.44 0.82 0.92 0.32
Net realized and unrealized
gain (loss) on investments (1.30) (0.31) 0.09 (1.54) 1.32 0.47
Total from investment operations (0.46) 0.75 0.53 (0.72) 2.24 0.79
Less distributions
Dividends from income (0.83) (1.06) (0.44) (0.81) (0.92) (0.32)
Distributions from capital gain - - - (0.10) - -
Distributions in excess of
net investment income - (0.04) - - (0.03) -
Total distributions (0.83) (1.10) (0.44) (0.91) (0.95) (0.32)
NET ASSET VALUE, END OF PERIOD $ 12.75 $ 14.04 $ 14.39 $ 14.42 $ 16.05 $ 14.76

Total Return (3.39%) 5.41% 3.37% (4.83%) 16.00% 5.34%

Ratios/Supplemental Data

Net assets, end of period (in thousands) $30,142 $47,780 $ 36,740 $25,056 $29,245 $ 18,801

Ratio of expenses to average net assets 1.38% 1.04% 0.36% (a) 1.24% 0.71% 0.00%(a)

Ratio of expenses to average net assets
excluding waiver 1.39% 1.22% 1.21% (a) 1.33% 1.39% 1.26%(a)

Ratio of net investment income
to average net assets 6.33% 7.31% 8.00% (a) 5.43% 5.92% 6.21%(a)

Portfolio turnover rate 455% 102% 9% 87% 88% 0%
</TABLE>

* Reflects operations for the period from April 29, 1992 (date of initial
public in vestment) to September 30, 1992.

(a) Annualized.

54 55

<PAGE>

CAMBRIDGE SERIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Class A Shares
CAMBRIDGE CAMBRIDGE
(continued) INCOME AND GROWTH PORTFOLIO GLOBAL PORTFOLIO

YEAR ENDED SEPTEMBER 30, 1994 1993*** 1994(B)

<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.88 $ 14.14 $ 14.18
Income from investment operations
Net investment income (loss) 0.31 0.09 (0.01)
Net realized and unrealized
gain on investments 0.64 0.73 0.06
Total from investment operations 0.95 0.82 0.05
Less distributions
Dividends from income (0.30) (0.08) 0.00
Distributions from capital gains (0.26) 0.00 0.00
Distributions in excess of
net investment income - 0.00 0.00
Total distributions (0.56) (0.08) 0.00
NET ASSET VALUE, END OF PERIOD $ 15.27 $ 14.88 $ 14.23
Total Return 6.54% 5.54% 0.35%
Ratios/Supplemental Data

Net assets, end of period (in thousands) $17,773 $ 9,849 $ 8,882
Ratio of expenses to average net assets 1.75% 1.56%(a) 2.09% (a)
Ratio of expenses to average net assets
excluding waiver 1.75% 1.94%(a) 3.18% (a)
Ratio of net investment income (loss)
to average net assets 2.20% 2.35%(a) (0.10%)(a)
Portfolio turnover rate 78% 13% 2%
</TABLE>

*** Reflects operations for the period from May 24, 1993 (date of initial
public investment) to September 30, 1993.

(a) Annualized.
(b) Reflects operations for the period from March 29, 1994 (date of initial
public investment) to September 30, 1994
.
SEE NOTES TO FINANCIAL STATEMENTS.

56 57

<PAGE>

CAMBRIDGE SERIES TRUST
Financial Highlights

<TABLE>
<CAPTION>
Class B Shares CAMBRIDGE CAMBRIDGE
GROWTH PORTFOLIO CAPITAL GROWTH PORTFOLIO

YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*

<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE

NET ASSET VALUE, BEGINNING OF PERIOD $ 16.59 $ 14.14 $ 14.18 $ 15.23 $ 14.22 $ 14.18
Income from investment operations
Net investment income (loss) (0.25) (0.14) (0.01) (0.04) 0.05 0.46
Net realized and unrealized
gain (loss) on investments (1.81) 2.59 (0.03) (0.26) 1.02 0.04
Total from investment operations (2.06) 2.45 (0.04) (0.30) 1.07 0.50
Less distributions
Dividends from income - - - - (0.05) (0.46)
Distributions from capital gains - - - (0.13) - -
Distributions in excess of
net investment income - - - - (0.01) -
Total distributions - - - (0.13) (0.06) (0.46)
NET ASSET VALUE, END OF PERIOD $ 14.53 $ 16.59 $ 14.14 $ 14.80 $ 15.23 $ 14.22

Total Return (12.48%) 17.33% (0.28%) (2.00%) 7.52% 0.61%

Ratios/Supplemental Data

Net assets, end of period (in thousands) $ 28,678 $35,069 $ 13,828 $41,106 $57,030 $ 25,468

Ratio of expenses to average net assets 2.56% 2.41% 2.07% (a) 2.46% 2.24% 1.86% (a)

Ratio of expenses to average net assets
excluding waiver 2.58% 2.53% 2.47% (a) 2.46% 2.34% 2.16%(a)

Ratio of net investment income (loss)
to average net assets (1.40%) (1.24%) (0.17%) (a) (0.22%) 0.21% 0.83%(a)

Portfolio turnover rate 132% 137% 26% 149% 192% 61%
</TABLE>

* Reflects operations for the period from April 29, 1992 (date of initial
public investment) to September 30, 1992.

(a) Annualized.

58 59

<PAGE>

CAMBRIDGE SERIES TRUST
Financial Highlights

<TABLE>
<CAPTION>
Class B Shares CAMBRIDGE CAMBRIDGE
(continued) GOVERNMENT INCOME PORTFOLIO MUNICIPAL INCOME PORTFOLIO

YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.06 $ 14.40 $ 14.30 $ 16.06 $ 14.78 $ 14.29
Income from investment operations
Net investment income 0.82 0.99 0.41 0.74 0.82 0.29
Net realized and unrealized
gain (loss) on investments (1.37) (0.31) 0.10 (1.54) 1.32 0.49
Total from investment operations (0.55) 0.68 0.51 (0.80) 2.14 0.78
Less distributions
Dividends from income (0.75) (0.99) (0.41) (0.73) (0.82) (0.29)
Distributions from capital gains - - - (0.10) - -
Distributions in excess of
net investment income - (0.03) - - (0.04) -
Total distributions (0.75) (1.02) (0.41) (0.83) (0.86) (0.29)
NET ASSET VALUE, END OF PERIOD $ 12.76 $ 14.06 $ 14.40 $ 14.43 $ 16.06 $ 14.78
Total Return (3.97%) 4.86% 3.24% (5.34%) 15.27% 5.28%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $77,888 $127,346 $ 65,661 $46,157 $50,976 $ 24,265
Ratio of expenses to average net assets 1.88% 1.54% 0.83%(a) 1.74% 1.21% 0.50%(a)
Ratio of expenses to average net assets
excluding waiver 1.90% 1.72% 1.67%(a) 1.86% 1.89% 1.76%(a)
Ratio of net investment income
to average net assets 6.21% 6.81% 7.53%(a) 4.93% 5.42% 5.80%(a)
Portfolio turnover rate 455% 102% 9% 87% 88% 0%
</TABLE>

* Reflects operations for the period from April 29, 1992 (date of initial
public investment) to September 30, 1992.

(a) Annualized.

60 61

<PAGE>

<TABLE>

CAMBRIDGE SERIES TRUST
Financial Highlights
Class B Shares
CAMBRIDGE
(continued) INCOME AND CAMBRIDGE
GROWTH PORTFOLIO GLOBAL PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993** 1994 (B)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE

NET ASSET VALUE, BEGINNING OF PERIOD $ 14.91 $ 14.14 $ 14.18
Income from investment operations
Net investment income (loss) 0.21 0.05 (0.04)
Net realized and unrealized
gain on investments 0.61 0.77 0.01
Total from investment operations 0.82 0.82 (0.03)
Less distributions
Dividends from income (0.19) (0.05) -
Distributions from capital gains (0.26) - -
Distributions in excess of
net investment income - - -
Total distributions (0.45) (0.05) -
NET ASSET VALUE, END OF PERIOD $ 15.28 $ 14.91 $ 14.15

Total Return 5.66% 5.54% (0.21%)

Ratios/Supplemental Data

Net assets, end of period (in thousands) $43,219 $ 18,127 $ 7,987

Ratio of expenses to average net assets 2.44% 2.31% (a) 2.79% (a)

Ratio of expenses to average net assets
excluding waiver 2.44% 2.69% (a) 3.93% (a)

Ratio of net investment income (loss)
to average net assets 1.51% 1.60% (a) (0.82%) (a)
</TABLE>

** Reflects operations for the period from May 24, 1993 (date of initial
public investment) to September 30, 1993.

(a) Annualized.

(b) Reflects operations for the period from March 29, 1994 (date of initial
public investment) to September 30, 1994.

SEE NOTES TO FINANCIAL STATEMENTS.

62 63

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements

NOTE 1: ORGANIZATION
Cambridge Series Trust ("Trust") is registered under the Investment Company
Act of 1940, as amended, as an

open-end management investment company. The Trust consists of six separate
diversified portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1994, as
follows:

Cambridge Growth Portfolio
("Growth Portfolio")
Cambridge Capital Growth Portfolio
("Capital Growth Portfolio")
Cambridge Government Income Portfolio
("Government Income Portfolio")
Cambridge Municipal Income Portfolio
("Municipal Income Portfolio")
Cambridge Income and Growth Portfolio
("Income and Growth Portfolio")
Cambridge Global Portfolio
("Global Portfolio")

The assets of each Portfolio of the Trust are segregated and a shareholder's
interest is limited to the Portfolio in which shares are held.

Each Portfolio provides two classes of shares ("Class A and Class B" ).
Class B shares are identical in all respects to Class A shares except that Class
B shares are sold pursuant to a distribution plan ("Plan") adopted in accordance
with Investment Company Act Rule 12b-1 and are not subject to a sales load.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios:

(a) Valuation of Securities-Listed equity securities held by the Growth
Portfolio, the Capital Growth Portfolio, the Income and Growth Portfolio and the
Global Portfolio are valued at the last sale prices reported on national
securities exchanges. Listed equity securities in which there were no sales are
valued at the mean between the bid and asked prices. Unlisted equity securities
are valued at the latest mean price. Bonds and other fixed-income securities are
valued at the last sale price on a national

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

securities exchange, if available. Otherwise, they are valued on the basis
of prices furnished by an independent pricing service. Short-term obligations
are ordinarily valued at the mean between the bid and asked prices as furnished
by an independent pricing service. However, short-term obligations with
maturities of 60 days or less are valued at amortized cost, which approximates
market value.

U.S. government obligations, held by the Government Income Portfolio and
the Income and Growth Portfolio are valued at the mean between the over-the-
counter bid and asked prices as furnished by an independent pricing service.
U.S. government obligations and other short-term obligations maturing in 60 days
or less are valued at amortized cost, which approximates market value.

Debt securities held by the Government Income Portfolio for which current
market quotations are not readily available are valued at their fair value. An
independent pricing service values such securities taking into consideration
yield, stability, risk, quality, coupon, maturity, type of issue, trading
characteristics, special circumstances of a security or trading market, and any
other factors or market data it deems relevant in determining valuations for
normal institutional size trading units of debt securities and does not rely
exclusively on quoted prices.

Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities and does not rely exclusively on quoted prices.

(b) Repurchase Agreements-Repurchase agreements are purchases of securities
where the seller agrees to repurchase the securities at a specified time and
price. It is the policy of the Trust to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book entry system,
or to have segregated within the custodian bank's vault all securities held as
collateral in support of repurchase agreement investments. Addi-

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

tionally, procedures have been established by the Trust to monitor, on a
daily basis, the market value of each repurchase agreement's underlying
securities to ensure the existence of a proper level of collateral.

The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Trust's adviser to be creditworthy pursuant to guidelines established by the
Trustees. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Trust could
receive less than the repurchase price on the sale of collateral securities.

(c) Borrowings-Each of the Portfolios may, under certain circumstances,
borrow money directly or through reverse repurchase agreements (arrangements in
which the Portfolio sells a security for a percentage of its market value with
an agreement to buy it back on a set date) or pledge securities. The Municipal
Income Portfolio may borrow up to 5% of its total assets and may pledge up to
10% of the value of those assets to secure such borrowings. Under certain
circumstances, each remaining Portfolio may borrow up to one-third of the value
of its net assets and pledge up to 10% of the value of those assets to secure
such borrowings. At September 30, 1994, Government Income Portfolio had an
outstanding reverse repurchase agreement which amounted to $8,956,501 with a
rate of 5.23%, and a maturity date of 12/22/94.

(d) Security Transactions and Investment Income-Security transactions for
the Portfolios are accounted for on the trade date. Dividend income is recorded
on the ex-dividend date. Interest income (except for Municipal Income Portfolio)
is recorded on the accrual basis. Interest income includes interest and discount
earned (net of premium) on short-term obligations, and interest earned on all
other debt securities including original issue discount as required by the
Internal Revenue Code. Dividends to shareholders and capital gain distributions,
if any, are recorded on the ex-dividend date.

Interest income for the Municipal Income Portfolio includes interest earned
net of premium, and original issue discount as required by the Internal Revenue
Code.

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

(e) Federal Taxes-No provision for federal income taxes has been made since
it is each Portfolio's intent to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limits substantially all taxable
income and realized capital gains.

Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends to
meet certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Portfolio to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private purpose
municipal bonds issued after August 7, 1986, may be considered a tax preference
item to shareholders.

At September 30, 1994, Growth Portfolio for federal tax purposes, had a
capital loss carryforward of approximately $2,690,000. Pursuant to the Code,
such capital loss carry-forwards expire as follows: $1,065,000 in 2001 and
$1,625,000 in 2002.

At September 30, 1994, Government Income Portfolio for federal tax
purposes, had a capital loss carryforward of approximately $4,500,000. Pursuant
to the Code, such capital loss carryforwards expire as follows: $821,000 in 2001
and $3,679,000 in 2002.

At September 30, 1994, Income and Growth Portfolio for Federal tax
purposes, had a capital loss carryforward of approximately $92,000. Pursuant to
the Code, such capital less carryforward will expire in 2002.

Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.

(f) When-Issued and Delayed Delivery Transactions-The Portfolios may engage
in when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent with their invest-

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

ment objectives and policies and not for the purpose of investment leverage.
The Portfolios will record a when-issued security and the related liability on
the trade date. Until the securities are received and paid for, the Portfolios
will maintain security positions such that sufficient liquid assets will be
available to make payment for the securities purchased. Securities purchased on
a when-issued or delayed delivery basis are marked to market daily and begin
earning interest on the settlement date.

(g) Futures Contracts-Upon entering into a futures contract with a broker,
the Municipal Income Portfolio is required to deposit in a segregated account an
amount ("initial margin") of cash or U.S. government securities equal to a
percentage of the contract value. When entering into the contract the Portfolios
agree to receive from or pay the broker an amount of cash equal to a specific
dollar amount times the difference between the closing value of the stock index
and the price at which the contract was made. On a daily basis, the value of a
futures contract is determined and any difference between such value and the
original futures contract value is reflected in the "variation margin" account.
Daily variation margin adjustments, arising from this "marking to market"
process, are recorded as unrealized gains or losses. At September 30, 1994, the
Municipal Income Portfolio had open U.S. Treasury Bond futures contracts with an
aggregate notional value of $10,000,000. The Portfolio recorded unrealized gains
of $352,317 on such futures contracts.

The Portfolio may decide to close their position on a contract at any time
prior to the contract's expiration. When a contract is closed, a realized gain
or loss is recognized. Risks of entering into futures contracts include the
possibility that there may be an illiquid market and that a change in the value
of the contract may not correlate with changes in the value of the underlying
securities. For the year ended September 30, 1994, the Municipal Income
Portfolio had realized gains of $167,132 on closed futures contracts.

(h) Option Contracts-The Growth Portfolio may write or purchase stock index
option contracts. A written stock index option obligates the Growth Portfolio to
deliver (a call), or to receive (a put), the contract amount of foreign currency

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

upon exercise by the holder of the option. The value of the option contract
is recorded as a liability and the unrealized gain or loss is measured by the
difference between the current value and the premium received. The Growth
Portfolio had no options outstanding at September 30, 1994.

(i) Deferred Organization Expenses- Costs incurred by the Portfolios in
connection with their initial share registration, other than organization
expenses, were deferred and are being amortized on a straight-line basis through
April 1997.

(j) Expenses-Expenses of the Portfolios (other than distribution fees) and
waivers and reimbursements, if any, are allocated to each class of shares based
on their relative average daily net assets for the period. Expenses incurred by
the Portfolios which do not specifically relate to an individual Portfolio are
allocated among all Portfolios based on a Portfolio's relative net asset value
size or as deemed appropriate by the administrator.

(k) Dollar Roll Transactions-The Government Income Portfolio, Income and
Growth Portfolio and Global Portfolio may enter into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, and FHLMC, in which
the Portfolios sell mortgage securities to financial institutions and
simultaneously agree to repurchase substantially similar (same type, coupon and
maturity) securities at a later date at an agreed upon price. During the period
between the sale and repurchase, the Portfolios forgo principal and interest
paid on the mortgage security sold. The Portfolios are compensated by the
interest earned on the cash proceeds of the initial sale and any additional fee
income received on the sale.

(l) Currency Transactions-Foreign currency amounts are converted into U.S.
dollars at the current rate of such currencies against U.S. dollars as follows:
assets and liabilities at the rate of exchange at the end of the respective
period; purchases and sales of securities and income and expenses at the rate of
exchange prevailing on the dates of such transactions. It is not practicable to
isolate that portion of the results of operations arising from changes in the
exchange rates from the portion arising from changes in the market prices of
investment securities.

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

(m) Distributions to shareholders are determined in accordance with income
tax regulations. Distributions from taxable net investment income and net
capital gains can exceed book basis net investment income and net capital gains.
Effective October 1, 1993, the Portfolios adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As a
result of this statement, the Portfolios changed the financial statement
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined in
accordance with income tax regulations. Accordingly, the following Portfolios
have made reclassifications as of September 30, 1993 to reflect the adoption of
the statement. The Growth Portfolio reclassification resulted in an increase in
undistributed net investment income of $367,348 and a decrease in additional
paid-in capital of $367,348. The Capital Growth Portfolio reclassification
resulted in an increase in undistributed net investment income of $49,507 and a
decrease in undistributed realized gain (loss) on investment transactions and
additional paid-in capital of $49,484 and $23, respectively.

Differences between book basis investment income available for distribution
and tax basisinvestment income available for distribution are primarily
attributable to differences in the treatment on net operation losses.

NOTE 3: DIVIDENDS

Dividends will be declared daily and paid monthly to all shareholders
invested in the Government Income Portfolio and the Municipal Income Portfolio
on the record date. Dividends are declared and paid semi-annually to all
shareholders invested in the Capital Growth Portfolio on the record date,
dividends are declared and paid annually to all shareholders invested in the
Growth Portfolio and the Global Portfolio on the record date, and dividends are
declared and paid quarterly to all shareholders invested in the Income and
Growth Portfolio on the record date. Dividends will be reinvested in additional
shares of the same class and Portfolio on payment dates at the ex-dividend date
net asset value without a sales charge unless

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

cash payments are requested by shareholders in writing to the Trust. Capital
gains realized by each portfolio, if any, will be distributed at least once
every 12 months.

NOTE 4: INVESTMENT ADVISORY FEE AND OTHER

Cambridge Investment Advisors, Inc., the Portfolios' investment adviser
("Investment Adviser"), receives for its services an annual investment advisory
fee not to exceed the following percentages of the average daily net assets of
the particular Portfolio: Growth Portfolio, 0.80%; Capital Growth Portfolio,
0.80%; Government Income Portfolio, 0.60%; Municipal Income Portfolio, 0.60%;
Income and Growth Portfolio, 0.75%; and Global Portfolio, 1.10%. The Investment
Adviser may, from time to time, voluntarily waive some or all of its investment
advisory fee and may terminate any such voluntary waiver at any time at its sole
discretion.

The Investment Adviser pays each sub-adviser an annual fee not to exceed
the following percentage of Portfolio average daily net assets: Growth
Portfolio, 0.40%, Capital Growth Portfolio, 0.40%; Government Income Portfolio,
0.30%; and Municipal Income Portfolio, 0.30%. The sub-adviser to the Income and
Growth Portfolio receives from the Investment Adviser an annual fee expressed as
a percentage of that Portfolio's average daily net assets as follows: 0.325% of
the first $50 million in Portfolio average daily net assets, 0.275% of the next
$150 million, 0.225% of the next $300 million and 0.200% of any amounts over
$500 million. The sub-adviser to the Global Portfolio receives from the
Investment Adviser an annual fee expressed as a percentage of that Portfolio's
average daily net assets as follows: 0.55% of the first $75 million in average
daily net assets, and 0.50% of any amounts over $75 million. No performance or
incentive fees are paid to the sub-advisers. Under certain sub-advisory
agreements, the particular sub-adviser may, from time to time, voluntarily waive
some or all of its sub-advisory fee charged to the Investment Adviser and may
terminate any such voluntary waiver at any time in its sole discretion. For the
year ended September 30, 1994 the Investment Adviser and sub-advisers earned and
voluntarily waived the following advisory fees:

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
<TABLE>
<CAPTION>

Sub-Adviser
Adviser Adviser Fee Sub-Adviser Fee
Fee Voluntarily Fee Voluntarily
Portfolio Earned Waived Earned Waiver
<S> <C> <C> <C> <C>
Growth $410,955 - $205,478 -
Capital Growth 590,693 - 295,347 -
Government Income 839,139 - 419,570 -
Municipal Income 468,787 81,713 234,393 -
Income and Growth 374,462 - 187,231 -
Global 69,515 69,515 34,757 -
</TABLE>

Administrative personnel and services are provided by Investment Management
Group, Inc. ("IMG" ) at an annual rate of .125 of 1% on the first $1.5 billion
of average aggregate daily net assets of the Trust and .120 of 1% on average
aggregate daily net assets in excess of $1.5 billion. Prior to June 1, 1994,
administrative personnel and services were provided by Cambridge Administration
Services ("CAS") at the same annual rate. IMG may voluntarily waive some or all
of its fee.

During the year ended September 30, 1994, CAS and IMG earned and
voluntarily waived the following administrative fees:

<TABLE>
<CAPTION>
Administrative Administrative Administrative Administrative
Fee Earned Fee Waived Fee Earned Fee Waived
Portfolio CAS CAS IMG IMG
<S> <C> <C> <C> <C>
Growth $ 45,092 $ 6,569 $19,103 -
Capital Growth 65,005 - 27,273 -
Government Income 126,300 23,563 48,497 -
Municipal Income 66,804 - 30,849 -
Income and Growth 37,484 15,033 24,831 -
Global 1,326 530 6,344 -
</TABLE>

The Class B shares of the Portfolios have adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Each
Portfolio will reimburse Cambridge Distributors, Inc. (the "Distributor"), from
the assets of the Class B Shares of each Portfolio, for fees it paid which
relate to the distribution and administration of each Portfolio's Class B
Shares. The Plan provides that the Portfolio may incur distribution expenses up
to 0.75% of 1% of the average daily net assets of the Class B shares for the
Growth Portfolio, Capital Growth Portfolio, Income and Growth Portfolio and
Global Portfolio and 0.50% of 1% of the average daily net assets of the Class B
shares for the Government Income Portfolio and Municipal Income Portfolio.

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

The Trust has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A and Class B shares of each Portfolio.Under the Service Plan,
financial institutions will enter into shareholder service agreements with the
Portfolios to provide administrative support services to their customers who
from time to time may be owners of record or beneficial owners of Class A or
Class B shares of one or more Portfolios. In return for providing these support
services, a financial institution may receive payments from one or more
Portfolios at a rate not exceeding 0.25 of 1% of the average daily net assets of
the Class A or Class B shares of the particular Portfolio or Portfolios
beneficially owned by the financial institution's customers for whom it is
holder of record or with whom it has a servicing relationship.

Organization expenses of the Growth Portfolio ($55,060), Capital Growth
Portfolio ($51,200), Government Income Portfolio ($51,301), Municipal Income
Portfolio ($49,701), Income and Growth Portfolio ($29,179) and Global Portfolio
($45,771) were borne initially by CAS. Each Portfolio has agreed to reimburse
CAS for the organization expenses initially borne by CAS during the five-year
period following the date the Trust's Portfolios' registration became effective.

The amounts reimbursed to CAS for the year ended September 30, 1994 were as
follows: Growth Portfolio ($11,012), Capital Growth Portfolio ($10,240),
Government Income Portfolio ($10,260), Municipal Income Portfolio ($9,940),
Income and Growth Portfolio ($5,836).

NOTE 5: INVESTMENT TRANSACTIONS

Purchases, and sales of investments (excluding short-term investments), for
the fiscal year ended September 30,

1994, were as follows:

Portfolio Purchases Sales

Growth $ 66,113,202 $ 68,718,113
Capital Growth 90,983,444 104,459,473
Government Income 764,033,260 766,987,854
Municipal Income 67,155,011 66,953,196
Income and Growth 64,498,072 37,345,870
Global 15,956,459 276,203

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION
OF INVESTMENTS
At September 30, 1994, the cost of investments for federal income tax
purposes, amounted to $38,969,059 for the Growth Portfolio, $61,477,308 for the
Capital Growth Portfolio, $137,682,288 for the Government Income Portfolio,
$73,076,934 for Municipal Income Portfolio, $59,801,451 for the Income and
Growth Portfolio, and $17,146,199 for the Global Portfolio. Gross unrealized
appreciation and depreciation of investments based on such cost at September 30,
1994 were as follows:

Gross Gross Net Unrealized
Unrealized Unrealized Appreciation/
Portfolio Appreciation Depreciation (Depreciation)

<S> <C> <C> <C>
Growth $4,509,389 $1,479,202 $ 3,030,187
Capital Growth 3,033,125 1,408,137 1,624,988
Government Income 327,206 5,643,273 (5,316,067)
Municipal Income 879,782 2,711,164 (1,831,382)
Income and Growth 3,199,063 3,001,962 197,101
Global 709,272 675,017 34,255
</TABLE>

NOTE 7: FORWARD CONTRACTS
In connection with portfolio purchases and sales of securities denominated
in a foreign currency, the Growth Portfolio, the Capital Growth Portfolio, the
Income and Growth Portfolio and the Global Portfolio may enter into forward
foreign currency exchange contracts ("contracts"). Additionally, from time to
time the Growth Portfolio, Capital Growth Portfolio, the Income and Growth
Portfolio and the Global Portfolio may enter into contracts to hedge certain
foreign currency assets. Contracts are recorded at market value. Realized gains
and losses arising from such transactions are included in net gain (loss) on
investments and forward foreign currency exchange contracts. The Portfolios are
subject to the credit risk that the other party will not complete the
obligations of the contract. At September 30, 1994 the Global Portfolio had
outstanding forward contracts as set forth below.

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Contracts Net Unrealized
to Deliver/ In Exchange Appreciation
Settlement Date Receive For (Depreciation)

Sales
4/25/96 Japan-Yen 52,596,340 $562,843 $ (15,282)
7/1/96 Japan-Yen 29,851,660 $321,878 $ 1,122
$884,721 $ (14,160)
Net unrealized
depreciation
on Forward Contracts $ (14,160)

NOTE 8: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value) for
each class of shares. Transactions in Portfolio shares were as follows:

CAMBRIDGE GROWTH PORTFOLIO

<TABLE>
<CAPTION>
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars

<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 1,180,695 $17,187,308 810,934 $11,500,191

Shares sold 220,548 3,512,282 557,050 8,601,094
Shares issued upon
reinvestment
of distributions - - 1,460 22,029

Shares redeemed (408,189) (6,315,589) (188,749) (2,936,006)

Shares outstanding,
end of period 993,054 $14,384,001 1,180,695 $17,187,308

CLASS B:
Shares outstanding,
beginning of period 2,113,910 $31,296,376 978,243 $13,778,060

Shares sold 733,554 11,516,364 1,426,86 121,994,222
Shares issued
upon reinvestment
of distributions - - - -

Shares redeemed (873,428) (13,336,068) (291,194) (4,475,906)

Shares outstanding,
end of period 1,974,036 $29,476,672 2,113,910 $31,296,376
</TABLE>

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
<TABLE>
<CAPTION>

CAMBRIDGE CAPITAL GROWTH PORTFOLIO

Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars

<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 2,055,500 $29,379,736 1,467,971 $20,673,912

Shares sold 155,406 2,353,285 866,833 12,868,150
Shares issued
upon reinvestment
of distributions 21,385 320,355 13,495 198,314

Shares redeemed (809,281) (12,181,621) (292,799) (4,360,640)

Shares outstanding,
end of period 1,423,010 $19,871,755 2,055,500 $29,379,736

CLASS B:
Shares outstanding,
beginning of period 3,744,511 $54,154,730 1,790,373 $25,238,907

Shares sold 484,356 7,254,585 2,369,048 35,080,707
Shares issued
upon reinvestment
of distributions 29,045 435,097 8,583 126,421

Shares redeemed (1,479,886) (22,203,933) (423,493) (6,291,305)

Shares outstanding,
end of period 2,778,026 $39,640,479 3,744,511 $54,154,730
</TABLE>

CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 3,403,828 $48,807,954 2,552,475 $36,680,594

Shares sold 175,391 2,326,934 1,223,573 17,167,884
Shares issued
upon reinvestment
of distributions 104,113 1,395,612 141,599 2,252,607

Shares redeemed (1,319,559) (17,795,382) (513,819) (7,293,131)

Shares outstanding,
end of period 2,363,773 $34,735,118 3,403,828 $48,807,954
</TABLE>

<PAGE>

<TABLE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS B:
Shares outstanding,
beginning of period 9,059,536 $129,708,345 4,558,855 $65,524,950

Shares sold 895,699 12,254,465 6,067,033 86,660,210
Shares issued
upon reinvestment
of distributions 290,900 3,906,462 336,653 4,535,586

Shares redeemed (4,142,540) (55,693,345) (1,903,005) (27,012,401)

Shares outstanding,
end of period 6,103,595 90,175,927 9,059,536 $129,708,345
</TABLE>

CAMBRIDGE MUNICIPAL INCOME PORTFOLIO

Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 1,822,030 $26,713,229 1,273,427 $18,482,871

Shares sold 192,548 2,946,139 699,910 10,541,396
Shares issued
upon reinvestment
of distributions 51,632 797,051 44,317 672,587

Shares redeemed (328,132) (4,975,320) (195,624) (2,983,625)

Shares outstanding,
end of period 1,738,078 $25,481,099 1,822,030 $26,713,229

CLASS B:
Shares outstanding,
beginning of period 3,173,809 $47,130,669 1,642,240 $24,071,326

Shares sold 723,926 11,283,387 1,890,537 28,671,521
Shares issued
upon reinvestment
of distributions 109,721 1,694,171 81,888 1,245,720

Shares redeemed (809,227) (12,195,599) (440,856) (6,857,898)

Shares outstanding,
end of period 3,198,229 $47,912,628 3,173,809 $47,130,669
</TABLE>

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

CAMBRIDGE INCOME AND GROWTH PORTFOLIO

Year Period
Ended 9/30/94 Ended 9/30/93*
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 661,893 $9,518,102 - $ -

Shares sold 621,368 9,508,705 692,725 9,965,467
Shares issued
upon reinvestment
of distributions 31,362 474,885 3,200 47,907

Shares redeemed (150,563) (2,281,176) (34,032) (495,272)

Shares outstanding,
end of period 1,164,060 17,220,516 661,893 $9,518,102

CLASS B:
Shares outstanding,
beginning of period 1,216,165 $17,686,756 - $ -

Shares sold 1,909,839 29,152,862 1,225,260 17,820,803
Shares issued
upon reinvestment
of distributions 59,116 895,345 3,359 50,376

Shares redeemed (356,385) (5,411,387) (12,454) (184,423)

Shares outstanding,
end of period 2,828,735 $42,323,576 1,216,165 $17,686,756

</TABLE>

CAMBRIDGE GLOBAL PORTFOLIO **

Period
Ended 9/30/94

Shares Dollars

CLASS A:
Shares outstanding,
beginning of period - -

Shares sold 713,962 $10,133,334
Shares issued
upon reinvestment
of distributions - -

Shares redeemed (89,781) (1,281,155)

Shares outstanding,
end of period 624,181 $ 8,852,179

<PAGE>

CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)

CAMBRIDGE GLOBAL PORTFOLIO **

Period
Ended 9/30/94
Shares Dollars

CLASS B:
Shares outstanding,
beginning of period - -

Shares sold 593,033 $8,409,160
Shares issued
upon reinvestment
of distributions - -

Shares redeemed (28,362) (404,051)

Shares outstanding,
end of period 564,671 $8,005,109

* For the period from May 24, 1993 (date of initial public investment)
to September 30, 1993.

** For the period from March 29, 1994 (date of initial public invest--
ment) to September 30, 1994.

<PAGE>

CAMBRIDGE SERIES TRUST
INDEPENDENT AUDITORS' REPORT

THE TRUSTEES AND SHAREHOLDERS
CAMBRIDGE SERIES TRUST

We have audited the accompanying statements of assets and liabilities of the
Growth, Capital Growth, Government Income, Municipal Income, Income and Growth
and Global Portfolios, portfolios of Cambridge Series Trust, including the
portfolios of investments, as of September 30, 1994 and related statements of
operations for the year then ended for the Growth, Capital Growth, Government
Income, Municipal Income, and Income and Growth Portfolios and for the period
from March 29, 1994 (date of initial public investment) to September 30, 1994
for the Global Portfolio, the statements of changes in net assets for each of
the years in the two year period ended September 30, 1994 for the Growth,
Capital Growth, Government Income and Municipal Income Portfolios, for the year
ended September 30, 1994 and for the period from May 24, 1993 (date of initial
public investment) to September 30, 1993 for the Income and Growth Portfolio and
for the period from March 29, 1994 to September 30, 1994 for the Global
Portfolio, and the financial highlights for the periods presented on pages 52 to
63. These financial statements and financial highlights are the responsibility
of the Trust'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 audit 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 the securities owned as of
September 30, 1994 by correspondence with the custodian and brokers. 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 the
Growth, Capital Growth, Government Income, Municipal Income, Income and Growth
and Global Portfolios, as of September 30, 1994, the results of their operations
for the year then ended for the Growth, Capital Growth, Government Income,
Municipal Income and Income and Growth Portfolios and for the period from March
29, 1994 to September 30, 1994 for the Global Portfolio, the changes in their
net assets for each of the aforementioned years or periods in the two year
period then ended and the financial highlights for each of the years or periods
as indicated on pages 52 to 63, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP
Boston, Massachusetts
November 11, 1994

<PAGE>

Mentor Growth Fund
Portfolio of Investments
December 31, 1994

SECURITY DESCRIPTION PERCENT OF NET ASSETS SHARES MARKET VALUE

COMMON STOCKS 87.4%

BASIC INDUSTRIES 4.0%
Alco Standard Corporation 18,900 $ 1,185,975
Guilford Mills, Inc. 110,400 2,456,400
Nucor Corporation 30,500 1,677,500
Steel Technologies, Inc. 50,700 659,100
Unifi, Inc. 61,650 1,572,075

Total Basic Industries 7,551,050

BUILDING 2.2%
Blount, Inc., Class A 90,850 4,224,525 *

CAPITAL GOODS 2.0%
Fastenal Company 23,070 942,986
Flextronics International, Ltd. 80,100 1,221,525 *
Kemet Corporation 48,000 1,422,000 *
NCI Building Systems 10,000 172,500 *

Total Capital Goods 3,759,011

CONSUMER DURABLES 7.4%
Callaway Golf Company 63,750 2,111,719
Chromcraft Revington, Inc. 119,700 2,633,400 *
Consolidated Graphics 93,500 1,051,875 *
Dorsey Trailers, Inc. 53,450 808,431 *
Equity Inns, Inc. 143,000 1,573,000
Legget & Platt, Inc. 52,250 1,828,750
Regal Cinemas, Inc. 80,325 2,048,287 *
Wabash National Corporation 36,950 1,441,050
Winsloew Furniture, Inc. 95,025 593,906 *

Total Consumer Durables 14,090,418

CONSUMER NON-DURABLES 6.2%
Consolidated Products Company 89,150 1,136,662 *
Davco Restaurants, Inc. 120,000 1,470,000 *
Mid-Atlantic Medical Services 84,000 1,921,500 *
Quality Dining, Inc. 157,000 1,942,875 *
R.P. Scherer Corporation 43,000 1,951,125 *
Richfood Holdings, Inc. 125,100 2,001,600
Roberts Pharmaceutical 44,400 1,409,700 *

Total Consumer Non-durables 11,833,462

FINANCIAL 6.9%
First Financial Management
Corporation 36,550 $ 2,252,394
Leader Financial Corporation 88,400 1,823,250 *
Markel Corporation 88,360 3,666,940 *
Midland Financial Group, Inc. 120,800 1,781,800
National Commerce Bancorp 114,996 2,616,159
TFC Enterprises, Inc. 121,100 923,388 *

Total Financial 13,063,931

HEALTH 18.2%
American Homepatient 56,000 1,330,000 *
Beverly Enterprises 140,000 2,012,500
Biomet, Inc. 64,050 896,700
Columbia Healthcare Corporation 76,550 2,794,075
Health Management Associates 66,800 1,670,000 *
Idexx Laboratories, Inc. 44,900 1,616,400 *
Integrated Health Services, Inc. 81,550 3,221,225
Isolyzer Company 30,300 545,400 *
Lincare Holdings, Inc. 98,250 2,849,250 *
Manor Care, Inc. 84,100 2,333,775
Medaphis Corporation 70,400 3,273,600 *
Omnicare, Inc. 48,800 2,141,100
Owens & Minor, Inc. 138,975 1,963,022
Phycor, Inc. 84,300 2,255,025 *
Physician Sales & Services, Inc. 73,500 1,166,812 *
Vencor, Inc. 161,925 4,513,659 *

Total Health 34,582,543

RETAIL TRADE 11.3%
Big B, Inc. 159,400 2,191,750
Books A Million, Inc. 85,400 1,441,125 *
Casey' s General Stores, Inc. 193,550 2,903,250
Dollar General Corporation 66,914 2,007,413
Haverty Furniture Companies, Inc. 152,000 1,786,000
Heilig-Meyers Company 95,450 2,362,387
Movie Gallery, Inc. 83,700 2,176,200 *
Office Depot, Inc. 96,600 2,270,100 *
Revco D. S., Inc. 84,000 1,984,500 *
S & K Famous Brands, Inc. 136,700 973,988 *
Sportmart, Inc. 60,825 676,679 *
Sportmart, Inc., Class A 60,825 631,059 *

Total Retail Trade 21,404,451

TECHNOLOGY 19.5%
3Com Corporation 29,300 $ 1,510,781 *
ALC Communications Corporation 102,000 3,174,750 *
Applied Digital Access 44,050 1,117,769 *
Applied Materials, Inc. 25,900 1,094,275
Benchmark Electronics, Inc. 71,300 1,720,112 *
California Microwave 14,600 532,900 *
Casino Data Systems 70,800 1,115,100 *
Cisco Systems, Inc. 52,200 1,833,525 *
Compuware Corporation 37,900 1,364,400 *
Danka Business System 77,600 1,678,100
Dell Computer Corporation 29,800 1,221,800 *
Electronic Fab Technology Corporation 69,700 531,463 *
Informix Corporation 55,400 1,779,725 *
Integrated Device Technology Corporation 57,500 1,696,250 *
Keane, Inc. 106,200 2,522,250 *
Kent Electronics Corporation 62,300 2,468,638 *
Lam Research Corporation 18,700 696,575 *
LDDS Communications, Inc. 58,762 1,142,186 *
Linear Technology Corporation 69,000 3,415,500
LSI Logic Corporation 44,600 1,800,725
Micros Systems, Inc. 37,050 1,398,638 *
Norand Corporation 36,000 1,278,000 *
Symmetricom, Inc. 77,350 1,034,556 *
Verifone, Inc. 40,000 890,000 *

Total Technology 37,018,018

TRANSPORTATION 4.1%
American Freightways Corporation 117,350 2,332,331 *
Swift Transportation Company, Inc. 207,800 4,259,900 *
USATruck, Inc. 84,700 1,270,500 *

Total Transportation 7,862,731

MISCELLANEOUS 5.6%
ABR Information Services 76,000 1,539,000 *
Accustaff, Inc. 49,350 678,562 *
Career Horizons, Inc. 55,700 905,125 *
Manpower, Inc. 97,700 2,747,813 *
Offshore Pipelines, Inc. 45,700 1,033,963 *
Olsten Corporation 57,000 $ 1,809,750
Sodak Gaming, Inc. 84,100 1,282,525 *
Tech Data Corporation 39,500 671,500 *

Total Miscellaneous 10,668,238

TOTAL COMMON STOCKS
(COST $128,226,144) 166,058,378

SHORT-TERM INVESTMENT 14.2%

Repurchase Agreement
Goldman Sachs & Company
Dated 12/30/94, 5.75%, due
1/3/95, collateralized
by $30,374,255 Federal
National Mortgage Association,
6.50%, due 6/15/09,
(cost $27,087,636) $27,087,636 27,087,636

TOTAL INVESTMENTS
(COST $155,313,780) 101.6% 193,146,014

OTHER ASSETS LESS LIABILITIES (1.6%) (3,020,056)

NET ASSETS 100.0% $190,125,958

* SECURITIES NOT CURRENTLY PRODUCING INCOME.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>
Mentor Strategy Fund
Portfolio of Investments
December 31, 1994

SECURITY DESCRIPTION PERCENT OF NET ASSETS SHARES MARKET VALUE

COMMON STOCKS 67.7%

BASIC MATERIALS 4.5%
Airgas, Inc. 63,000 $1,338,750 *
British Steel PLC, ADR** 34,200 829,350
Federal Paper Board Company, Inc. 62,800 1,821,200
Phelps Dodge Corporation 29,000 1,794,375
Rohm and Haas Company 11,700 668,363
Union Camp Corporation 36,100 1,701,213

Total Basic Materials 8,153,251

COMMERCIAL SERVICES & PRODUCTS 2.4%
Cadmus Communication Corporation 43,000 677,250
Equifax, Inc. 61,100 1,611,512
Paychex, Inc. 49,825 2,017,912

Total Commercial Services & Products 4,306,674

CONSUMER DURABLES 7.2%
Arctco, Inc. 86,250 1,671,094
Bush Industries, Inc., Class A 65,100 1,334,550
Capitol Cities-ABC, Inc. 9,500 809,875
Clear Channel Communications 36,000 1,827,000 *
Meredith Corporation 38,300 1,785,738
National Gaming Corporation 6,120 73,440 *
Polygram NV, ADR** 40,400 1,863,450
Royal Carribbean Cruises, Ltd. 58,500 1,667,250
Sport Supply Group, Inc., Warrants 7,675 13,431 *
Sunbeam-Oster Company, Inc. 74,400 1,915,800

Total Consumer Durables 12,961,628

CONSUMER NON-DURABLES 1.1%
Terra Industries, Inc. 189,800 1,969,175

ENERGY 2.4%
Ashland Oil Company, Inc. 20,100 693,450
Lyondell Petrochemicals Company 69,400 1,795,725
Offshore Pipelines, Inc. 83,500 1,889,187 *

Total Energy 4,378,362

FINANCIAL 2.7%
Aflac, Inc. 51,300 $1,641,600
Morgan Stanley Emerging Markets
Fund, Inc. 61,000 1,311,500
T. Rowe Price Associates, Inc. 60,500 1,815,000

Total Financial 4,768,100

HEALTH 12.0%
Cordis Corporation 15,900 961,950 *
Coventry Corporation 70,650 1,730,925 *
Datascope Corporation 104,000 1,768,000
Genentech, Inc. 36,100 1,638,037 *
Health Management Associates, Inc. 72,550 1,813,750 *
Healthsource, Inc. 46,500 1,900,688 *
Horizon Healthcare Corporation 72,100 2,018,800 *
Loewen Group, Inc. 69,400 1,839,100
Mid-Atlantic Medical Services, Inc. 68,000 1,555,500 *
Oxford Health Plans, Inc. 22,100 1,751,425 *
Pfizer, Inc. 12,000 927,000
Service Corporation International 65,600 1,820,400
Target Therapeutics, Inc. 60,100 1,697,825 *

Total Health 21,423,400

INDUSTRIAL PRODUCTS 3.1%

AGCO Corporation 52,050 1,581,019
Apogee Enterprises, Inc. 100,000 1,725,000
Empresas ICA Sociedad Controlador,
S.A., ADR** 32,900 509,950

Thermo Electron Corporation 39,500 1,772,562 *

Total Industrial Products 5,588,531

RETAIL 7.4%
Best Buy Company, Inc. 41,400 1,293,750
Books A Million, Inc. 112,500 1,898,438
Lowe' s Companies, Inc. 45,100 1,567,225
Office Depot, Inc. 72,450 1,702,575 *
Safeway, Inc. 58,400 1,861,500
Staples, Inc. 96,250 2,382,188
Vikings-Office Products, Inc. 59,100 1,809,937
Williams-Sonoma, Inc. 24,000 721,500

Total Retail 13,237,113

TECHNOLOGY 23.4%
Adaptec, Inc. 79,050 $ 1,867,556 *
Amphenol Corporation 39,700 952,800 *
Analog Devices, Inc. 50,400 1,770,300 *
Andrew Corporation 18,800 982,300
California Microwave, Inc. 30,600 1,116,900 *
Ceridian Corporation 74,700 2,007,563 *
Chipcom Corporation 22,000 1,100,000 *
Cognex Corporation 71,000 1,828,250 *
Computer Sciences Corporation 21,550 1,099,050 *
Continuum Company, Inc. 61,100 1,863,550 *
Dell Computer Corporation 19,800 811,800
EMC Corporation 42,000 908,250 *
Hewlett Packard Company 10,300 1,028,712
Hong Kong Telecommunications,
Ltd., ADR** 90,150 1,724,119
In Focus Systems, Inc. 48,300 1,258,819 *
KLA Instruments Corporation 36,000 1,764,000
LAM Research Corporation 42,300 1,575,675 *
Linear Technology Corporation 39,450 1,952,775
LSI Logic Corporation 21,000 847,875 *
Maxim Integrated Products, Inc. 55,800 1,953,000 *
Medic Computers Systems, Inc. 50,000 1,550,000 *
Nationwide Cellular Services, Inc. 70,800 1,354,050 *
Novellus Systems, Inc. 33,800 1,690,000 *
Silicon Graphics, Inc. 32,000 988,000 *
Stratcom, Inc. 35,400 1,239,000 *
Tech Data Corporation 88,600 1,506,200 *
Teradyne, Inc. 19,500 660,562 *
US Robotics, Inc. 45,500 1,967,875 *
Vanguard Cellular Systems, Inc. 33,400 860,050 *
Vicor Corporation 69,300 1,784,475

Total Technology 42,013,506

TRANSPORTATION 1.0%
American Freightways Corporation 84,900 1,687,388 *

MISCELLANEOUS 0.5%
Alco Standard Corporation 13,000 815,750

TOTAL COMMON STOCKS
(COST $116,154,950) 121,302,878

GOVERNMENT BONDS 14.8%

U.S. TREASURY NOTES-STRIPS ***
8.31%, 2/15/21 $68,032,000 $ 8,880,897
8.29%, 5/15/21 69,125,000 8,871,503
8.09%, 2/15/23 75,621,000 8,867,318

Total U.S. Treasury Notes-Strips 26,619,718

TOTAL GOVERNMENT BONDS
(COST $24,348,827) 26,619,718

SHORT-TERM INVESTMENT 16.0%
Repurchase Agreement
Goldman Sachs & Company
Dated 12/30/94, 5.75%, due 1/3/95,
collateralized by $32,141,470
Federal National Mortgage
Association, 6.50%, 6/15/09
(cost $28,663,290) 28,663,290 28,663,290

TOTAL INVESTMENTS
(COST $169,167,067) 98.5% 176,585,886

OTHER ASSETS LESS LIABILITIES 1.5% 2,687,920

NET ASSETS 100.0% $179,273,806

* SECURITIES NOT CURRENTLY PRODUCING INCOME.
** AMERICAN DEPOSITORY RECEIPTS.
*** INTEREST ONLY SECURITY.

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>

Mentor Short-Duration Income Fund
Portfolio of Investments
December 31, 1994

<TABLE>

PRINCIPAL
SECURITY DESCRIPTION PERCENT OF NET ASSETS AMOUNT MARKET VALUE
<S> <C> <C> <C>
ASSET-BACKED SECURITIES 23.0%
Advanta CCMT 94-D, 6.30%, 9/1/00 $1,250,000 $ 1,249,608
General Motors Acceptance Corporation, 6.30%, 6/15/99 782,890 762,217
Signet CC Master Trust, 6.80%, 12/15/00 2,000,000 1,924,200

Total Asset-Backed Securities (cost $4,009,335) 3,936,025

GOVERNMENT BONDS AND AGENCIES 54.9%
Federal Home Loan Mortgage Corporation, 8.19%, 12/16/97 5,000,000 4,971,700
U. S. Treasury Note, 7.50%, 10/31/99 4,500,000 4,435,830

Total Government Bonds and Agencies (cost $9,448,860) 9,407,530

COLLATERALIZED MORTGAGE OBLIGATIONS 13.2%

Federal Home Loan Mortgage Corporation, 6.47%, 7/15/97 1,657,560 1,644,084
Ryland Acceptance Corporation, 9.63%, 9/25/17 653,951 627,391

Total Collateralized Mortgage Obligations (cost $2,302,562) 2,271,475

CORPORATE BOND 8.6%
General Motors Acceptance Corporation, 6.90%, 2/19/98
(cost $1,480,437) 1,550,000 1,482,188

SHORT-TERM INVESTMENT 4.5%
Repurchase Agreement
Lehman Brothers, Inc.
Dated 12/30/94, 5.40%, due 1/3/95, collateralized by
$1,000,000 U. S. Treasury Note, 3.88%,
8/31/95 (cost $775,000) 775,000 775,000

TOTAL INVESTMENTS (COST $18,016,194) 104.2% 17,872,218

OTHER ASSETS LESS LIABILITIES (4.2%) (728,376)

NET ASSETS 100.0% $17,143,842

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>
Mentor Series Trust
Statements of Assets and Liabilities
December 31, 1994

<TABLE>

Mentor Mentor Mentor
Growth Strategy Short-Duration
Fund Fund Income Fund**
<C> <C> <C> <C>
ASSETS
Investments, at market
value * (Note 2) $ 193,146,014 $ 176,585,886 $ 17,872,218
Cash - 7,269 -
Receivables
Investments sold 810,306 9,015,343 -
Fund shares sold 232,214 436,271 100,010
Dividends and interest 109,811 334,562 129,676
Deferred expenses 33,985 80,617 32,214
Other assets 15,809 - -

Total assets 194,348,139 186,459,948 18,134,118

LIABILITIES
Payable for investments purchased 3,959,796 6,739,051 -
Payable for fund shares redeemed 130,076 341,768 869,359
Dividends payable - 21,859 86,346
Accrued administration expenses
(Note 3) 8,177 - -
Accrued expenses 124,132 83,464 34,571

Total liabilities 4,222,181 7,186,142 990,276

NET ASSETS $190,125,958 $179,273,806 $17,143,842

Net Assets represented by:
Capital stock $ 15,653 $ 14,645 $ 1,407
Additional paid-in capital 152,435,771 182,020,192 17,617,300
Accumulated distributions in excess of
net investment income - - (37,127)
Undistributed net realized losses on
investment transactions (157,700) (10,179,850) (293,762)
Net unrealized appreciation
(depreciation)
of investments 37,832,234 7,418,819 (143,976)

Net Assets $ 190,125,958 $ 179,273,806 $17,143,842

Shares Outstanding 15,653,316 14,645,199 1,407,124

NET ASSET VALUE PER SHARE $ 12.15 $ 12.24 $ 12.18

* INVESTMENTS AT COST $155,313,780, $169,167,067 AND $18,016,194 RESPECTIVELY.

SEE NOTES TO FINANCIAL STATEMENTS.

</TABLE>

<PAGE>
Mentor Series Trust
Statements of Operations
Year ended December 31, 1994

<TABLE>

Mentor Mentor Mentor
Growth Strategy Short-Duration
Fund Fund Income Fund **
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of withholding taxes)* $ 833,720 $1,393,401 $ -
Interest 703,805 1,265,356 643,128 (a)

Total investment income (Note 2) 1,537,525 2,658,757 643,128

Expenses
Distribution fee (Note 4) 1,422,197 1,207,346 29,331
Management fee (Note 3) 1,327,384 1,368,325 48,884
Shareholder servicing fee (Note 4) 474,066 402,448 24,442
Custodian and accounting fees (Note 3) 103,545 117,006 5,964
Transfer agent fees 338,231 301,671 48,299
Registration expenses 51,421 - -
Shareholder reports and postage expenses 47,208 52,879 3,058
Auditing fees 10,700 13,035 11,784
Legal fees 5,945 7,241 1,309
Directors' fees and expenses 12,368 15,063 4,982
Administration fee (Note 3) - 160,979 9,776
Organizational expenses (Note 2) 8,634 20,135 4,512
Miscellaneous expenses 9,681 3,325 47

Total expenses 3,811,380 3,669,453 192,388

Deduct
Waiver of administration fee (Note 3) - 131,557 9,776
Waiver of management fee (Note 3) - - 48,884

NET EXPENSES 3,811,380 3,537,896 133,728

NET INVESTMENT INCOME (LOSS) (2,273,855) (879,139) 509,400

REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS

Net realized gain (loss) on
investments sold 13,751,586 (10,179,850) (293,762) (b)

Change in unrealized appreciation
(depreciation) (20,155,668) 5,285,954 (143,976)

Net realized and unrealized loss
on investments (6,404,082) (4,893,896) (437,738)

Net increase (decrease) in net assets
resulting from operations $(8,677,937) $(5,773,035) $ 71,662

* WITHHOLDING TAXES WERE $805 AND $12,905 FOR THE GROWTH FUND AND STRATEGY FUND RESPECTIVELY FOR THE YEAR.
** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994.
(A) NET OF INTEREST EXPENSE OF $110,072. (NOTE 2)
(B) INCLUDES NET REALIZED GAIN ON CLOSED FUTURES CONTRACTS OF $6,488.

SEE NOTES TO FINANCIAL STATEMENTS.

</TABLE>

<PAGE>

Mentor Series Trust
Statements of Changes in Net Assets

<TABLE>

Mentor Mentor Mentor
Growth Strategy Short-Duration
Fund Fund Income Fund

Year ended December 31, 1994 1993 1994 1993* 1994**
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $(2,273,855) $(1,776,781) $(879,139) $14,753 $ 509,400
Net realized gain (loss) on investments 13,751,586 13,552,855 (10,179,850) - (293,762)
Change in unrealized appreciation
(depreciation) of investments (20,155,668) 12,813,963 5,285,954 2,132,865 (143,976)

Increase (decrease) in net assets
from operations (8,677,937) 24,590,037 (5,773,035) 2,147,618 71,662

DISTRIBUTIONS TO SHAREHOLDERS

Net investment income - - (14,753) - (509,400)
In excess of net investment income - - (7,106) - (41,639)
Net realized gain on investments (14,441,603) (12,862,838) - - -
In excess of realized gain
on investments (186,774) - - - -

Net decrease from distributions (14,628,377) (12,862,838) (21,859) - (551,039)

CAPITAL SHARE TRANSACTIONS (NOTE 7)
Net proceeds from sale of shares 35,199,222 41,824,518 70,664,481 120,228,889 27,846,704
Reinvested distributions 14,274,538 12,518,967 - - 366,811
Cost of shares redeemed (23,019,529) (15,145,165) (7,772,804) (199,484) (10,590,296)

Change in net assets from capital
share transactions 26,454,231 39,198,320 62,891,677 120,029,405 17,623,219

Net increase in net assets 3,147,917 50,925,519 57,096,783 122,177,023 17,143,842

NET ASSETS
Beginning of period 186,978,041 136,052,522 122,177,023 - -

End of period $190,125,958 $186,978,041 $179,273,806 $122,177,023 $17,143,842

* FOR THE PERIOD FROM OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1993.
** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994.

SEE NOTES TO FINANCIAL STATEMENTS.

</TABLE>

<PAGE>
Mentor Series Trust
Financial Highlights

<TABLE>
Mentor Growth Fund
Year ended December 31, 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE

NET ASSET VALUE, BEGINNING OF PERIOD $13.78 $12.81 $12.16 $8.37 $9.63
Net investment income (loss) (0.15) (0.08) (0.06) (0.09) 0.02
Net realized and unrealized
gain (loss) on investments (0.47) 2.07 1.94 4.30 (1.10)

Total from investment operations (0.62) 1.99 1.88 4.21 (1.08)

Less distributions
Dividends from net investment income - - - - (0.05)
Distributions from capital gains (1.00) (1.02) (1.23) (0.42) (0.13)
Distributions in excess of
capital gains (0.01) - - - -

Total distributions (1.01) (1.02) (1.23) (0.42) (0.18)

NET ASSET VALUE, END OF PERIOD $12.15 $13.78 $12.81 $12.16 $ 8.37

Total Return (4.48%) 15.60% 15.46% 50.30% (11.21%)

Ratios / Supplemental Data

Net assets, end of period (in 000's) $190,126 $186,978 $136,053 $108,719 $83,540

Ratio of expenses to
average net assets 2.01% 2.02% 2.05% 2.17% 2.25%

Ratio of net investment income (loss)
to average net assets (1.20%) (1.12%) (0.76%) (0.80%) 0.26%

Portfolio turnover rate 77% 64% 50% 40% 50%

SEE NOTES TO FINANCIAL STATEMENTS.

</TABLE>

<PAGE>
Mentor Series Trust
Financial Highlights (continued)

<TABLE>
Mentor Mentor
Strategy Short-Duration
Fund Income Fund
Year ended December 31, 1994 1993* 1994**
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE

NET ASSET VALUE, BEGINNING OF PERIOD $12.70 $ 12.50 $ 12.50
Net investment income (loss) (0.06) - 0.41
Net realized and unrealized
gain (loss) on investments (0.40) 0.20 (0.29)

Total from investment operations (0.46) 0.20 0.12

Less distributions
Dividends from net investment income - - (0.41)
Distributions in excess of
net investment income - - (0.03)

Total distributions - - (0.44)

NET ASSET VALUE, END OF PERIOD $12.24 $12.70 $12.18

Total Return (3.61%) 1.60% 0.95%

Ratios / Supplemental Data

Net assets, end of period (in 000's) $179,274 $122,177 $17,144

Ratio of expenses to
average net assets 2.19% 2.06% (a) 1.29% (a)

Ratio of net investment income (loss)
to average net assets (0.54%) 0.08% (a) 4.90% (a)

Portfolio turnover rate 143% 0% 166%

* FOR THE PERIOD FROM OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1993.
** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994.
(A) DETERMINED ON AN ANNUALIZED BASIS.

SEE NOTES TO FINANCIAL STATEMENTS.

</TABLE>

<PAGE>
Mentor Series Trust
Notes to Financial Statements
December 31, 1994

NOTE 1: ORGANIZATION

Mentor Series Trust ("Trust") was organized on August 16, 1993 and
is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Trust is the successor to the
Mentor Growth Trust, Inc., which was incorporated on January 8, 1985. The
Trust consists of four separate diversified funds (hereinafter each
individually referred to as a Fund or collectively as the "Funds") at December
31, 1994, as follows: Mentor Growth Fund (Growth Fund) (formerly, Mentor Growth
Trust, Inc.)

Mentor Strategy Fund (Strategy Fund)

Mentor Short-Duration Income Fund (Short-Duration Income Fund)

Mentor Balanced Fund (Balanced Fund)

The assets of each Fund of the Trust are segregated and a shareholder' s
interest is limited to the Fund in which shares are held.

The Balanced Fund is not currently being offered to new investors.
These financial statements include the Growth Fund, Strategy Fund
and Short-Duration Income Fund.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds:

(a) Valuation of Securities - Listed securities held by the Growth Fund and
Strategy Fund and traded on national stock exchanges and over-the-counter
securities quoted on the NASDAQ National Market System are valued at the last
reported sales price or, lacking any sales, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated by the Board of Trustees of the Fund as the
primary market. Securities traded in the over-the-counter market, other than
those quoted on the NASDAQ National Market System, are valued at the last
available bid price. Short-term investments with remaining maturities of 60
days or less are carried at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Trustees.

U.S. Government obligations held by the Short-Duration Income
Fund are valued at the mean between the over-the-counter bid and
asked prices as furnished by an independent pricing service. Listed
corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities
are valued at the prices provided by an independent pricing service.
Security valuations not available from an independent pricing service
are provided by dealers approved by the Funds' Board of Trustees.
In determining value, the dealers use information with respect to
transactions in such securities, market transactions in comparable
securities, various relationships between securities, and yield to
maturity.

(b) Repurchase Agreements - All repurchase agreements are fully collateralized
by U.S. Government Agency securities and such collateral is in the possession of
the Trust' s custodian. The Trust monitors on a daily basis, the market value
of the collateral of each repurchase agreement to ensure the existence of a
proper level of collateral.

(c) Borrowings- Short-Duration Income Fund may, under certain
circumstances, borrow money directly or through dollar-roll transactions and
repurchase agreements (arrangements in which the Fund sells a security for a
percentage of its market value with an agreement to buy it back on a set
date). The Short-Duration Income Fund may borrow up to one-third of the value
of its net assets. The Fund had no reverse repurchase agreements or
dollar-rolls outstanding at December 31, 1994.

(d) Security Transactions and Investment Income - Security transac-
tions for the Funds are accounted for on a trade date basis. Dividend
income is recorded on the ex-dividend date, and interest is recorded
on the accrual basis. Interest income includes interest and discount
earned (net of premium) on short term obligations, and interest
earned on all other debt securities including original issue discounts
as required by the Internal Revenue Code. Realized and unrealized
gains and losses on investment security transactions are calculated
on an identified cost basis.

(e) Federal Income Taxes - No provision for federal income taxes has been made
since it is each Fund' s policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.

(f) In order to gain exposure to or protect against declines in security
values, the Short-Duration Income Fund may buy and sell futures contracts. The
Fund may also buy or write put or call options on these futures contracts.

The Fund generally sells futures contracts to hedge against declines
in the value of portfolio securities. The Fund may also purchase
futures contracts to gain exposure to market changes as it may be
more efficient or cost effective than actually buying securities. The
Fund will segregate assets to cover its commitments under such
speculative futures contracts.

Upon entering into a futures contract, the Fund is required to deposit ither
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (varia- tion margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is
closed. For the year ended December 31, 1994, the Short-Duration Income Fund
had a realized gain of $6,488 on closed futures contracts.

Mentor Series Trust
Notes to Financial Statements (continued)

Risks of entering into future contracts (and related options) include the
possibility that there may be an liquid market and that a change in the value of
the contract or option may not correlate with changes in the value of the
underlying securities. At December 31, 1994, the Short-Duration Income Fund had
no open futures contracts or options thereon.

(g) Deferred Expenses - Costs incurred by the Trust in connection with its
initial share registration and organization costs were deferred by the Funds and
are being amortized on a straight-line basis over a five-year period through
April 1999.

(h) Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses and deferral of wash sales.
During the year ended December 31, 1994, the Growth Fund, Strategy Fund and
Short-Duration Income Fund made the following reclassifications to increase
(decrease) the accounts as shown:

ACCUMULATED UNDISTRIBUTED NET
DISTRIBUTIONS IN REALIZED LOSSES
ADDITIONAL EXCESS OF NET ON INVESTMENT
PAID-IN CAPITAL INVESTMENT INCOME TRANSACTIONS
Growth Fund $(2,302,929) $2,273,855 $29,074
Strategy Fund (886,245) 886,245 -
Short-Duration
Income Fund (4,512) 4,512 -

The above reclassifications had no effect on net investment income,
net realized gains (losses), or net assets of the Funds.

(i) Distributions to Shareholders- Distributions from net investment income and
net realized capital gains, after offsetting capital loss car- ryovers are
distributed annually for the Growth Fund and the Strategy Fund. Distributions
from net investment income are declared daily and paid monthly for the
Short-Duration Income Fund, and distribu- tions from net realized capital gains,
if any, are paid annually.

NOTE 3: INVESTMENT ADVISORY AND MANAGEMENT AND
ADMINISTRATION AGREEMENTS

The Growth Fund has entered into an Investment Advisory and Man- agement
Agreement with Charter Asset Management, Inc. (Charter), a wholly-owned
subsidiary of Investment Management Group, Inc., which is a wholly-owned
subsidiary of Wheat First Butcher Singer, Inc. Under this agreement, Charter s
management fee is accrued daily and paid monthly at an annual rate of 0.70%
applied to the average daily net assets of the Fund.

The Strategy Fund has entered into an Investment Advisory Agreement with
Wellesley Advisors, Inc. (Wellesley), a wholly-owned subsidiary of Investment
Management Group, Inc., which is a wholly-owned subsidiary of Wheat First
Butcher Singer, Inc. Under this agreement, Wellesley' s management fee is
accrued daily and paid monthly at an annual rate of 0.85% applied to the average
daily net assets of the Fund.

The Short-Duration Income Fund has entered into an Investment Advisory Agreement
with Commonwealth Investment Counsel, Inc. (Commonwealth), a wholly-owned
subsidiary of Investment Management Group, Inc. (IMG), which is a wholly-owned
subsidiary of Wheat First Butcher Singer, Inc. Under this agreement,
Commonwealth' s management fee is accrued daily and paid monthly at an annual
rate of 0.50%, applied to the average daily net assets of the Fund. For the year
ended December 31, 1994 Commonwealth earned and voluntarily waived advisory fees
of $48,884 for the Short-Duration Income Fund.

IMG provides administrative personnel and services to the Strategy Fund and
Short-Duration Income Fund, under an Administration Agreement, at an annual rate
of .10 of 1% of the average daily net assets of each Fund. In order to limit
the Funds' expenses during its start-up period, IMG agreed to waive its fee for
the first year of each Funds' operations. This waiver period elapsed on
October 31, 1994 for the Strategy Fund. In addition, the Growth Fund and
Strategy Fund provide direct reimbursement to IMG for certain accounting and
operation related costs not covered under the Administration Agreement. For the
year ended December 31, 1994, the Growth Fund and the Strategy Fund paid $24,000
and $21,507, respectively to IMG for these direct reimbursements.

Charter, Wellesley, and Commonwealth have agreed to reimburse the Funds for the
operating expenses (exclusive of interest, taxes, brokerage and distributions
fees, and extraordinary expenses) in excess of the most restrictive expense
limitation imposed by state securities commissions with jurisdiction over the
Funds. The most stringent state expense limitation applicable to the Funds
requires reimbursement of expenses in any year that such expenses exceed 2.5% of
the first $30,000,000 of average daily net assets, 2% of the next $70,000,000 of
average daily net assets, and 1.5% of the average daily net assets over
$100,000,000. During the year ended December 31, 1994 for the Growth Fund and
Strategy Fund and the period of April 29, 1994 to December 31, 1994 for the
Short-Duration Income Fund, no reimbursement from Charter, Wellesley or
Commonwealth was required as a result of such state expense limitations.

NOTE 4: DISTRIBUTION AGREEMENT AND OTHERTRANSACTIONS
WITH AFFILIATES
Under a Distribution Agreement between the Funds and Wheat, First
Securities, Inc. (Wheat), a wholly-owned subsidiary of Wheat First
Butcher Singer, Inc., Wheat was appointed Distributor of the Funds.
To compensate Wheat for the services it provides and for the expenses
it incurs under the Distribution Agreement, the Funds have adopted a
Plan of Distribution pursuant to Rule 12b-1 under the Investment
Company Act of 1940, under which they pay a distribution fee, which
is accrued daily and paid monthly at the annual rate of 0.75% of the
Funds' average daily net assets for the Growth Fund and Strategy
Fund, and 0.30% of the Fund' s average daily net assets for the Short-Duration
Income Fund.

Mentor Series Trust
Notes to Financial Statements (continued)
Effective, July 7, 1993 for the Growth Fund, October 29, 1993 for
the Strategy Fund and April 29, 1994 for the Short-Duration Income
Fund, the Funds commenced payment of certain compensation to
Wheat under a Shareholder Service Agreement for administrative
support services at an annual rate of 0.25% of the Funds' average
daily net assets. The total charges to be borne by the Growth Fund
and Strategy Fund, under the Distribution and Shareholder Service
Agreements is expected to remain at an annual rate of 1% of the
Funds' average daily net assets. The total charges to be borne by the
Short-Duration Income Fund under the Distribution and Shareholder
Service Agreements is expected to remain at an annual rate of 0.55%
of the Fund' s average daily net assets.

In addition, Wheat is paid a contingent deferred sales charge on share
redemptions made within five years of original share purchase.
Reinvested distributions and share appreciation are excluded from
the sales charge. During the year ended December 31, 1994, Wheat
was paid contingent deferred sales charges of $321,429 and
$108,534, respectively, by the redeeming shareholders of the Growth
Fund and Strategy Fund.

NOTE 5: INVESTMENT TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities, for the
Growth Fund and the Strategy Fund during the year ended December 31, 1994, the
Short-Duration Income Fund for the period from April 29, 1994 to December 31,
1994 were as follows:

PURCHASES SALES
Growth Fund $132,806,285 $132,443,083
Strategy Fund 241,632,204 204,570,532
Short-Duration Income Fund 45,291,725 27,756,769

At December 31, 1994, Strategy Fund for federal tax purposes, had
a capital loss carryforward of approximately $9,900,000. Pursuant
to the Internal Revenue Code, such capital loss carryforward will
expire in 2002.

At December 31, 1994, Short-Duration Income Fund for federal tax purposes, had a
capital loss carryforward of approximately $67,000. Pursuant to the Internal
Revenue Code, such capital loss carryforward will expire in 2002. In addition,
the Fund realized approxi- mately $227,000 in net realized losses subsequent to
October 31, 1994 which for federal tax purposes may be used to offset realized
gains occurring in the next fiscal year.

NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF
INVESTMENTS

The cost of investments for federal income tax purposes amounted to
$155,471,480, for the Growth Fund, $169,431,332 for the Strategy Fund,
$18,016,194 for the Short-Duration Income Fund at December 31, 1994. Gross
unrealized appreciation and depreciation of investments at December 31, 1994
based on such costs were as follows:

NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)

Growth Fund $44,656,702 $(6,982,168) $37,674,534
Strategy Fund 11,169,452 (4,014,898) 7,154,554
Short-Duration
Income Fund 1,751 (145,727) (143,976)

NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions
in Fund shares were as follows:
GROWTH FUND
YEAR YEAR
ENDED ENDED
12/31/94 12/31/93
Shares outstanding,
beginning of period 13,569,941 10,620,907
Shares sold 2,621,726 3,156,077
Shares issued upon reinvestment
of distributions 1,176,364 916,466
Shares redeemed (1,714,715) (1,123,509)
Shares outstanding,
end of period 15,653,316 13,569,941

STRATEGY FUND
YEAR PERIOD
ENDED ENDED
12/31/94 12/31/93 *
Shares outstanding,
beginning of period 9,616,768 -
Shares sold 5,670,538 9,632,745
Shares issued upon reinvestment
of distributions - -
Shares redeemed (642,107) (15,977)
Shares outstanding,
end of period 14,645,199 9,616,768

SHORT-DURATION
INCOME FUND
PERIOD
ENDED
12/31/1994**
Shares outstanding,
beginning of period -
Shares sold 2,235,823
Shares issued upon reinvestment
of distributions 29,697
Shares redeemed (858,396)
Shares outstanding,
end of period 1,407,124

* FOR THE PERIOD FROM OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1993.

** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1994.

<PAGE>

Mentor Series Trust
Independent Auditors' Report

THE TRUSTEES AND SHAREHOLDERS
MENTOR SERIES TRUST

We have audited the accompanying statements of assets and liabilities of Mentor
Growth Fund, Mentor Strategy Fund and Mentor Short-Duration Income Fund,
portfolios of Mentor Series Trust, including the portfolios of investments, as
of December 31, 1994, and the related statements of operations for the year then
ended for Mentor Growth Fund and Mentor Strategy Fund and for the period from
April 29, 1994 (commencement of operations) to December 31, 1994 for Mentor
Short-Duration Income Fund, the statements of changes in net assets for each of
the years in the two year period then ended for Mentor Growth Fund, for the year
then ended and the period from October 29, 1993 (commencement of operations) to
December 31, 1993 for Mentor Strategy Fund and for the peri- od from April 29,
1994 to December 31, 1994 for Mentor Short-Duration Income Fund, and the
financial high- lights for each of the years in the five-year period then ended
for Mentor Growth Fund, for the year then ended and for the period from October
29, 1993 to December 31, 1993 for Mentor Strategy Fund and for the period from
April 29, 1994 to December 31, 1994 for Mentor Short-Duration Income Fund.
These financial statements and financial highlights are the responsibility of
the Trust' 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 audit 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
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall finan- cial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mentor Growth Fund, Mentor
Strategy Fund and Mentor Short-Duration Income Fund, portfolios of Mentor Series
Trust, as of December 31, 1994, the results of their operations, changes in
their net assets and their financial highlights for each of the years or periods
specified in the first paragraph above in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Boston, Massachusetts
February 3, 1995

<PAGE>

MENTOR BALANCED FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>

Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 59.9%
BASIC INDUSTRIES 3.1%
Mohawk Industries, Inc. 2,300 $ 29,325
Unifi, Inc. 2,355 60,052
Total Basic Industries 89,377
CAPITAL GOODS 2.2%
York International Company 1,760 64,900
CONSUMER DURABLES 4.4%
Circus Circus Enterprises 2,480 57,660
Newell Company 3,420 71,820
Total Consumer Durables 129,480

CONSUMER NON-DURABLES 13.6%
Johnson & Johnson, Inc. 1,025 56,119
McDonald's Corporation 2,370 69,322
Pepsico, Inc. 2,300 83,375
Sonoco Products Company 2,570 56,219
Sysco Corporation 2,900 74,675
UST, Inc. 2,070 57,442
Total Consumer Non-durables 397,152

ENERGY 2.0%
Schlumberger Ltd. 1,140 57,428

FINANCIAL 9.5%
Banc One Corporation 2,612 66,279
Federal National Mortgage Association 550 40,081
Torchmark Corporation 1,890 65,914
United Asset Management Company 2,040 75,225
Wilmington Trust Corporation 1,330 30,257
Total Financial 277,756

RETAIL TRADE 12.8%
Albertson's, Inc. 1,980 57,420
Avon Products Company 1,190 71,103
May Department Store 2,000 67,500
Rubbermaid, Inc. 2,090 60,088
Toys R Us, Inc. 1,340 40,870
Tyco International Ltd. 1,570 74,575
Total Retail Trade 371,556

TECHNOLOGY 7.5%
Automatic Data Processing Corporation 840 49,140
Intel Corporation 860 54,933
</TABLE>

<PAGE>
MENTOR BALANCED FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994

<TABLE>
Shares or
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY (CONTINUED)
Premier Industrial Corporation 2,770 $ 65,441
Sensormatic Electronics Corporation 1,340 48,240
Total Technology 217,754
MISCELLANEOUS 4.8%
General Electric Company 1,530 78,030
Interpublic Group Company 1,890 60,716

Total Miscellaneous 138,746

TOTAL COMMON STOCKS (COST $1,748,659) 1,744,149

FIXED INCOME SECURITIES 41.5%

ASSET BACKED SECURITIES 2.9%

Advanta Credit Card Master Trust
94-D A, CMO, 6.29%, 9/1/00 $55,000 54,983
Case Equipment Loan Trust,
4.40%, 11/15/98 29,224 28,447

TOTAL ASSET BACKED SECURITIES
(COST $83,710) 83,430

GOVERNMENT BONDS 30.6%

U.S. TREASURY BONDS 4.7%
7.25%, 5/15/16 75,000 69,370
7.13%, 2/15/23 75,000 68,262
Total U.S. Treasury Bonds 137,632

U.S. TREASURY NOTES 24.0%
4.25%, 1/31/95 130,000 129,910
5.88%, 5/15/95 35,000 34,925
6.50%, 8/15/97 115,000 111,376
7.50%, 10/31/99 85,000 83,788
5.50%, 4/15/00 75,000 67,589
7.75%, 2/15/01 70,000 69,711
5.88%, 2/15/04 180,000 157,027
7.90%, 2/15/14 (a) 205,000 45,258
Total U.S. Treasury Notes 699,584

FEDERAL HOME LOAN MORTGAGE CORPORATION 1.9%
6.90%, 10/17/96 55,000 54,067

TOTAL GOVERNMENT BONDS (COST $900,794) 891,283
</TABLE>

<PAGE>

MENTOR BALANCED FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994

<TABLE>

Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>

NON-CONVERTIBLE CORPORATE BOND 1.6%

First Chicago Corporation, 7.63%,
1/15/03 (cost $49,094) $ 50,000 $ 47,187

SHORT-TERM INVESTMENT 6.4%
Repurchase Agreement
Goldman Sachs & Company
Dated 12/30/94, 5.75%, due
1/3/95, collateralized by
$207,851 Federal National Mortgage
Association, 6.50%, 6/15/09
(cost $185,103) 185,103 185,103

TOTAL FIXED INCOME SECURITIES
(COST $1,218,701) 1,207,003

TOTAL INVESTMENTS (COST $2,967,360) 101.4% 2,951,152

OTHER ASSETS LESS LIABILITIES (1.4%) (40,053)

NET ASSETS 100.0% $2,911,099

</TABLE>

CMO - Collateralized Mortgage Obligation
(a) Represents Interest Only U.S. Treasury Strip.

See notes to financial statements.

<PAGE>

MENTOR SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994

MENTOR
BALANCED
FUND

ASSETS
Investments, at market value* (Note 2) $2,951,152
Dividends and interest receivables 22,926
Other assets 6,906
Total assets 2,980,984

LIABILITIES
Payable for investments purchased 20,898
Dividends payable 43,277
Other accrued expenses 5,710
Total liabilities 69,885

NET ASSETS $2,911,099

Net Assets represented by:
Capital stock $ 234
Additional paid-in capital 2,926,764
Undistributed net investment income 7,414
Undistributed net realized losses on
investment transactions (7,105)
Net unrealized depreciation of investments (16,208)
Net Assets $2,911,099

Shares Outstanding 233,931

NET ASSET VALUE PER SHARE $ 12.44

* Investments at cost $2,967,360.

See notes to financial statements.

<PAGE>

MENTOR SERIES TRUST
STATEMENT OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1994

MENTOR
BALANCED
FUND*

INTEREST INCOME
Dividends $ 17,245
Interest 41,137
Total investment income (Note 2) 58,382

Expenses
Distribution fee (Note 4) 11,536
Management fee (Note 3) 11,536
Shareholder servicing fee (Note 4) 3,845
Custodian and accounting fees 5,115
Registration expenses 303
Shareholder reports and postage expenses 285
Auditing fees 5,040
Directors' fees and expenses 3,835
Miscellaneous expenses 18
Total expenses 41,513

Deduct
Waiver of distribution fee (Note 3) 11,536
Waiver of management fee (Note 3) 11,536
Waiver of shareholder servicing fee (Note 3) 3,845
Reimbursement of expenses by Administrator 6,905

NET EXPENSES 7,691
NET INVESTMENT INCOME 50,691

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments sold (7,105)
Change in unrealized depreciation (16,208)
Net realized and unrealized loss on investments (23,313)
Net increase in net assets resulting
from operations $ 27,378

* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.

See notes to financial statements.

<PAGE>

MENTOR SERIES TRUST
STATEMENT OF CHANGES IN NET ASSETS

MENTOR
BALANCED FUND
PERIOD ENDED DECEMBER 31, 1994*

INCREASE IN NET ASSETS
OPERATIONS
Net investment income $ 50,691
Net realized loss on investments (7,105)
Change in unrealized depreciation of investments (16,208)
Increase in net assets from operations 27,378

DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (43,277)

CAPITAL SHARE TRANSACTIONS (NOTE 7)
Net proceeds from sale of shares 2,926,998
Reinvested distributions -
Cost of shares redeemed -
Change in net assets from capital
share transactions 2,926,998
Net increase in net assets 2,911,099

NET ASSETS
Beginning of period -
End of period $2,911,099

* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.

See notes to financial statements.

<PAGE>

MENTOR SERIES TRUST
FINANCIAL HIGHLIGHTS

MENTOR
BALANCED FUND
PERIOD ENDED DECEMBER 31, 1994*

PER SHARE OPERATING PERFORMANCE

NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50
Net investment income 0.22
Net realized and unrealized loss
on investments (0.09)
Total from investment operations 0.13

Less distributions
Dividends from net investment income (0.19)

NET ASSET VALUE, END OF PERIOD $ 12.44

Total Return 1.00%

Ratios/Supplemental Data

Net assets, end of period (in 000's) $ 2,911
Ratio of expenses to average net assets 0.50% (a)
Ratio of net investment income to average net assets 3.32% (a)
Portfolio turnover rate 71%

* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.

(a) Determined on an annualized basis.

See notes to financial statements.

<PAGE>

MENTOR SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994

NOTE 1: ORGANIZATION
Mentor Series Trust ("Trust") was organized on August 16, 1993 and is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Trust is the successor to the Mentor Growth Trust, Inc.,
which was incorporated on January 8, 1985. The Trust consists of four separate
diversified funds at December 31, 1994, as follows:

Mentor Growth Fund ("Growth Fund") (formerly, Mentor Growth Trust, Inc.)

Mentor Strategy Fund ("Strategy Fund")

Mentor Short-Duration Income Fund ("Short-Duration Income Fund")

Mentor Balanced Fund ("Balance Fund")

The assets of each Fund of the Trust are segregated and a shareholder's interest
is limited to the Fund in which shares are held.

The financial statements included in this report are for the Balanced Fund
(hereinafter referred to as the "Fund").

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund:

(a) Valuation of Securities - Listed securities held by the Fund and traded on
national stock exchanges and over-the-counter securities quoted on the NASDAQ
National Market System are valued at the last reported sales price or, lacking
any sales, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by the Board of Trustees of the Fund as the primary market. Securities traded in
the over-the-counter market, other than those quoted on the NASDAQ National
Market System, are valued at the last available bid price. Short-term
investments with remaining maturities of 60 days or less are carried at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Board of Trustees.

U.S. Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities are
valued at the prices provided by an independent pricing service. Security
valuations not available from an independent pricing service are provided by
dealers approved by the Fund's Board of Trustees. In determining value, the
dealers use information with respect to transactions in such securities, market
transactions in comparable securities, various relationships between securities,
and yield to maturity.

(b) Repurchase Agreements- All repurchase agreements are fully collateralized by
U.S. Government Agency securities and such collateral is in the possession of
the Trust's custodian. The Trust monitors on a daily basis, the market value of
the collateral of each repurchase agreement to ensure the existence of a proper
level of collateral.

(c) Security Transactions and Investment Income - Security transactions for the
Fund are accounted for on a trade date basis. Dividend income is recorded on the
ex-dividend date, and interest is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short term
obligations, and interest earned on all other debt securities including original
issue discounts as required by the Internal Revenue Code. Realized and
unrealized gains and losses on investment security transactions are calculated
on an identified cost basis.

(d) Federal Income Taxes - No provision for federal income taxes has been made
since it is the Fund's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.

(e) Deferred Expenses - Costs incurred by the Trust in connection with its
initial share registration and organization costs were deferred by the Fund and
are being amortized on a straight-line basis over a five-year period through
June 1999.

(f) Distributions to Shareholders - Distributions from net investment income and
net realized capital gains, after offsetting capital loss carryovers are
distributed annually for the Fund.

NOTE 3: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS

The Fund has entered into an Investment Advisory Agreement with Commonwealth
Investment Counsel, Inc. ("Commonwealth"), a wholly-owned subsidiary of
Investment Management Group, Inc., which is a wholly-owned subsidiary of Wheat
First Butcher Singer, Inc. Under this agreement, Commonwealth's management fee
is accrued daily and paid monthly at an annual rate of 0.75% applied to the
average daily net assets of the Fund. In order to limit the Fund's expenses
during its start-up period, Commonwealth has agreed to reduce its compensation
to the extent that expenses of the Fund during the first three months of its
operations (exclusive of brokerage, interest, taxes, deferred organization
expenses, and payments under the Fund's Distributions Plan) exceed an annual
rate of 0.50% of the Fund's average net assets. For the year ended December 31,
1994 Commonwealth earned and voluntarily waived advisory fees of $11,536 for the
Fund.

Investment Management Group, Inc. ("IMG") provides administrative personnel and
services to the Fund, under an Administration Agreement, at an annual rate of
.10 of 1% of the average daily net assets of the Fund. In order to limit the
Fund's expenses during its start-up period, IMG agreed to waive its fee for the
first year of the Fund's operations.

Commonwealth has agreed to reimburse the Fund for the operating expenses
(exclusive of interest, taxes, brokerage and distributions fees, and
extraordinary expenses) in excess of the most restrictive expense limitation
imposed by state securities commissions with jurisdiction over the Fund. The
most stringent state expense limitation applicable to the Fund requires
reimbursement of expenses in any year that such expenses exceed 2.5% of the
first $30,000,000 of average daily net assets, 2% of the next $70,000,000 of
average daily net assets, and 1.5% of the average daily net assets over
$100,000,000. During the period from June 21, 1994 to December 31, 1994, no
reimbursement from Commonwealth was required as a result of such state expense
limitations.

NOTE 4: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

Under a Distribution Agreement between the Fund and Wheat, First Securities,
Inc. ("Wheat"), a wholly-owned subsidiary of Wheat First Butcher Singer, Inc.,
Wheat was appointed Distributor of the Fund. To compensate Wheat for the
services it provides and for the expenses it incurs under the Distribution
Agreement, the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the Investment Company Act of 1940, under which the Fund pays a
distribution fee, which is accrued daily and paid monthly at the annual rate of
0.75% of the Fund's average daily net assets.

Effective June 21, 1994 the Fund commenced payment of certain compensation to
Wheat under a Shareholder Service Agreement for administrative support services
at an annual rate of 0.25% of the Fund's average daily net assets. The total
charges to be borne by the Fund, under the Distribution and Shareholder Service
Agreements is expected to remain at an annual rate of 1% of the Fund's average
daily net assets. For the year ended December 31, 1994 Wheat earned and
voluntarily waived distribution and shareholder services fees of $15,381.

NOTE 5: INVESTMENT TRANSACTIONS

Purchases and sales of investments, exclusive of short-term securities,
aggregated $4,724,246 and $1,749,781 respectively, for the period from June 21,
1994 to December 31, 1994. Purchases include $2,690,820 of trades in-kind.

At December 31, 1994, the Fund for federal tax purposes, had a capital loss
carryforward of approximately $7,000. Pursuant to the Internal Revenue Code,
such capital loss carryforward will expire in 2002.

NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS

At December 31, 1994 the cost of investments for federal income tax purposes
amounted to $2,967,360 and net unrealized depreciation aggregated $16,208, of
which $79,764 related to appreciated securities and $95,972 related to
depreciated securities.

NOTE 7: CAPITAL SHARE TRANSACTIONS

The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Fund shares
were as follows:

PERIOD
ENDED
12/31/94*

Shares outstanding, beginning of period -
Shares sold 233,931
Shares issued upon reinvestment of distribution -
Shares redeemed -
Shares outstanding, end of period 233,931

* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.

<PAGE>

MENTOR SERIES TRUST
INDEPENDENT AUDITORS' REPORT

THE TRUSTEES AND SHAREHOLDERS
MENTOR SERIES TRUST

We have audited the accompanying statement of assets and liabilities of Mentor
Balanced Fund, portfolio of Mentor Series Trust, including the portfolio of
investments, as of December 31, 1994, and the related statement of operations,
the statement of changes in net assets, and the financial highlights for the
period from June 21, 1994 (commencement of operations) to December 31, 1994.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 December 31, 1994 by
correspondence with the custodian and brokers. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mentor Balanced Fund, portfolio
of Mentor Series Trust, as of December 31, 1994, the results of its operations,
changes in its net assets and its financial highlights for the period specified
in the first paragraph above in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP