PREFERRED GROUP OF MUTUAL FUNDS, 485APOS, 1999-08-31

PREFERRED GROUP OF MUTUAL FUNDS
485APOS, 1999-08-31

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As filed with the Securities and Exchange Commission on August 31, 1999

Registration No. 33-46479
File No. 811-06602
===============================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 x
-----

Pre-Effective Amendment No.
-----

Post-Effective Amendment No. 15 x
-----

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 x
-----

Amendment No. 18 x
-----

THE PREFERRED GROUP OF MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)

411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (309) 675-4999

Name and Address of Agent for Service:

David Bomberger
THE PREFERRED GROUP OF MUTUAL FUNDS
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602

Copy to:
J.B. Kittredge, Esq.
Ropes & Gray
One International Place
Boston, MA 02110-2624

The Registrant has previously registered an indefinite number or amount of its
shares of beneficial interest pursuant to Rule 24f-2. The Registrant filed a
Rule 24f-2 Notice on August 22, 1995.

It is proposed that this filing will become effective:

____ Immediately upon filing pursuant to paragraph (b),

____ On _______________ pursuant to paragraph (b),

____ 60 days after filing pursuant to paragraph (a)(1),

x On November 1, 1999 pursuant to paragraph (a)(1),
----

____ 75 days after filing pursuant to paragraph (a)(2), or

____ On _______________ pursuant to paragraph (a)(2), of Rule 485.

If appropriate, check the following box:

_____ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

<PAGE>

PROSPECTUS

November 1, 1999

411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602-1104

PREFERRED GROWTH FUND
PREFERRED VALUE FUND
PREFERRED INTERNATIONAL FUND
PREFERRED SMALL CAP FUND
PREFERRED ASSET ALLOCATION FUND
PREFERRED FIXED INCOME FUND
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
PREFERRED MONEY MARKET FUND

The Preferred Group of Mutual Funds ("The Preferred Group") is an open-end,
diversified series investment company offering eight portfolios ("Funds") with
different investment objectives and strategies. Shares of the Funds are offered
without a sales charge at net asset value.

This Prospectus concisely describes the information that investors should know
before investing. Please read this Prospectus carefully and keep it for future
reference.

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 on the
accuracy or adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.

For more information about The Preferred Group call 1-800-662-4769.

<PAGE>

Table of Contents

Risk/Return Summaries..........................................
Preferred Growth Fund......................................
Preferred Value Fund.......................................
Preferred International Fund...............................
Preferred Small Cap Fund...................................
Preferred Asset Allocation Fund............................
Preferred Fixed Income Fund................................
Preferred Short-Term Government Securities Fund............
Preferred Money Market Fund................................
Summary of Principal Risks.................................

Schedule of Fund Expenses......................................

Investment Policies............................................

General Policies and Risk Considerations.......................

About The Preferred Group......................................

Portfolio Managers.............................................

Determination of Net Asset
Value and Pricing..........................................

Your Preferred Group Account...................................

How to Open Your Account...................................

How to Buy Shares..........................................

Exchanging and Redeeming Shares............................

Important Information About Your Account...................

Additional Shareholder Services............................

Distributions..............................................

Choosing a Distribution Option.............................

Taxes......................................................

Financial Highlights.......................................

<PAGE>

RISK/RETURN SUMMARIES

The following are risk/return summaries of key information about each Fund in
The Preferred Group of Mutual Funds. You will find additional information about
each Fund, including a detailed description of the risks of an investment in
each Fund, after these summaries.

Each summary describes the Fund's objectives, principal investment strategies,
principal risks and fees. Each Fund's summary page includes a short discussion
of some of the principal risks of investing in that Fund. More detailed
descriptions of the Funds, including these and other principal risks associated
with investing in the Funds, can be found elsewhere in this prospectus. Please
be sure to read this additional information before you invest.

Each risk/return summary includes a table for each Fund showing its average
annual returns and a bar chart showing its annual returns. The table and the bar
chart provide an indication of the historical risk of an investment in each Fund
by showing:

o How the Fund's average annual returns for one year, five years and the
life of the Fund compare to those of a broad based securities market
index; and

o How the Fund's performance has changed from year to year over the life
of the Fund.

A Fund's past performance, of course, does not necessarily indicate how it will
perform in the future.

Other important things for you to note:

o You may lose money by investing in the Funds.

o An investment in the Funds is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.

PREFERRED GROWTH FUND

OBJECTIVE: The Preferred Growth Fund seeks its objective of long-term capital
appreciation by investing primarily in equity securities believed to offer the
potential for capital appreciation, including stocks of companies that are
experiencing above-average earnings growth.

PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
Fund invests at least 65% of its total assets in equity securities (common
stocks, preferred stocks and securities convertible to common or preferred
stocks) believed to offer the potential for capital appreciation. These
securities include stocks of companies that are experiencing above-average
earnings growth.

In addition, the Fund may invest in options and futures contracts, obligations
issued or guaranteed by the U.S. Government, corporate bonds, short-term debt
obligations, warrants, foreign currencies and related instruments, securities of
foreign issuers, money market instruments, mortgage-backed securities,
collateralized mortgage obligations and asset-backed securities. The Fund may
also loan its portfolio securities, make short sales, enter into forward
commitments and repurchase agreements and purchase illiquid securities.

You could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk

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<PAGE>

The Fund is also subject to other risks, including credit risk, currency risk,
derivatives risk, foreign risk, leveraging risk, liquidity risk, money market
risk and smaller company risk.

ANNUAL PERFORMANCE

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

[legend: Annual Return, -5, 0, 5, 10, 15, 20, 25, 30, 35]

16.06% -1.11% 28.37% 18.88% 31.22% 35.58%
1993 1994 1995 1996 1997 1998

During the periods shown above, the highest quarterly return was 28.46% (for the
quarter ended 12/31/98), and the lowest was -12.43% (for the quarter ended
9/30/98). From January 1, 1999 through September 30, 1999, the Fund's return was
____%.

The table shows how the Fund's average annual returns for one year, five years
and inception-to-date compare to those of the Standard & Poor's Composite Index
of 500 Stocks. This is a widely recognized, unmanaged index of U.S. common
stocks.

AVERAGE ANNUAL TOTAL RETURNS (for periods ended December 31, 1998)

Since
Inception
Past 1 Year Past 5 Years (7/1/92)
Preferred Growth Fund 30.26% 28.09% 23.15%
S&P 500 Index 22.72% 27.86% 21.61%

PREFERRED VALUE FUND

OBJECTIVE: The Preferred Value Fund seeks its objective of capital appreciation
and current income by investing primarily in equity securities that are believed
to be undervalued and that offer above-average potential for capital
appreciation.

Principal Investment Strategies and Risks: Under normal market conditions, the
Fund invests at least 65% of its total assets in equity securities (common
stocks, preferred stocks and securities convertible to common or preferred
stocks) believed to be undervalued, thereby offering above-average potential for
capital appreciation. The Fund is built one stock at a time by conducting
in-depth research to identify companies believed to have strong businesses and
that are selling at reasonable prices.

You could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk

The Fund is also subject to other risks, including credit risk, currency risk,
derivatives risk, foreign risk, leveraging risk, liquidity risk, money market
risk and smaller company risk.

-2-
<PAGE>

ANNUAL PERFORMANCE

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

[legend: Annual Return, -5, 0, 5, 10, 15, 20, 25, 30, 35]

8.79 0.48 37.71 25.31 28.02 14.31
1993 1994 1995 1996 1997 1998

During the periods shown above, the highest quarterly return was 17.13% (for the
quarter ended 12/31/98), and the lowest was -15.82% (for the quarter ended
9/30/98). From January 1, 1999 through September 30, 1999, the Fund's return was
____%.

Average Annual Total Returns (for periods ended December 31, 1998)

Since
Inception
Past 1 Year Past 5 Years (7/1/92)
Preferred Value Fund 6.52% 22.84% 18.46%
S&P 500 Index 22.72% 27.86% 21.61%

Preferred International Fund

Objective: The Preferred International Fund seeks its objective of long-term
capital appreciation by investing primarily in equity securities traded
principally on markets outside the United States.

Principal Investment Strategies and Risks: The International Fund invests
primarily in equity securities (common stocks, preferred stocks and securities
convertible to common or preferred stocks) traded principally outside the United
States, including emerging markets, believed to be undervalued and thereby
offering above-average potential for capital appreciation. Under normal market
conditions, the International Fund invests at least 65% of its total assets in
at least three countries, not including the United States.

In addition, the Fund may invest in options and futures contracts, corporate and
government bonds (including domestic bonds), bankers' acceptances or negotiable
bank certificates of deposit issued by banks, prime commercial paper, foreign
currencies and related instruments, money market instruments, mortgage-backed
securities, collateralized mortgage obligations and asset-backed securities. The
Fund may also loan its portfolio securities, make short sales, enter into
forward commitments and repurchase agreements and purchase illiquid securities.

You could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:
o Management Risk
o Foreign Risk
o Currency Risk

The Fund is also subject to other risks, including credit risk, derivatives
risk, leveraging risk, liquidity risk, market risk, money market risk and
smaller company risk.

ANNUAL PERFORMANCE

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

-3-

<PAGE>

[legend: Annual Return, -5, 0, 5, 10, 15, 20, 25, 30, 35]

41.53% 3.27% 9.93% 17.14% 6.78% 10.55%
1993 1994 1995 1996 1997 1998

During the periods shown above, the highest quarterly return was 16.00% (for the
quarters ended 12/31/93 and 3/31/98), and the lowest was -16.07% (for the
quarter ended 9/30/98). From January 1, 1999 through September 30, 1999, the
Fund's return was ____%.

The table shows how the Fund's average annual returns for one year, five years
and inception-to-date compare to those of the Europe, Australasia & Far East
Index (EAFE). This index contains over 1,000 stocks from 20 different countries
with Japan, the United Kingdom, France and Germany being the most heavily
weighted.

Average Annual Total Returns (for periods ended December 31, 1998)

Since
Inception
Past 1 Year Past 5 Years (7/1/92)
Preferred International Fund 7.17% 11.29% 11.03%
EAFE 7.92% 8.52% 11.41%

PREFERRED SMALL CAP FUND

OBJECTIVE: The Preferred Small Cap Fund seeks its objective of long-term capital
appreciation through investments in companies with small equity capitalizations.

PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
Fund invests at least 65% of its total assets in equity securities (common
stocks, preferred stocks and securities convertible to common or preferred
stocks) of small-capitalization companies. (Small-capitalization companies are
generally defined as companies with equity capitalizations of less than $1
billion.)

In addition, the Fund may invest in options and futures contracts, equity and
equity-related securities of large-capitalization issuers, obligations issued or
guaranteed by the U.S. Government, corporate bonds, short-term debt obligations,
warrants, foreign currencies and related instruments, securities of foreign
issuers, money market instruments, mortgage-backed securities, collateralized
mortgage obligations and asset-backed securities. The Fund may also loan its
portfolio securities, make short sales, enter into forward commitments and
repurchase agreements and purchase illiquid securities.

You could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk
o Liquidity Risk

The Fund is also subject to other risks, including credit risk, currency risk,
derivatives risk, foreign risk, leveraging risk, money market risk and smaller
company risk.

ANNUAL PERFORMANCE

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

[legend: Annual Return, -20, -10, 0, 10, 20, 30, 40]

-4-
<PAGE>

20.44 31.42 -5.01
1996 1997 1998

During the periods shown above, the highest quarterly return was 22.20% (for the
quarter ended 9/30/97), and the lowest was -22.96% (for the quarter ended
9/30/98). From January 1, 1999 through September 30, 1999, the Fund's return was
____%.

The table shows how the Fund's average annual returns for one year, three years
and inception-to-date compare to those of the Russell 2000 Index. This index
contains the 2,000 smallest of the 3,000 largest U.S. domiciled corporations,
ranked by market capitalization.

AVERAGE ANNUAL TOTAL RETURNS (for periods ended December 31, 1998)

Since
Inception
Past 1 Year Past 3 Years (11/1/95)
Preferred Small Cap Fund -19.26% 8.74% 10.65%
Russell 2000 Index 1.50% 11.21% 14.13%

PREFERRED ASSET ALLOCATION FUND

OBJECTIVE: The Preferred Asset Allocation Fund seeks its objective of both
capital appreciation and current income by allocating its assets among stocks,
bonds and high quality money market instruments.

PRINCIPAL INVESTMENT STRATEGIES AND RISKS: The Fund allocates its assets among
stocks, bonds and money market instruments. Mellon Capital Management
Corporation and PanAgora Asset Management each manage approximately one-half of
the Fund's assets (although these proportions may vary due to differential
performance). All amounts received by the Fund for sales of its shares and paid
by the Fund for redemptions of its shares are split evenly between Mellon and
PanAgora. The portions of the Fund's assets invested in stocks, bonds and money
market instruments vary from time to time in light of changes in interest rates
and other economic factors. The Fund may invest in any combination of these
asset classes without limit.

In addition, the Fund may invest in options and futures contracts, common
stocks, long-term U.S. Treasury bonds, money market instruments, foreign
currencies and related instruments, securities of foreign issuers,
mortgage-backed securities, collateralized mortgage obligations and asset-backed
securities. The Fund may also loan its portfolio securities, make short sales,
enter into forward commitments and repurchase agreements and purchase illiquid
securities.

You could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:

o Management Risk
o Market Risk
o Interest Rate Risk
o Derivatives Risk

The Fund is also subject to other risks, including credit risk, currency risk,
foreign risk, leveraging risk, liquidity risk, money market risk and smaller
company risk.

Annual Performance

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

[legend: Annual Return, -5, 0, 5, 10, 15, 20, 25, 30, 35]

-5-
<PAGE>

10.60 -2.51 32.79 15.17 20.92 37.01
1993 1994 1995 1996 1997 1998

During the periods shown above, the highest quarterly return was 15.97% (for the
quarter ended 12/31/98), and the lowest was -4.60% (for the quarter ended
3/31/94). From January 1, 1999 through September 30, 1999, the Fund's return was
____%.

The table shows how the Fund's average annual returns for one year, five years
and inception-to-date compare to those of the 65/30/5 Blended Index. This index
is composed of the S&P 500 Index (65%); the Lehman Brothers Long-Term Treasury
Index (30%); and the 90-Day Treasury Bill benchmark (5%).

The S&P 500 Index is the most common index for the overall U.S. stock market. It
comprises 500 of the leading U.S. companies representing major industries. The
Lehman Brothers Long-Term Treasury Index is a market-weighted index of all
publicly held Treasury issues with maturities greater than 10 years. The 90-Day
Treasury Bill benchmark is a performance calculation using recently issued
90-Day Treasury Bills.

AVERAGE ANNUAL TOTAL RETURNS (for periods ended December 31, 1998)

Since
Inception
Past 1 Year Past 5 Years (7/1/92)
Preferred Asset Allocation Fund 17.22% 19.98% 15.77%
65/30/5 Blended Index 15.23% 21.91% 17.08%

PREFERRED FIXED INCOME FUND

OBJECTIVE: The Preferred Fixed Income Fund seeks its objective of a high level
of current income consistent with investment in a diversified portfolio of high
quality debt securities.

PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
Fund invests at least 65% of its total assets in fixed-income securities. The
Fund invests primarily in publicly traded domestic debt securities (such as U.S.
Treasury and agency obligations, mortgage-backed securities and corporate debt
securities).

In addition, the Fund may invest in options and futures contracts, corporate
private placements, directly placed mortgage obligations, preferred stocks,
foreign currency-denominated bonds, money market instruments, foreign currencies
and related instruments, securities of foreign issuers, mortgage-backed
securities, collateralized mortgage obligations and asset-backed securities. The
Fund may also loan its portfolio securities, make short sales, enter into
forward commitments and repurchase agreements and purchase illiquid securities.

You could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:
o Management Risk
o Interest Rate Risk
o Market Risk
o Credit Risk
o Derivatives Risk

The Fund is also subject to other risks, including currency risk, foreign risk,
leveraging risk, liquidity risk, money market risk and smaller company risk.

ANNUAL PERFORMANCE

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

-6-

<PAGE>

[legend: Annual Return, -3, -1, 1, 3, 5, 7, 9, 11, 13, 15, 17]

10.31% -2.38% 17.65% 2.99% 8.45% 6.97%
1993 1994 1995 1996 1997 1998

During the periods shown above, the highest quarterly return was 6.10% (for the
quarter ended 6/30/99), and the lowest was -2.20% (for the quarters ended
3/31/94 and 3/31/96). From January 1, 1999 through September 30, 1999, the
Fund's return was ____%.

The table shows how the Fund's average annual returns for one year, five years
and inception-to-date compare to those of the Salomon Brothers Broad Investment
Grade Index (BIG). This index contains 5,000 U.S. Treasury, Agency, mortgage and
corporate bonds. Credit quality must be investment grade (AAA-BBB by Standard &
Poor's).

AVERAGE ANNUAL TOTAL RETURNS (for periods ended December 31, 1998)

Since
Inception
Past 1 Year Past 5 Years (7/1/92)
Preferred Fixed Income Fund 1.06% 6.81% 6.54%
BIG Index 3.12% 7.82% 7.06%

PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND

OBJECTIVE: The Preferred Short-Term Government Securities Fund seeks its
objective of high current income, consistent with preservation of capital,
primarily through investment in U.S. Government securities.

PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
Fund invests at least 65% of its total assets in securities issued or guaranteed
by the U.S. Government and its agencies, authorities or instrumentalities, and
related purchase agreements. Some of these U.S. Government securities, such as
U.S. Treasury bills, notes and bonds, mortgage participation certificates
guaranteed by the Government National Mortgage Association ("Ginnie Mae"), and
Federal Housing Administration debentures, are supported by the full faith and
credit of the United States.

In addition, the Fund may loan its portfolio securities, make short sales, enter
into forward commitments and repurchase agreements and purchase illiquid
securities. The Fund may also purchase securities on a when-issued basis, money
market instruments, mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities.

You could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:
o Management Risk
o Interest Rate Risk
o Market Risk

The Fund is also subject to other risks, including credit risk, currency risk,
foreign risk, leveraging risk, liquidity risk, money market risk and smaller
company risk.

Annual Performance

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

[legend: Annual Return, -1, 0, 1, 2, 3, 4, 5, 6, 7, 8, 9]

-7-
<PAGE>

5.57% -0.69% 9.08% 4.71% 6.18% 4.76%
1993 1994 1995 1996 1997 1998

During the periods shown above, the highest quarterly return was 2.90% (for the
quarter ended 6/30/95), and the lowest was -0.90% (for the quarter ended
3/31/94). From January 1, 1999 through September 30, 1999, the Fund's return was
____%.

The table shows how the Fund's average annual returns for one year, five years
and inception-to-date compare to those of the Merrill Lynch 1-3 Year Treasury
Index. This is an index composed primarily of U.S. Treasury notes and bonds with
remaining maturities of one to three years.

Average Annual Total Returns (for periods ended December 31, 1998)

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Since
Inception
Past 1 Year Past 5 Years (7/1/92)
Preferred Short-Term Government Securities Fund 3.27% 5.12% 4.67%
Merrill Lynch 1-3 Year Treasury Index 5.08% 6.32% 5.67%
</TABLE>

PREFERRED MONEY MARKET FUND

OBJECTIVE: The Preferred Money Market Fund seeks its objective of the maximum
current income believed to be consistent with preservation of capital and
maintenance of liquidity by investing in short-term, fixed-income instruments.

PRINCIPAL INVESTMENT STRATEGIES AND RISKS: The Fund invests in a portfolio of
U.S. dollar-denominated, short-term, fixed income instruments, including:
short-term U.S. Government securities; certificates of deposit and bankers'
acceptances; prime commercial paper; high-quality, short-term corporate
obligations; and repurchase agreements with respect to U.S. Government
securities.

The Fund may also invest in Yankeedollar and Eurodollar obligations,
dollar-denominated commercial paper of foreign issuers, mortgage-backed
securities, collateralized mortgage obligations and asset-backed securities.

Although the Fund seeks to preserve the value of your investment at $1.00 per
share, you could lose money on your investment in the Fund, or the Fund could
underperform other investments due to the following principal risks:
o Management Risk
o Money Market Risk

ANNUAL PERFORMANCE

The bar chart below illustrates how the performance of the Fund has varied from
year to year.

[legend: Annual Return, -5, 0, 5, 10, 15, 20, 25, 30, 35]

2.62% 3.92% 5.77% 5.07% 5.16% 5.38%
1993 1994 1995 1996 1997 1998

During the periods shown above, the highest quarterly return was 1.40% (for the
quarters ended 3/31/95, 6/30/95, 9/30/95 and 12/31/95), and the lowest was 0.60%
(for the quarters ended ended 3/31/93, 6/30/93 and 9/30/93). From January 1,
1999 through September 30, 1999, the Fund's return was ____%.

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<PAGE>

The table shows how the Fund's average annual returns for one year, five years
and inception-to-date compare to those of IBC's Money Fund Report Average/All
Taxable, the benchmark used for taxable money market funds.

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DECEMBER 31, 1998)

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Since
Inception
Past 1 Year Past 5 Years (7/1/92)
Preferred Money Market Fund 4.89% 5.20% 4.51%
IBC's Money Fund Report Average/All Taxable 4.67% 4.99% 4.38%
</TABLE>

SUMMARY OF PRINCIPAL RISKS

Many factors can affect the value of your investment in a Preferred Group Fund.
This summary covers the principal risks that may affect a Fund's value.

CREDIT RISK
This is the risk that the issuer or the guarantor of a fixed-income security, or
the counterparty to an over-the-counter transaction (including repurchase
agreements and derivatives contracts), will be unable or unwilling to make
timely payments of interest or principal, or to otherwise honor its obligations.
The degree of risk for a particular security may be reflected in its credit
rating. Credit risk is greater for funds, such as the Fixed Income Fund, that
invest in lower-rated or similar unrated securities ("junk bonds"). Junk bonds
have speculative elements or are predominately speculative credit risks. Foreign
investments are also subject to increased credit risk because of the
difficulties of requiring foreign entities to honor their contractual
commitments, and because a number of foreign governments and other issuers are
already in default. Each of the Funds is affected by credit risk.

CURRENCY RISK
This is the risk that fluctuations in the exchange rates between the U.S. dollar
and foreign currencies may negatively affect the value of any Fund, such as the
Growth, Value, Small Cap, Asset Allocation and Fixed Income Funds and, in
particular, the International Fund, that invests in securities denominated in,
and receiving revenues in, foreign currencies.

DERIVATIVES RISK
Derivatives are financial contracts in which value depends on, or is derived
from, the value of an underlying asset, reference rate, or index. Derivatives
are sometimes used as part of a strategy designed to reduce (hedge) other risks.
Generally, however, derivatives are used to earn income, enhance yield and
increase diversification, all of which entail greater risk than if used solely
for hedging purposes.

In addition to risks such as the credit risk of the counterparty, derivatives
involve the risk of mistakes in pricing and valuation and the risk that changes
in the value of the derivative may not correlate perfectly with the relevant
assets, rates or indices. Each of the Funds, other than the Short-Term
Government Securities and Money Market Funds, is subject to this risk.

FOREIGN RISK
Foreign securities may exhibit more extreme changes in value than securities of
U.S. companies. The securities markets of many foreign countries are relatively
small, with a limited number of companies representing a small number of
securities. In addition, foreign companies usually are not subject to the same
degree of regulation as U.S. companies.

Reporting, accounting and auditing standards of foreign countries differ, in
some cases significantly, from U.S. standards. Nationalization, expropriation or
confiscatory taxation, currency blockage, political changes

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<PAGE>

or diplomatic developments could adversely affect a Fund's investments in a
foreign country. In the event of nationalization, expropriation or other
confiscation, a Fund could lose its entire investment.

Investments in emerging market countries are likely to involve significant
risks. These countries are generally more likely to experience political and
economic instability. Each of the Funds is subject to this risk.

LEVERAGING RISK
When a Fund is borrowing money or otherwise leveraging its portfolio, the value
of an investment in that Fund will be more volatile and all other risks will
tend to be compounded. Funds take on leveraging risk when they borrow money to
meet redemption requests, invest collateral from securities loans or use reverse
repurchase agreements, forward commitments, inverse floating rate investments or
derivatives. All Funds are subject to this risk.

LIQUIDITY RISK
Liquidity risk exists when particular investments are difficult to purchase or
sell, possibly preventing a Fund from selling investments at an advantageous
price. Derivatives and securities involving substantial interest rate and credit
risk tend to involve greater liquidity risk. In addition, liquidity risk tends
to when a Fund invests in debt securities whose sale may be restricted by law or
by contract. All Funds are subject to this risk.

MANAGEMENT RISK
Caterpillar Investment Management Ltd. and the subadvisers to the Preferred
Group apply their investment techniques and risk analyses in making investment
decisions for the Funds, but there can be no guarantee that their decisions will
produce the desired results. In some cases, derivative and other investment
techniques may be unavailable or a Fund may not use them, possibly even under
market conditions where their use would have benefited the Fund. Because they
are actively managed, all Preferred Funds are subject to management risk.

MARKET RISK
Each of the Funds is subject to market risk, which is the general risk of
unfavorable changes in the market value of a Fund's portfolio securities. Those
Funds that invest in equity securities are exposed to the risk of changes in the
value of equity securities. Those risks include the risks of broader market
declines as well as more specific risks affecting the issuers, such as
management performance, financial leverage, industry problems and reduced demand
for the issuer's goods or services.

Another aspect of market risk affecting all of the Funds is interest rate risk.
As interest rates rise, your investment in a Fund is likely to be worth less
because its income-producing equity or debt investments are likely to be worth
less. Even Funds such as the Short-Term Government Securities Fund and the Money
Market Fund are subject to interest rate risk, even though they generally invest
substantial portions of their assets in the highest quality debt securities,
such as U.S. Government securities. Interest rate risk is generally greater for
Funds that invest in debt securities with longer maturities. This risk is
usually compounded for Funds that invest significantly in mortgage-backed or
other asset-backed securities that may be prepaid. These securities have
variable maturities that tend to lengthen when that is least desirable--when
interest rates are rising.

MONEY MARKET RISK
While the Money Market Fund is designed to be a relatively low risk investment,
it is not entirely free of risk. The Fund may not be able to maintain a net
asset value of $1.00 per share, as a result of deterioration in the credit
quality of issuers whose securities the Fund holds, or an increase in interest
rates. In addition, the Fund is still subject to the risk that the value of your
investment may be eroded over time by inflation. All Funds are subject to this
risk.

SMALLER COMPANY RISK

-10-
<PAGE>

Market risk and liquidity risk are particularly pronounced for stock of
companies with relatively small market capitalizations. These companies may have
limited product lines, markets or financial resources, or they may depend on a
few key employees. The Growth and Small Cap Funds in particular have exposure to
this risk.

SCHEDULE OF FUND EXPENSES

Shareholder Transaction Expenses (All Funds)

Maximum sales load imposed on purchases.......................... NONE

Maximum sales load imposed on reinvested dividends............... NONE

Exchange fees.................................................... NONE

Maximum contingent deferred sales charge......................... NONE

Redemption fees.................................................. NONE

ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<CAPTION>
<S> <C> <C> <C>
TOTAL FUND
FUND MANAGEMENT FEES OTHER EXPENSES OPERATING EXPENSES

Growth .75% .08% .83%
Value .75% .09% .84%
International .95% .25% 1.20%
Small Cap .75% .17% .92%
Asset Allocation .70% .19% .89%
Fixed Income .50% .15% .65%
Short-Term Gov't Securities .35% .20% .55%
Money Market .30% .15% .45%
</TABLE>

The purpose of the preceeding table is to assist in understanding the various
costs and expenses of The Preferred Group that are paid indirectly by
shareholders.

EXAMPLE: Your investment of $10,000 would incur the following expenses assuming
5% annual return and redemption at the end of each period:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS

Growth $85 265 460 1,025
Value 86 268 466 1,037
International 122 381 660 1,455
Small Cap 94 293 509 1,131
Asset Allocation 91 284 493 1,096
Fixed Income 68 214 373 835
Short-Term Government Securities 56 176 307 689
Money Market 46 144 252 567
</TABLE>

NOTE: The figures shown in the example above are hypothetical. They are not
representations of past or future performance or expenses; actual performance
and/or expenses may be greater or less than shown.

-11-
<PAGE>

INVESTMENT POLICIES

The investment policies of each Fund are stated on the following pages.

PREFERRED GROWTH FUND

When selecting securities for purchase or sale, the subadvisor, Jennison
Associates LLC, considers a variety of factors, including a company's earnings
and revenue growth, profitability, financial condition, the company's business
franchise and market position, strength and experience of its management group,
research and development practices, and marketing strength and capability.

PREFERRED VALUE FUND

The subadvisor, Oppenheimer Capital, seeks to identify companies that have three
basic traits:

1. They have a competitive advantage versus other companies within their
industries, a feature that will enable them to sustain their profitability.

2. They have capable management teams who focus on working hard for shareholders
through effective use of discretionary cash, such as reinvesting in
profitable business activities, making astute acquisitions and paying
dividends.

3. Their stocks can be purchased at favorable prices.

In short, the Fund's focus is on investments in companies that Oppenheimer
Capital believes are selling at reasonable valuations and have solid
fundamentals to support their businesses in good economic times and bad, with
strong prospects for the long term.

PREFERRED INTERNATIONAL FUND

The approach of the subadvisor, Mercator Asset Management, L.P., is to identify
attractive, undervalued securities and to select those that have good earnings
prospects. Using strict valuation criteria, the Mercator universe is ranked by
deciles; the high-ranking stocks are buy candidates and the low-ranking stocks
are sell candidates.

In addition to the principal investments listed above, the Fund may invest in:

1. Bankers' acceptances or negotiable bank certificates of deposit issued by
U.S. or foreign banks having outstanding debt rated at least A by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's ("S&P") or, if not
so rated, of equivalent quality as determined by Mercator;

2. Prime commercial paper issued by companies having an outstanding debt issue
rated at least A or Prime-2 by Moody's or A or A-2 by S&P or, if not rated,
of comparable quality as determined by Mercator;

3. High-grade short-term corporate obligations rated at least A by Moody's or
S&P.

PREFERRED SMALL CAP FUND

In selecting securities for the Fund, Caterpillar Investment Management Ltd.
("CIML") seeks out small-capitalization companies according to such factors as
earnings, price/cash flow ratio, market price/book value ratio and
earnings/price ratio.

In addition to the principal investments listed above, the Fund may invest in
other securities, including equity and equity-related securities of
large-capitalization issuers, obligations issued or guaranteed by the U.S.
Government or its agencies, authorities or instrumentalities, corporate bonds
rated at least A by Moody's

-12-
<PAGE>

or S&P at the time of purchase, and short-term debt obligations rated at least
Prime-2 by Moody's or A-2 by S&P at the time of purchase. If corporate bonds or
short-term debt obligations do not have these ratings, they must be of at least
equivalent quality as determined by CIML.

PREFERRED ASSET ALLOCATION FUND

Two subadvisors, Mellon Capital Management Corporation and PanAgora Asset
Management, manage the Preferred Asset Allocation Fund.

HOW MELLON MANAGES THE FUND. Mellon allocates the Fund's assets based on
expected returns, risks and risk/return correlations among the three asset
classes.

The Fund may invest in common stocks that are in the S&P 500 Index, long-term
U.S. Treasury bonds and money market instruments. The Fund's money market
investments are limited to short-term investments meeting one of the following
criteria:

1. Rated Prime-1 by Moody's or A-1 by S&P at the time of purchase;

2. Unrated securities that Mellon determines to be of a quality comparable to
Moody's Prime-1 or S&P's A-1 ratings; or

3. Repurchase agreements with respect to U.S. Government securities.

Mellon may use financial futures and related options to achieve a substantial
portion of the Fund's exposure to the stock and bond markets. For instance,
Mellon may increase the Fund's exposure to stocks by investing in S&P 500
futures contracts. Similarly, Mellon may increase the Fund's exposure to bonds
by investing in futures contracts on U.S. Treasury bonds. The Fund may make
other types of investments, such as in asset-backed securities.

HOW PANAGORA MANAGES THE FUND. PanAgora's proprietary asset allocation
discipline provides percentage guidelines for a mix of holdings among stocks,
bonds and money market instruments. These guidelines are established by
comparing the expected performance for each investment class with its current
performance (as measured by the S&P 500, the Lehman Brothers Long-Term Treasury
Index; and 3-month and 1-year Treasury bills, respectively). PanAgora forecasts
the return of each class through a proprietary mix of value, economic, monetary
and sentiment indicators.

In selecting stocks for the Fund, PanAgora generally purchases stocks in order
to replicate the S&P 500 Index.

In selecting bonds, the Fund invests in highly liquid securities that are issued
by the U.S. Government and included in the Lehman Brothers Long-Term Treasury
Index. PanAgora generally selects bonds to match the Lehman Index in maturity,
quality, sector and coupon characteristics. Typically, the average maturity of
these securities is approximately 30 years, although the Fund may invest in
securities with longer or shorter maturities at the discretion of PanAgora.

PanAgora may achieve a substantial portion of the Fund's exposure to the stock
and bond markets using financial futures and related options.

For money market instruments, the Fund invests in U.S. Government obligations,
bank certificates of deposit and time deposits, bankers' acceptances, prime
commercial paper, high-grade short-term corporate obligations and repurchase
agreements for these instruments.

PREFERRED FIXED INCOME FUND

The subadvisor, J.P. Morgan Investment Management Inc., may invest in any
security which is rated, at the time of purchase, at least Baa by Moody's or BBB
by S&P, or in any unrated security that Morgan determines is of comparable
quality. In addition, it may invest up to 5% of its assets in any security which
is

-13-
<PAGE>

rated, at the time of purchase, below Baa by Moody's or BBB by S&P, or in any
unrated security that Morgan determines is of comparable quality.

The Fund may, however, invest in any fixed income securities such as corporate
private placements, directly-placed mortgage obligations and foreign currency
denominated bonds, and including, for this purpose, preferred stocks. For
temporary or defensive purposes, Morgan may also invest in money market
instruments.

The Fund allocates its investments among different fixed income security market
sectors based on the relative attractiveness of each sector. Following these
sector allocations, Morgan purchases securities it believes are attractively
valued within these sectors.

Under normal market conditions, Morgan manages the Fund's portfolio subject to
the following investment guidelines:

1. Minimum average dollar-weighted credit quality of the portfolio (excluding
short-term investments) of A as rated by either Moody's or S&P. To calculate
this average credit requirement, instruments that are not rated are assigned
a rating by Morgan.

2. Minimum credit quality for short-term investments at the time of purchase of
Prime-1 as rated by Moody's or A-1 as rated by S&P.

The Fund's portfolio generally has a duration of no less than three years and no
more than seven years (excluding short-term investments). The duration of a
fixed income security is the weighted average maturity, expressed in years, of
the present value of all future cash flows, including coupon payments and
principal repayments.

Securities rated lower than A by either Moody's or S&P have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to late or defaulted payments on these obligations than on
higher-rated securities. If the rating of any security held by the Fund falls
below its rating at the time of purchase, the Fund is not obligated to dispose
of it.

The Fund's debt securities may include corporate or U.S. Government zero-coupon
securities of any maturity; securities such as Government National Mortgage
Association ("Ginnie Mae") certificates, which represent ownership interests in
mortgage pools; and securities backed by commercial mortgages, including
mortgages on a single property.

PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND

In selecting securities for the Fund, Caterpillar Investment Management Ltd.
("CIML") invests primarily in securities issued or guaranteed by the U.S.
Government and its agencies, authorities or instrumentalities. In order to
reduce risk, the Fund maintains an average dollar-weighted portfolio maturity of
not more than three years, and it typically purchases securities with remaining
maturities of less than five years.

U.S. Government securities are supported by the discretionary authority of the
U.S. Government to purchase the issuer's obligations or by the right of the
issuer to borrow from the U.S. Treasury. The U.S. Treasury is under no legal
obligation, however, to purchase securities or to make loans. Still other
securities are supported only by the credit of a government agency or similar
body.

Bodies whose obligations are not backed by the full faith and credit of the U.S.
Government include the Federal National Mortgage Association ("Fannie Mae"),
Federal Home Loan Banks, the Tennessee Valley Authority, the Bank for
Cooperatives and the Federal Home Loan Mortgage Corporation. A significant
portion of the Fund's portfolio may consist of Ginnie Mae mortgage-backed
certificates and other U.S. Government securities representing ownership
interests in mortgage pools.

-14-
<PAGE>

U.S. Government securities generally do not involve the credit risks associated
with investments in other types of fixed income securities. As a result, the
yields from U.S. Government securities are generally lower than the yields from
otherwise comparable corporate fixed income securities.

The Fund's debt securities may include U.S. Government zero-coupon securities of
any maturity and securities such as Ginnie Mae certificates, which represent
ownership interests in mortgage pools.

PREFERRED MONEY MARKET FUND

The subadvisor, J.P. Morgan Investment Management Inc., invests in a portfolio
of U.S. dollar-denominated, short-term, fixed income instruments. All of the
Fund's investments have remaining maturities of 397 days or less at the time of
investment. The average dollar-weighted maturity of the Fund's portfolio is 90
days or less. The Fund's investments are limited to those which, in accordance
with standards established by The Preferred Group's trustees, are believed to
present minimal credit risk. The Money Market Fund may invest up to 100% of its
assets in bank obligations.

Because of the high quality and short maturity of the Fund's investments, the
Fund's yield may be lower than that of funds investing in lower-rated securities
and securities of longer maturities. Unlike investments that pay a fixed yield
for a stated period of time, yields of money market funds fluctuate.

GENERAL POLICIES AND RISK CONSIDERATIONS

PORTFOLIO TURNOVER

Portfolio turnover is not a limiting factor in investment decisions. High
portfolio turnover involves higher brokerage commissions and other transaction
costs on the sale of securities and reinvestment in other securities that are
borne directly by the Funds. These transactions may also result in the
realization of taxable capital gains. Portfolio turnover rates for the life of
each Fund are shown in the section "Financial Highlights."

MONEY MARKET INSTRUMENTS

The money market instruments in which the Money Market Fund may invest include:

1. Short-term U.S. Government securities.

2. Certificates of deposit, bankers' acceptances and other bank obligations
rated in the two highest rating categories by at least two major rating
agencies or, if rated by only one major agency, in that agency's two highest
grades, or unrated but determined to be comparable by CIML or Morgan. Bank
obligations must be those of a bank that has deposits in excess of $2 billion
or that is a member of the Federal Deposit Insurance Corporation. The Fund
may invest in obligations of U.S. branches or subsidiaries of foreign banks
("Yankeedollar obligations") or foreign branches of U.S. banks ("Eurodollar
obligations").

3. Commercial paper rated in the two highest rating categories by at least two
major rating agencies or, if rated by only one major agency, in that agency's
two highest grades or, if not rated, of comparable quality as determined by
the subadviser to the Fund according to procedures approved by The Preferred
Group's Trustees.

4. Corporate obligations with an initial maturity of over 397 days but a
remaining maturity of 397 days or less whose issuers have outstanding
short-term debt obligations rated in the highest rating category by at least
two major rating agencies or, if rated by only one major agency, in that
agency's highest grade.

5. Repurchase agreements with domestic commercial banks or registered
broker-dealers.

For temporary defensive purposes, each of the other Funds may also invest all or
a portion of its assets in the above kinds of money market instruments. However,
determinations of the quality of unrated securities may be made by each Fund's
subadviser.

-15-
<PAGE>

OPTIONS AND FUTURES TRANSACTIONS; FOREIGN CURRENCY TRANSACTIONS

Each Fund (except the Short-Term Government Securities Fund and the Money Market
Fund) may engage in a variety of transactions involving options and futures
contracts, which are commonly known as "derivative securities," for hedging,
dividend accruals and portfolio allocation purposes.

In order to hedge against possible variations in foreign exchange rates pending
the settlement of securities transactions, each of the Funds (other than the
Short-Term Government Securities and Money Market Funds) may buy or sell foreign
currencies or may deal in forward foreign currency contracts; that is, agree to
buy or sell a specified currency at a specified price and future date. These
Funds may also invest in currency futures contracts and related options. If a
fall in exchange rates for a particular currency is anticipated, a Fund may, as
a hedge, sell a currency futures contract or a related call option or purchase a
related put option. If it is anticipated that exchange rates for a particular
currency will rise, a Fund may purchase a currency futures contract or a related
call option or sell (write) a related put option to protect against an increase
in the price of securities denominated in the currency the Fund intends to
purchase.

These futures contracts and related options are used only as a hedge against
anticipated currency rate changes, and all options on currency futures written
by the Funds are covered. These practices, however, may present risks different
from or in addition to the risks associated with investments in foreign
currencies.

RISK FACTORS OF FOREIGN INVESTMENTS

The Money Market Fund may invest all or any portion of its assets in
Yankeedollar and Eurodollar obligations and in dollar-denominated commercial
paper of foreign issuers. The Growth, Value, Small Cap, Asset Allocation and
Fixed Income Funds each may invest without limit in securities of foreign
issuers that are traded in domestic securities markets, and each may invest up
to 10% of its assets in securities traded principally in securities markets
outside the United States. (Eurodollar certificates of deposit are excluded from
these limitations.)

These investments, as well as investments of the International Fund in
securities of foreign issuers or securities principally traded abroad, may
involve certain special risks due to foreign economic, political and legal
developments. These developments may include unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation of assets, imposition of withholding taxes on dividend or interest
payments, and possible difficulty in obtaining and enforcing judgments against
foreign entities. Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers.

The securities of some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable U.S. companies
and U.S. securities markets, and certain foreign securities markets may be
subject to less governmental supervision than in the United States. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded abroad.

The International Fund may also invest in countries whose economies or
securities markets are not highly developed. Special considerations associated
with these investments (in addition to the considerations regarding foreign
investments generally) may include greater political uncertainty, an economy's
dependence on revenues from particular commodities or on international aid or
development assistance, currency transfer restrictions, a limited number of
potential buyers for these securities, and delays and disruptions in securities
settlement procedures.

If a Fund invests in foreign currency-denominated debt obligations and hedging
activities, its book income is likely to differ from its taxable income. This
difference may cause a portion of the Fund's income distributions to constitute
a return of capital for tax purposes or require the Fund to make distributions
exceeding book income to qualify as a "regulated investment company" for federal
tax purposes.

-16-
<PAGE>

LOANS OF PORTFOLIO SECURITIES
Each Fund (except the Money Market Fund) may lend its portfolio securities to
broker-dealers under contracts calling for collateral in cash, U.S. Government
securities or other high-quality debt securities equal to at least the market
value of the securities loaned. Each Fund would continue to benefit from
interest on the securities loaned and would also receive either interest,
through investment of cash collateral by the Fund in permissible investments, or
a fee. Securities lending involves the risk of loss of rights in the collateral
or delay in recovery of the collateral if the borrower fails financially.

SHORT SALES

Each Fund (except the Money Market Fund) may from time to time make short sales
involving securities held in the Fund's portfolio or which the Fund has the
right to acquire without further payment.

FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Short-Term Government Securities Fund may purchase U.S. Government
securities on a when-issued basis, and may purchase or sell these securities for
delayed delivery.

All Funds (except the Money Market Fund) may make contracts to purchase
securities for a fixed price at a future date beyond normal settlement time
("forward commitments").

All Funds may also enter into forward commitments to sell securities. The Funds
may simultaneously be obligated to forward commitment purchase and sale
contracts and may sell a portfolio security or enter into a forward commitment
sale contract (a "dollar-roll transaction") that is coupled with an agreement by
the Fund (including a forward commitment) to repurchase a similar, but not
identical, security at a later date. When-issued transactions, delayed delivery
purchases and forward commitments involve a risk of loss if the value of the
securities declines before the settlement date. This risk is in addition to the
risk that the value of the Fund's other assets may decline. No income accrues to
the purchaser of these securities before delivery.

REPURCHASE AGREEMENTS

Each of the Funds may enter into repurchase agreements with banks and
broker-dealers. Under a repurchase agreement, a Fund acquires a security
(usually an obligation of the U.S. Government) for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed-upon price and date. The resale price is greater than the acquisition
price and reflects an agreed-upon market rate unrelated to the coupon rate on
the purchased security. These transactions give the Fund an opportunity to earn
a return on temporarily available cash at no market risk, although there is a
risk that the seller may default in its obligation to pay the agreed-upon sum on
the redelivery date. Such a default may subject the Fund to expenses, delays and
risks of loss.

MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND ZERO-COUPON SECURITIES

Each of the Funds may invest in mortgage-backed securities, collateralized
mortgage obligations ("CMOs") and asset-backed securities. Interest and
principal payments (including prepayments) on the mortgages underlying
mortgage-backed securities are passed through to the holders of mortgage-backed
securities. Prepayments occur when the mortgagor on an individual mortgage
prepays the remaining principal before the mortgage's scheduled maturity date.
Because of the pass-through of prepayments of principal on the underlying
mortgages, mortgage-backed securities are often subject to more rapid prepayment
of principal than their stated maturity. Because the prepayment characteristics
of the underlying mortgages vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of pass-through
certificates.

Prepayments are important because they affect the yield and price of the
securities. During periods of declining interest rates, prepayments can be
expected to accelerate, and a Fund would be required to

-17-
<PAGE>

reinvest the proceeds at the lower interest rates then available. In addition,
prepayments of mortgages which underlie securities purchased at a premium could
result in capital losses because the premium may not have been fully amortized
at the time the obligation is prepaid. As a result of these principal prepayment
features, mortgage-backed securities that are U.S. Government securities are
generally more volatile investments than other U.S. Government securities. Also,
although the values of mortgage-backed securities generally fall when interest
rates rise, their potential for capital appreciation when interest rates are
falling is limited because of the prepayment feature.

CMOs, which are commonly considered to be "derivatives," are securities backed
by a portfolio of mortgages or mortgage-backed securities held under an
indenture agreement. The issuer's obligation to make interest and principal
payments is secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are issued with a number of classes or series which have
different maturities and which may represent interests in some or all of the
interest and/or principal on the underlying collateral. CMOs of different
classes are generally retired in sequence as the underlying mortgage loans in
the mortgage pool are repaid. If there are enough early prepayments on these
mortgages, the class or series of CMOs first to mature generally would be
retired prior to its maturity. Therefore, the early retirement of a particular
class or series of a CMO held by a Fund has the same effect as the prepayment of
mortgages underlying a mortgage-backed pass-through security.

Commercial mortgage-related securities are generally structured similarly to
pass-through securities or CMOs, although other structures are possible. They
may pay fixed or adjustable rates of interest. Commercial mortgage-related
securities are issued in public or private transactions by a variety of public
and private issuers.

The commercial mortgage loans that underlie commercial mortgage-related
securities have certain distinct risk characteristics. Commercial mortgage loans
generally lack standardized terms, which may complicate their structure.
Commercial properties tend to be unique and are more difficult to value than
single family residential properties. Commercial mortgage loans also tend to
have shorter maturities than residential mortgage loans. They also may not be
fully amortizing, which means that they may have a significant principal
balance, or "balloon" payment, due on maturity. Assets underlying commercial
mortgage-related securities may relate only to a few properties or a single
property. The risk involved in single property financings is highly
concentrated.

Asset-backed securities are structured like mortgage-backed securities, but
instead of mortgage loans or interests in mortgage loans, the underlying assets
may include motor vehicle installment sales or installment loan contracts,
leases of various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed securities to
enforce its security interest in the underlying assets may be limited, and
asset-backed securities are subject to prepayment risks similar to those
described above for mortgage-backed securities.

The Fixed Income and Short-Term Government Securities Funds may also invest in
"zero-coupon" U.S. Government securities. (Zero-coupon securities 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.)

The Fixed Income and Short-Term Government Securities Funds may also invest in
"IO/PO Strips" (certificates that represent undivided interests in "stripped"
U.S. Government securities and coupons). IO/PO Strips are usually structured
with two classes that receive different portions of the interest and principal
distributions on a pool of mortgage assets.

Zero-coupon securities and IO/PO Strips tend to be more volatile than other
types of U.S. Government securities. Mortgage-backed IO Strips involve the
additional risk of loss of the entire value of the investment if the underlying
mortgages are prepaid. IO/PO Strips that are U.S. Government securities backed
by fixed-rate mortgages may be considered liquid securities if so determined by
the subadviser under procedures approved by The Preferred Group's Trustees. All
other IO/PO Strips are considered illiquid. If either Fund invests in IO/PO
Strips that are "stripped" by private entities, these securities are not
considered to be U.S. Government securities.

-18-
<PAGE>

Zero-coupon securities may be issued by the U.S. Treasury or by a U.S.
Government agency or entity (such as the Student Loan Marketing Association or
the Resolution Funding Corporation). A Fund is required to accrue and distribute
income from zero-coupon securities on a current basis, even though it does not
receive that income currently in cash. Therefore the Fund may have to sell other
investments to obtain cash needed to make income distributions.

ILLIQUID SECURITIES

Each Fund may purchase "illiquid securities." This includes securities whose
disposition is restricted by the securities laws, so long as no more than a
fixed percentage of that Fund's net assets (determined by the SEC to be 15% (10%
for the Money Market Fund) as of the date of this Prospectus) would be invested
in these illiquid securities. There may be relatively few potential purchasers
for these securities, especially under adverse market or economic conditions or
if the financial condition of the issuer deteriorates.

A Fund could find it more difficult to sell these securities when CIML or the
subadviser believes it advisable to do so or may be able to sell these
securities only at prices lower than if the securities were not subject to
restrictions on disposition. At times, it may also be more difficult to
determine the fair value of these securities in computing a Fund's net asset
value. Illiquid securities include repurchase agreements maturing in more than
seven days, certain IO/PO Strips, over-the-counter options and assets used to
"cover" over-the-counter options written by a Fund (to the extent described
under "Options and Futures Transactions--OTC Options" in the Statement of
Additional Information).

Certain securities whose disposition is restricted by the securities laws, such
as securities eligible for resale to qualified institutions under Rule 144A and
privately-placed commercial paper, may be determined by CIML or the subadviser
to be liquid (and so not subject to the 15% or 10% limitations) under procedures
approved by the Preferred Group's Trustees. It is possible that, despite this
determination, there may be relatively few potential purchasers for these
securities and they may therefore be subject to the risks described above.

YEAR 2000 ISSUES

The Funds could be adversely affected if the computer systems used by CIML and
the Funds' other service providers do not properly process and calculate
date-related information relating to the end of this century and the beginning
of the next. While year 2000-related computer problems could have a negative
effect on the Funds, both in their operations and in their investments, CIML is
working to avoid such problems and to obtain assurances from service providers
that they are taking similar steps. No assurances, however, can be provided that
the Funds will not be adversely impacted by these matters.

ABOUT THE PREFERRED GROUP

MANAGEMENT OF THE PREFERRED GROUP

The Preferred Group is managed by Caterpillar Investment Management Ltd.
("CIML"), which provides investment advisery and portfolio management services
for The Preferred Group. CIML also provides executive and other personnel for
management of The Preferred Group. Pursuant to The Preferred Group's Agreement
and Declaration of Trust, the Trustees supervise the affairs of The Preferred
Group as conducted by CIML.

CATERPILLAR INVESTMENT MANAGEMENT LTD.

Caterpillar Investment Management Ltd. (CIML) is a Delaware corporation formed
on December 18, 1991. Its principal place of business is 411 Hamilton Boulevard,
Suite 1200, Peoria, Illinois 61602-1104. CIML is a wholly-owned subsidiary of
Caterpillar Inc., an international manufacturer of machinery and engines and
provider of financial products. In addition to managing the Funds, CIML serves
as an investment adviser to the Caterpillar Investment Management Ltd. Tax
Exempt Group Trust (the "Group Trust"). CIML has

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advised the Funds since inception and has experience managing portfolios of the
Group Trust that are similar to certain of the Funds.

For investment advisory services, each Fund pays a management fee to CIML, as
follows:

Growth .75%
Value .75%
International .95%
Small Cap .75%
Asset Allocation .70%
Fixed Income .50%
Short-Term Gov't Securities .35%
Money Market .30%

In turn, CIML pays a portion of the fee it receives from each Fund to the
subadvisor(s) of that Fund for its/their services.

THE SUBADVISERS

To assist it in carrying out its responsibility, CIML has retained various
subadvisers to provide advisory services to the Funds under the supervision of
CIML and The Preferred Group's Board of Trustees.

JENNISON provides investment advice to mutual funds, institutional accounts and
other entities. Its principal place of business is 466 Lexington Avenue, New
York, New York 10017. Jennison is a wholly-owned subsidiary of The Prudential
Insurance Company of America, a mutual insurance company and a registered
investment adviser.

OPPENHEIMER CAPITAL is a Delaware general partnership formed on July 1, 1987.
Its address is Oppenheimer Tower, World Financial Center, New York, New York
10281. Oppenheimer Capital provides investment advice to individuals, state and
local government agencies, pension and profit sharing plans, trusts, estates,
businesses and other organizations.

Oppenheimer Capital is a registered investment adviser with approximately $67
billion in assets under management as of June 30, 1998. Oppenheimer Capital is a
wholly-owned subsidiary of PIMCO Advisers L.P., a registered investment adviser.

MERCATOR provides investment advice to mutual funds and other entities. Its
principal place of business is 2400 East Commercial Blvd., Ft. Lauderdale,
Florida 33308. Mercator Asset Management, L.P. is a Delaware general partnership
owned by its executive officers and The Prudential Insurance Company of America,
a 20% limited partner.

MELLON, a Delaware corporation, is located at 595 Market Street, Suite 3000, San
Francisco, California 94105. Mellon was founded in 1983 and, as of June 30,
1998, manages over $68.2 billion in funds. Mellon is a wholly-owned, indirect
subsidiary of Mellon Bank Corporation, Pittsburgh, Pennsylvania, a bank holding
company which engages in the businesses of retail banking, wholesale banking and
service products. Mellon serves as an investment adviser and manager for
institutional clients.

PANAGORA'S principal place of business is 260 Franklin Street, Boston,
Massachusetts 02110. Fifty percent of the outstanding voting stock of PanAgora
is owned by each of Nippon Life Insurance Company, a mutual life insurance
company, and Putnam Investments, Inc. ("Putnam"). Putnam is owned by Marsh &
McLennan Companies, Inc., a publicly-owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management. PanAgora serves as an investment
adviser and manager to a variety of endowment funds, pension accounts, other
institutions and investment companies, with total assets under management in
excess of $17 billion.

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MORGAN provides investment advice to mutual funds and other entities. Its
principal place of business is 522 Fifth Avenue, New York, New York 10036.
Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, an
international financial services corporation.

PORTFOLIO MANAGERS

PREFERRED GROWTH FUND
SUBADVISER: Jennison Associates LLC ("Jennison")
PORTFOLIO MANAGER: Kathleen McCarragher
TITLE: Director, Executive Vice President and Domestic Equity Investment
Strategist
LAST FIVE YEARS EXPERIENCE: Managing Director and Director of Large Cap
Growth Equities at Weiss, Peck & Greer before joining Jennison in May 1998.
Kathleen assumed management of the Preferred Growth Fund in April 1999.
EDUCATION: B.B.A. in Finance - University of Wisconsin; M.B.A. - Harvard
Business School

PREFERRED VALUE FUND
SUBADVISER: Oppenheimer Capital
PORTFOLIO MANAGER: John G. Lindenthal
TITLE: Managing Director, Oppenheimer Capital
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Oppenheimer Capital. John
has managed the Preferred Value Fund since its inception on July 1, 1992.
EDUCATION: B.S., MBA--University of Santa Clara

PREFERRED INTERNATIONAL FUND
SUBADVISER: Mercator Asset Management, L.P. ("Mercator")
PORTFOLIO MANAGER: Peter F. Spano, CFA
TITLE: President, PXS Corp., General Partner
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Mercator. Pete has managed
the Preferred International Fund since its inception on July 1, 1992.
EDUCATION: BBA--St. John's University; MBA--Baruch College (City University
of New York); Chartered Financial Analyst

PREFERRED SMALL CAP FUND
PORTFOLIO MANAGER: Todd M. Sheridan, CFA
TITLE: Senior Portfolio Manager, CIML
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at CIML. Todd has been
involved in the management of the Preferred Small Cap Fund since its
inception on November 1, 1995.
EDUCATION: B.S.--University of Illinois; Chartered Financial Analyst

PREFERRED ASSET ALLOCATION FUND
SUBADVISERS: Mellon Capital Management Corporation ("Mellon") and PanAgora
Asset Management, Inc. ("PanAgora")

PORTFOLIO MANAGER: Thomas B. Hazuka
TITLE: Chief Investment Officer, Mellon
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Mellon. Tom has been
involved in the management of the Preferred Asset Allocation Fund since its
inception on July 1, 1992.
EDUCATION: B.S.--Stevens Institute of Technology; MBA--University of
Connecticut; Ph.D.--Stanford University

PORTFOLIO MANAGER: Edgar E. Peters

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<PAGE>

TITLE: Director of Asset Allocation and Chief Investment Strategist,
PanAgora
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at PanAgora. Ed has been
involved in the management of the Preferred Asset Allocation Fund since its
inception on July 1, 1992.
EDUCATION: B.S.--Montclair State College; MBA--Rutgers University

PREFERRED FIXED INCOME FUND
SUBADVISER: J.P. Morgan Investment Management Inc. ("Morgan")
PORTFOLIO MANAGER: Paul L. Zemsky, CFA
TITLE: Managing Director, Morgan
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Morgan. Paul has been
involved in the management of the Preferred Fixed Income Fund since January
1, 1994.
EDUCATION: B.S.E.E.--University of Pennsylvania

PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
PORTFOLIO MANAGER: Todd M. Sheridan, CFA
TITLE: Senior Portfolio Manager, CIML
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at CIML. Todd has managed the
Preferred Short-Term Government Securities Fund since June 1998 and
participated in the management of the Preferred Short-Term Government
Securities Fund from January 1, 1993, through June 28, 1995.
EDUCATION: B.S.--University of Illinois; Chartered Financial Analyst

PREFERRED MONEY MARKET FUND
SUBADVISER: J.P. Morgan Investment Management Inc. ("Morgan")
PORTFOLIO MANAGER: Robert (Skip) R. Johnson
TITLE: Vice President, Morgan
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Morgan. Skip has been
involved with the management of the Preferred Money Market Fund since its
inception on July 1, 1992.
EDUCATION: B.A.--Dartmouth College

DETERMINATION OF NET ASSET VALUE AND PRICING

NET ASSET VALUE

Net asset value per share (NAV), or share price, for each Fund is normally
determined on each day the New York Stock Exchange is open as of the close of
regular trading on the Exchange (generally 4:00 p.m. Eastern time). Fund share
prices (other than the Money Market Fund) can be found daily in most major
newspapers' mutual fund listings under the heading "Preferred Group."

PURCHASE SHARE PRICE

If your request is received on a regular business day before 4:00 p.m. (Eastern
time) in good order, your shares will be priced at that day's net asset value.
Requests received after 4:00 p.m. (Eastern time) will be priced at the next
day's net asset value. Requests to purchase shares on other than a regular
business day will be priced at the net asset value determined on the next
regular business day.

REDEMPTION SHARE PRICE

If your redemption request is received prior to 4:00 p.m. (Eastern time) in good
order on a regular business day, your shares will be priced at that day's net
asset value. Redemption proceeds will normally be sent on the following business
day. Redemption requests received after 4:00 p.m. (Eastern time) will be
processed on the business day following receipt.

EXCHANGE SHARE PRICE

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Exchanges are priced in the same manner as purchases and redemptions.

DETERMINATION OF NAV

Each Fund's share price is calculated by dividing the total value of each Fund's
assets, minus liabilities, by the total number of outstanding shares. Portfolio
securities, options and futures contracts for which market quotations are
readily available are valued at market value. Short-term obligations having
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market value. The portfolio investments of the Money Market Fund
are valued using the amortized cost method of valuation, in accordance with Rule
2a-7 under the Investment Company Act of 1940. All other securities and assets
are valued at their fair value as determined in good faith following procedures
approved by the Trustees.

GENERAL

Please note that The Preferred Group does not accept requests which specify a
particular date for purchases or redemptions, or which specify any special
conditions. We will notify you if your request cannot be accepted and provide
additional instructions.

YOUR PREFERRED GROUP ACCOUNT

HOW TO OPEN YOUR ACCOUNT

To open a new account, simply complete and return the New Account Registration
Form included with this Prospectus and mail with your check or money order. We
must have your correct Social Security or corporate tax identification number
and your signature. In order to open an account, you must meet the minimum
investment requirements described below.

A completed and signed application is required for each new account you open.
Redemptions are not permitted until your completed application is on file.

Purchase orders received by The Preferred Group by 4:00 p.m. (Eastern time) on
any regular business day are generally processed at that day's net asset value.
There are no sales commissions or 12b-1 fees.

All shareholders receive individual confirmations of each purchase, redemption,
dividend reinvestment, exchange or transfer of shares, including the total
number of shares owned as of the confirmation date.

If you have questions about the Funds or require additional assistance with the
New Account Registration Form, please call Investor Services at 1-800-662-4769.
We are happy to assist you.

The following account procedures may not be pertinent to institutional or
employer-sponsored retirement plan accounts. Please call 1-800-662-2465 for
information regarding such accounts.

HOW TO BUY SHARES

You can purchase shares of any Fund by using one of the four methods described
on the following pages.

For new accounts, please mail us your New Account Registration Form and check in
the return envelope provided. For additional investments, please write your
account number on your check and use the remittance form attached to your
confirmation statement. Mail your check in the return envelope provided. All
checks should be made payable to "The Preferred Group (name of Fund)." Third
party checks are not accepted. Please mail all purchase requests to one of the
following addresses:

REGULAR MAIL:
The Preferred Group

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P.O. Box 8320
Boston, MA 02266-8320

REGISTERED, EXPRESS OR CERTIFIED MAIL:
The Preferred Group
2 Heritage Drive
N. Quincy, MA 02171

The Preferred Group reserves the right to accept or reject any order for the
purchase of Fund shares.

<TABLE>
<CAPTION>
<S> <C> <C>
ADDITIONAL
METHOD INITIAL INVESTMENTS MINIMUM INVESTMENTS MINIMUM

BY MAIL $ 1,000 -Regular Account $50 for all Accounts
$ 250 -IRAs & Uniform Gifts/Transfers to Minors Accounts
$ 150 -Quarterly Systematic Savings Plan
$ 50 -Monthly Systematic Savings Plan

FOR ALL CHOICES BELOW, PLEASE CALL 1-800-662-4769

ADDITIONAL
METHOD INITIAL INVESTMENT MINIMUM INVESTMENTS MINIMUM

BY EXCHANGE $1,000 $50 (from another Fund)

The new account will have the same registration as the account from which you
are exchanging. For more information about exchanges, see "Exchanging and
Redeeming Shares."

Additional
METHOD INITIAL INVESTMENT MINIMUM INVESTMENTS MINIMUM

BY WIRE $1,000 $1,000

Federal funds should be wired to: State Street Bank & Trust Company, Custody and
Shareholder Services Division, Boston, MA 02110, ABA No. 011000028, DDA:
9904-636-9, The Preferred Group, your name and your Fund/Account Number.

ADDITIONAL
METHOD INITIAL INVESTMENT MINIMUM INVESTMENTS MINIMUM

BY MONEY EXPRESS NOT AVAILABLE $50
(Electronic Funds
Transfer Option)

This service may be used only if you authorize it on your account application.
The maximum transfer amount is $50,000.
</TABLE>

EXCHANGING AND REDEEMING SHARES

Shares may be exchanged or redeemed on the basis of their net asset values
beginning 10 days after purchase on any day the New York Stock Exchange is open.
There are currently no exchange or redemption fees or charges. You may redeem
all or a portion of your shares.

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<PAGE>

Please note that an exchange is treated as a redemption and a subsequent
purchase. Therefore, you could realize a taxable gain or loss on your
transaction.

The Preferred Group reserves the right to modify or terminate the exchange
privilege at any time.

The Preferred Group's exchange service is not intended to encourage shareholder
speculation on short-term movements in the market. Each Fund reserves the right
to restrict exchanges to one purchase and one redemption of shares in the same
Fund during any 120-day period. The exchange privilege may not be exercised for
shares of any Fund which are not qualified or exempt under the securities laws
of the state in which the shareholder resides.

The redemption of shares will be suspended during any period in which the New
York Stock Exchange is closed for other than weekends or holidays or, if
permitted by the rules of the SEC, when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Funds to dispose of
their securities or to determine fairly the value of their net assets, or during
any other period permitted by the SEC for the protection of investors.

Redemption proceeds are normally paid in cash. However, if you redeem more than
$250,000, or 1% of a Fund's net assets, in any 90-day period, the Fund may, at
its discretion, pay the difference between the redemption amount and the lesser
of those two figures with securities of the Fund. If redemptions are made in
securities rather than cash, the securities are valued using the procedures
described under "Determination of Net Asset Value and Pricing."

The Preferred Group will normally send you payment for your shares the following
business day after your request is received in proper form by the Transfer
Agent. However, the transmission of your proceeds may be delayed for up to seven
days after your request is received. The mailing of proceeds on redemption
requests involving any shares purchased by personal, corporate or government
check, or bank-fund transfers is generally subject to a 10-day delay to allow
the check or transfer to clear. The clearing period does not apply to purchases
made by wire, Systematic Savings Plan, or cashier's, treasurer's or certified
checks. Redemption or transfer requests will not be honored until all required
documents in the proper form have been received by the Transfer Agent.

HOW TO REDEEM OR EXCHANGE SHARES

FOR ALL OPTIONS BELOW, CALL INVESTOR SERVICES AT 1-800-662-4769

BY MAIL
To redeem or exchange shares in writing, send an instruction letter signed by
all registered owners, including fiduciary titles, specifying the name on the
account and the account number, the Fund name and the number of shares or dollar
amount you want to exchange or redeem. For exchanges, mail to the attention of
the Fund you are exchanging from and specify the Fund you are exchanging to. We
require the signature of all owners exactly as registered. For redemptions over
$50,000, we require a signature guarantee.

REGULAR MAIL: REGISTERED, EXPRESS OR CERTIFIED MAIL:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171

CORPORATIONS, PARTNERSHIPS OR ASSOCIATIONS. The letter of instruction must be
accompanied by a resolution. The letter must be signed by at least one
individual authorized by resolution to act on the account. The resolution must
include a signature guarantee.

TRUSTS. The letter of instruction must be signed by the Trustee(s) with a
signature guarantee.

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<PAGE>

NOTE: If you want to keep your account open, please maintain a balance of at
least $1,000. If you have questions, please call Investor Services at
1-800-662-4769.

BY PHONE
If you have authorized Preferred Tele-Services on your account application,
exchanges or redemptions can be made between 8:00 a.m. (Eastern time) and the
close of regular trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time).

Redemption proceeds can be mailed, wired to your bank or sent by electronic
funds transfer. The Preferred Group's bank charges a $10 fee for wire
redemptions, minimum $100, subject to change without notice. Your bank may also
charge you for receiving wires.

BY CHECK
If you have authorized the check writing feature on your account application,
you may-redeem shares in your account provided that the appropriate signatures
are on your check. The minimum check amount is $250. There is no charge for this
service, and you may write an unlimited number of checks, provided the account
minimum of $1,000 per Fund is maintained. Check writing privileges apply to the
Money Market and the Short-Term Government Securities Funds ONLY.

BY MONEY EXPRESS
If you have authorized the Preferred Money Express feature on your account
application, you may redeem by electronic funds transfer. The maximum redemption
amount ~is $50,000.

BY WIRE
If you have authorized the Wire Transfer feature on your account application,
you may-have your redemption proceeds wired to your bank on the next business
day after the redemption is processed. The Preferred Group's bank charges a $10
fee for wire redemptions, minimum $100, subject to change without notice. Your
bank may also charge you for receiving wires.

IMPORTANT INFORMATION ABOUT YOUR ACCOUNT

ACCOUNT BALANCES

The Preferred Group reserves the right to redeem shares in any account which
drops below the minimum initial investment amount of $1,000 due to shareholder
redemptions. You are allowed 60 days to make an additional investment before the
account is liquidated. The minimum does not apply to IRAs or other retirement
accounts, Uniform Gifts/Transfers to Minors Act accounts, or Systematic Savings
accounts.

INTERMEDIARIES

If you purchase or redeem Preferred Group shares through a registered
broker-dealer, a bank, an investment adviser, or other third party, those
entities may charge you a service fee.

NON-U.S. BANK CHECKS

All deposit checks must be drawn on U.S. chartered banks. Checks drawn on
foreign banks must be converted to U.S. dollars; in the case of smaller
investments, the fee for conversion may be disproportionately high in relation
to the value of the investment.

PURCHASES BY CHECK

Purchases are accepted subject to collection of checks at full value and
conversion into federal funds. Payment by a check drawn on any member of the
Federal Reserve System can normally be converted into federal funds within two
business days after receipt of the check. Checks drawn on a nonmember bank may
take up to 10 days to convert into federal funds. In all cases, the purchase
price is based on the net asset

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<PAGE>

value next determined after the purchase order and check are accepted, even
though the check may not yet have been converted into federal funds. Third-party
checks will not be accepted.

SHARE CERTIFICATES

When you open your account, you will receive a confirmation indicating your name
and account number, which will be evidence that you have opened a Preferred
Group account. No share certificates will normally be issued.

SIGNATURE GUARANTEES

A signature guarantee verifies the authenticity of your signature and is
sometimes required for our mutual protection. When a signature guarantee is
required, you should have "Signature Guaranteed" stamped under your signature
and guaranteed at a commercial bank (FDIC member), trust company, firm that is a
member of a domestic stock exchange, foreign branches of any of the above and
certain other financial institutions.

You will generally need a signature guarantee to:

1. Authorize or change certain services after your account is opened;

2. Transfer shares to another owner;

3. Redeem over $50,000 by written request;

4. Redeem or exchange shares when someone who is not a registered owner of the
account will receive the proceeds;

5. Send proceeds to an address other than the account address;

6. Send proceeds to an account address which has been changed within 30 days of
the redemption request; and

7. Pay the proceeds to a corporation, partnership, trust or fiduciary.

TELEPHONE EXCHANGE AND REDEMPTION

The Preferred Group may accept telephone redemption or exchange instructions
from any person with respect to accounts of shareholders who elect this service.
The Preferred Group employs reasonable procedures to verify that telephone
requests for redemptions and exchanges are genuine, such as requiring a form of
personal identification prior to acting on telephone instructions, recording
telephone instructions and sending written confirmations of the resulting
transactions to shareholders.

The Preferred Group reserves the right to terminate or modify the telephone
exchange or telephone redemption service at any time. During times of severe
disruption in the securities markets, the volume of calls may make it difficult
to exchange or redeem by telephone, in which case a shareholder may wish to send
a written request for exchange or redemption as described under "Exchanging and
Redeeming Shares--By Mail."

ADDITIONAL SHAREHOLDER SERVICES

CHECK-WRITING SERVICES (MONEY MARKET AND SHORT-TERM GOVERNMENT SECURITIES FUNDS
ONLY)

The minimum check amount is $250. This service is FREE and you may write an
unlimited number of checks. You must maintain a minimum $1,000 account balance
after your withdrawal. (Remember that

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<PAGE>

redeeming shares from the Short-Term Government Securities Fund will be treated
as a capital gain or loss transaction for tax purposes.)

PREFERRED MONEY EXPRESS (ELECTRONIC FUNDS TRANSFER OPTION)

This plan allows you to buy or sell shares by transferring money between your
Fund account and your account at a bank, savings and loan association or credit
union that is a member of the ACH (Automated Clearing House) system. Preferred
Money Express eliminates the expense of wiring funds and the delay of mailing a
check. You need to sign up for Preferred Money Express on your account
application to use this service.

PREFERRED TELE-SERVICES LINE

You may reach The Preferred Group by calling Preferred Tele-Services at
1-800-662-4769, 24-hours a day. Between the hours of 8:00 a.m. and 6:00 p.m.
(Eastern time) you will reach an Investor Services Representative. If you are
calling after 6:00 p.m. (Eastern time) on a Touch-Tone(R) phone, you will
receive instructions on how you can (1) listen to price and yield information
and (2) obtain your share balance and account value. The Preferred Group records
telephone transactions to verify data concerning these transactions.

SYSTEMATIC SAVINGS PLAN

This plan allows you to make monthly or quarterly investments automatically by
authorizing us to move $50 or more on the same day each month (or $150 per
quarter) from your checking account to any Fund. You will be sent a confirmation
statement for each transaction, and a debit will appear on your checking account
statement. To change the amount of your systematic savings authorization or to
terminate this service, please call Investor Services or write to the address
printed on your account statement. Be sure to include your account number.

SYSTEMATIC WITHDRAWAL PLAN

This plan automatically redeems enough shares each month or quarter to provide
you with a check, wire or electronic funds transfer to your checking account for
a minimum amount of $50 monthly or $150 quarterly. You must maintain a $1,000
minimum account balance after your withdrawal.

TAX-QUALIFIED RETIREMENT PLANS

Tax-deferred individual retirement plans are available. Please call Investor
Services for details and the appropriate forms for:

O INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). Any wage earner between 18 and 70 1/2
years of age can contribute up to $2,000 per tax year. This $2,000
contribution limit is phased out if the wage earner (or the wage earner's
spouse) actively participates in an employer-sponsored qualified retirement
plan. For married individuals, the annual contribution limit is $2,000 for
each spouse, but the couple's aggregate deductible contributions may not
exceed the combined compensation of both spouses (reduced by any
contributions made to other forms of IRAs--such as "Roth IRAs").
O ROTH IRAS. Single wage earners with an adjusted gross income of less than
$95,000 (and married wage earners who file jointly and have an aggregate
adjusted gross income of less than $150,000) can make non-deductible
contributions to Roth IRAs of up to $2,000 per year less amounts contributed
on behalf of these individuals to other IRAs. The $2,000 contribution limit
is phased out for wage earners with adjusted gross incomes that exceed the
above amounts. Qualifying distributions from a Roth IRA are tax-free,
provided the Roth IRA has been in existence for at least five years.
O ROLLOVER IRAS. When a participant of a tax-favored retirement plan receives
an eligible rollover distribution of assets, the assets may be "directly
transferred" or "directly rolled over" into an IRA. Eligible rollover
distributions that are not "directly transferred" to an IRA or other
tax-favored retirement

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<PAGE>

plan are subject to a 20% tax withholding. You can also roll over an existing
IRA to a Preferred Group IRA.
o SEP-IRAs. Simplified Employee Pension Plans are arrangements under which
employers may contribute directly to an employee's IRA.

In addition, The Preferred Group may be an appropriate investment for 403(b)
plans, 401(k) plans and Keogh or corporate profit-sharing plans.

DISTRIBUTIONS

OPTIONS

You can select the distribution option that best suits your needs. See "Choosing
a Distribution Option" in this section.

GENERAL

The Fixed Income, Short-Term Government Securities and Money Market Funds
declare dividends daily and pay them monthly. The Asset Allocation Fund declares
and pays dividends quarterly. The Growth, Value, International and Small Cap
Funds declare and pay dividends at least annually. Each Fund pays out as
dividends substantially all of its net investment income (which comes from
dividends and interest it receives from its investments) and net realized
short-term capital gains. For these purposes and for federal income tax
purposes, a portion of the premiums from certain expired call or put options
written by a Fund, net gains from closing purchase and sale transactions with
respect to these options, and net gains from futures transactions are treated as
short-term capital gains.

Each Fund distributes substantially all of its net realized capital gains, if
any, at least annually after giving effect to any available capital loss
carry-over. The Short-Term Government Fund currently has available capital loss
carry-overs. Subject to applicable law, dividends and capital gains
distributions may be declared more or less frequently at the discretion of the
Trustees.

CHOOSING A DISTRIBUTION OPTION

When completing your account application, you may select any one of the
following distribution options. If you do not specify an option, all of your
distributions are reinvested in additional shares of the relevant Fund. If you
choose to change your distribution election, you must notify Investor Services
in writing. The address for Investor Services is The Preferred Group, P.O. Box
8320, Boston, MA 02266-8320.

REINVEST OPTION

All dividends and capital gain distributions are reinvested in additional
shares. All distributions are reinvested as of the record date for the
distribution and are paid on the payment date.

CASH DIVIDEND OPTION

All dividends are paid in cash (by check). All capital gains distributions are
reinvested in additional Fund shares as of the record date for the distribution
and are paid on the payment date.

ALL CASH OPTION

All dividends and capital gain distributions are paid in cash (by check).

In addition, an option to invest your cash dividends and/or capital gains
distributions of a Preferred Group Fund in another Preferred Group Fund is
available. Please call Investor Services (1-800-662-4769) for more

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<PAGE>

information. If it is determined that the U.S. Postal Service cannot properly
deliver Fund mailings to you, The Preferred Group will terminate your election
to receive dividends and other distributions in cash, and will invest the
undeliverable distributions in shares of the relevant Fund. Your subsequent
dividends and other distributions will be automatically reinvested in additional
shares of the relevant Fund until you notify The Preferred Group of your correct
address and request in writing that the election to receive dividends and other
distributions in cash be reinstated.

TAXES

Dividends and any short-term capital gains distributions (that is, distributions
derived from net gains from securities held for not more than a year) of the
Funds are taxable to the shareholder at ordinary income rates. Distributions
designated as deriving from net gains on securities held for more than one year
are taxable to shareholders as such (generally at a 20% rate for noncorporate
shareholders), regardless of how long a shareholder may have owned shares in the
Fund.

Distributions are taxable as described above whether received in cash or in
shares through the reinvestment of distributions.

Dividends derived from interest on certain U.S. Government securities may be
exempt from state and local taxes, although interest on mortgage-backed U.S.
Government securities (which may constitute a substantial portion of the
Short-Term Government Securities Fund's assets) may not be exempt.

Shareholders should consult their tax advisers concerning the possible
application of state and local income tax laws to a Fund's dividends and capital
gains distributions.

The International Fund may make an election which allows shareholders who are
U.S. citizens or U.S. corporations to claim a foreign tax credit or deduction
(but not both) on their U.S. income tax returns. As a result, the amounts of
foreign income taxes paid by the International Fund would be treated as
additional income to International Fund shareholders from non-U.S. sources and
as foreign taxes paid by International Fund shareholders for purposes of the
foreign tax credit.

Only shareholders who hold Fund shares (without protection from risk of loss) on
the ex-dividend date and for at least 15 other days during the 30-day period
surrounding the ex-dividend date would be entitled to claim a foreign tax
credit. Investors should consult their tax advisers for further information
relating to the foreign tax credit and deduction, which are subject to certain
restrictions and limitations.

Shareholders who are not U.S. citizens or which are foreign corporations may be
subject to substantially different tax treatment on distributions.

BUYING A DIVIDEND

On the record date for a distribution, the Fund's share value is reduced by the
amount of the distribution. If you purchase shares just before the record date
("buying a dividend"), you pay the full price for the shares and then receive a
portion of the purchase price back as a taxable distribution.

FINANCIAL HIGHLIGHTS

(To be provided in a post-effective amendment)

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<PAGE>

OFFICERS AND TRUSTEES

Gary M. Anna......................................................Trustee
William F. Bahl...................................................Trustee
F. Lynn McPheeters................................................Trustee
Dixie L. Mills....................................................Trustee
David L. Bomberger..............................................President
Fred L. Kaufman................................Vice President & Treasurer
Richard P. Konrath..................................................Clerk
Ken Zika..........................................................Trustee

INVESTMENT ADVISER

Caterpillar Investment Management Ltd.
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602-1104

DISTRIBUTOR
Caterpillar Securities Inc.
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602-1104

CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101

TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171

LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110

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<PAGE>

THE PREFERRED GROUP OF MUTUAL FUNDS

Investors who want more information about Preferred Group Funds, the following
documents are available upon request.

ANNUAL REPORTS

The annual and semi-annual reports of the Preferred Group provide additional
information about their investments. In the annual report, you will also find a
discussion of the market conditions and investment strategies that significantly
affected the performance of Preferred Group Funds during the last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI contains additional detailed information about The Preferred Group of
Mutual Funds and is incorporated by reference into (legally part of) this
prospectus.

Investors can receive free copies of these materials, request other information
about the Funds and make shareholder inquiries by writing to: The Preferred
Group, P.O. Box 8320, Boston, MA 02266-8320; or calling The Preferred Group at
1-800-662-4769.

You can review, for a fee, the reports of the Funds and SAI by writing to the
SEC's Public Reference Section, Washington, D.C. 20459-6009, or by calling the
SEC at 1-800-SEC-0330. You can get copies of this information for free on the
SEC's Internet site at http://www.sec.gov.

The Funds' Investment Company Act of 1940 file number is 811-06602.

<PAGE>

THE PREFERRED GROUP OF MUTUAL FUNDS

STATEMENT OF ADDITIONAL INFORMATION

November 1, 1999

This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated November 1, 1999, as
supplemented from time to time, and should be read in conjunction therewith. A
copy of the Prospectus may be obtained from The Preferred Group of Mutual Funds,
P.O. Box 8320, Boston, MA 02266-8320 or by calling 1-800-662-4769.

<PAGE>

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

DEFINITIONS..................................................1

INVESTMENT RESTRICTIONS......................................1

OPTIONS AND FUTURES TRANSACTIONS.............................6

MISCELLANEOUS INVESTMENT PRACTICES..........................17

AMORTIZED COST VALUATION AND DAILY DIVIDENDS................21

EXCHANGE PRIVILEGE..........................................23

HOW TO BUY..................................................23

HOW TO REDEEM...............................................24

HOW NET ASSET VALUE IS DETERMINED...........................24

CALCULATION OF YIELD AND TOTAL RETURN.......................26

PERFORMANCE COMPARISONS.....................................27

PERFORMANCE DATA............................................29

TAXES ...................................................31

MANAGEMENT OF THE TRUST.....................................35

INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS............44

OTHER SERVICES..............................................45

PORTFOLIO TRANSACTIONS......................................46

ORGANIZATION AND CAPITALIZATION OF THE TRUST................51

ADDITIONAL INFORMATION......................................52

APPENDIX A..................................................54

APPENDIX B..................................................57

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DEFINITIONS

"Asset Allocation Fund" - Preferred Asset Allocation
Fund

"Distributor" - Caterpillar Securities Inc.

"Fixed Income Fund" - Preferred Fixed Income Fund

"Fund" - any of the portfolios offered
by The Preferred Group of
Mutual Funds

"Growth Fund" - Preferred Growth Fund

"International Fund" - Preferred International Fund

"Manager" - Caterpillar Investment
Management Ltd.

"Money Market Fund" - Preferred Money Market Fund

"1940 Act" - Investment Company Act of
1940

"Short-Term Government - Preferred Short-Term
Securities Fund" Government Securities Fund

"Small Cap Fund" - Preferred Small Cap Fund

"Subadviser" - any subadviser of any of the
Funds

"Trust" - The Preferred Group of Mutual
Funds

"Value Fund" - Preferred Value Fund

INVESTMENT RESTRICTIONS

Without a vote of the majority of the outstanding voting securities of
a Fund, the Trust will not take any of the following actions with respect to
such Fund:

(1) Issue senior securities or borrow money in excess of 10% of the
value (taken at the lower of cost or current value) of the Fund's total
assets (not including the amount borrowed) at the time the borrowing is
made, and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might

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otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. Such borrowings will be repaid before
any additional investments are purchased. For purposes of this restriction,
the purchase or sale of securities on a "when-issued" or delayed delivery
basis, the purchase and sale of futures contracts, the entry into forward
contracts and short sales and collateral arrangements with respect to any
of the foregoing, to the extent consistent with pronouncements of the
Securities and Exchange Commission, are not deemed to be the issuance of a
senior security.

(2) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of the Fund's total assets (taken at cost) in connection with
borrowings permitted by Restriction 1 above.

(3) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities.
(For this purpose, the deposit or payment by a Fund of initial or variation
margin in connection with futures contracts or related options transactions
is not considered the purchase of a security on margin.)

(4) Make short sales of securities or maintain a short position for
the account of a Fund unless at all times when a short position is open
such Fund owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to,
the securities sold short.

(5) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it
may be deemed to be an underwriter under federal securities laws.

(6) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by
interests in real estate.

(7) Purchase or sell commodities or commodity contracts except that
the Growth, Value, International, Small Cap, Asset Allocation, Fixed
Income, and Short- Term Government Securities Funds may purchase and sell
futures contracts and related options.

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<PAGE>

(8) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities with respect to not more than 33 1/3% of its total assets.

(9) Invest in securities of any issuer if, to the knowledge of the
Trust, any officers and Trustees of the Trust and officers and directors of
the Manager who individually own beneficially more than 1/2 of 1% of the
securities of that issuer, own beneficially in the aggregate more than 5%.

(10) With respect to 75% of the total assets of each of the Funds,
invest in securities of any issuer if, immediately after such investment,
more than 5% of the total assets of the Fund (taken at current value) would
be invested in the securities of such issuer; provided that this limitation
does not apply to obligations issued or guaranteed as to interest and
principal by the U.S. government or its agencies or instrumentalities or
repurchase agreements relating thereto.

(11) Acquire more than 10% of the voting securities of any issuer,
both with respect to any Fund and to the Trust in the aggregate.

(12) Concentrate more than 25% of the value of its total assets in any
one industry; except that the Money Market Fund reserves freedom of action
to invest up to 100% of its assets in certificates of deposit and bankers'
acceptances issued by domestic banks (for the purposes of this restriction,
obligations of a foreign government and its agencies or instrumentalities
constitute a separate "industry" from those of another foreign country;
issuers of U.S. Government Securities and repurchase agreements relating
thereto do not constitute an "industry"; and the term "domestic banks"
includes foreign branches of domestic banks only if, in the determination
of the Manager or the relevant Subadviser, the investment risk associated
with investing in instruments issued by the foreign branch of a domestic
bank is the same as that of investing in instruments issued by the domestic
parent, in that the domestic parent would be unconditionally liable in the
event that the foreign branch failed to pay on its instruments for any
reason).

(13) Invest in securities of other registered investment companies,
except by purchase in the open market involving only customary brokers'
commissions.

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For purposes of this restriction, foreign banks or their agents or
subsidiaries are not considered investment companies.

In addition, without the approval of a majority of the outstanding
voting securities of the relevant Fund, no Fund will purchase securities the
disposition of which is restricted under federal securities laws if, as a
result, such investments would exceed 15% of the value of the net assets of such
Fund, excluding restricted securities that have been determined by the Trustees
of the Trust (or the person designated by them to make such determinations) to
be readily marketable.

In determining whether to invest in certificates of deposit or bankers'
acceptances, the Money Market Fund will consider a variety of factors such as
interest rates and the credit quality of the issuer.

It is contrary to the Trust's present policy with respect to any Fund
created under the Trust, which may be changed by the Trustees without
shareholder approval, to:

(1) Invest in warrants or rights excluding options (other than
warrants or rights acquired by the Fund as a part of a unit or attached to
securities at the time of purchase) if as a result such investments (valued
at the lower of cost or market) would exceed 5% of the value of a Fund's
net assets; provided that not more than 2% of the Fund's net assets may be
invested in warrants not listed on the New York or American Stock
Exchanges.

(2) Invest in securities of an issuer, which, together with any
predecessors or controlling persons, has been in operation for less than
three consecutive years and in equity securities for which market
quotations are not readily available (excluding restricted securities) if,
as a result, the aggregate of such investments would exceed 5% of the value
of a Fund's net assets; provided, however, that this restriction shall not
apply to any obligation of the U.S. Government or its instrumentalities or
agencies, repurchase agreements relating thereto, CMOs or asset- backed
securities. (Debt securities having equity features are not considered
"equity securities" for purposes of this restriction.)

(3) Write (sell) or purchase options except that each Fund other than
the Short-Term Government Securities Fund and the Money Market Fund may (a)
with respect to all or any part of its portfolio securities, write covered
call options or covered put options and

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<PAGE>

enter into closing purchase transactions with respect to such options, and
(b) in combination therewith, or separately, purchase put and call options;
provided that the premiums paid by each Fund on all outstanding options it
has purchased do not exceed 5% of its total assets. Each Fund may enter
into closing sale transactions with respect to options it has purchased.

(4) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.

(5) Make investments for the purpose of gaining control of a company's
management.

(6) Invest in certificates of deposit of any bank if, immediately
after such investment, more than 5% of the total assets of the Fund (taken
at current value) would be invested in the securities (including
certificates of deposit) of that bank, except that (i) the Money Market
Fund may, to the extent permitted by Rule 2a-7 under the 1940 Act, invest
more than 5% of its total assets in the securities (including certificates
of deposit) of any bank and (ii) each other Fund may invest up to 25% of
its total assets without regard to this restriction.

(7) Make any additional investment if, immediately after such
investment, the Fund's outstanding borrowings of money would exceed 5% of
the current value of the Fund's total assets.

(8) Purchase or sell real property (including real estate limited
partnership interests, but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of companies
which invest in real estate).

(9) With respect to the Money Market Fund, invest in securities of any
issuer if, immediately after such investment, more than 5% of the total
assets of the Fund (taken at current value) would be invested in the
securities of such issuer, except that the Fund may, to the extent
permitted by Rule 2a-7 under the 1940 Act, invest more than 5% of its total
assets in the securities (including certificates of deposit) of any bank.
(Provided that this limitation does not apply to obligations issued or
guaranteed as to interest and principal by the U.S. government or its
agencies or instrumentalities or repurchase agreements relating thereto.)

(10) With respect to the Small Cap Fund, invest more than 25% of its
assets in any combination of mortgage-backed

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<PAGE>

securities, asset-backed securities and collateralized mortgage
obligations.

(11) With respect to the Small Cap Fund, sell short securities valued,
at the time of purchase, greater than 10% of its assets (excluding
"covered" short sales, i.e. short sales of securities held by the Fund).

All percentage limitations on investments set forth herein and in the
Prospectus will apply at the time of the making of an investment and shall not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.

The phrase "shareholder approval," as used in the Prospectus, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the relevant Fund or the Trust, as the case may be, or (2)
67% or more of the shares of the relevant Fund or the Trust, as the case may be,
present at a meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy.

Note on Shareholder Approval

Unless otherwise indicated, the investment policies and objectives of
the Funds may be changed without shareholder approval.

OPTIONS AND FUTURES TRANSACTIONS (All Funds except the Short-Term
Government Securities Fund and the Money Market Fund)

As disclosed in the Prospectus, the Fixed Income Fund, to increase
current return, may write covered call and covered put options on any security
that it is eligible to purchase. For hedging purposes, it may (1) purchase call
options on securities it expects to acquire, and put options on securities it
holds, and (2) purchase and sell futures contracts on U.S. Government Securities
and purchase and write options on such futures contracts.

The Growth, Value, International, Small Cap and Asset Allocation Funds
may each: (1) purchase call and put options, and purchase warrants, on
securities that they are eligible to purchase; (2) write covered call and
covered put options on such securities; (3) buy and sell stock index options,
stock index futures contracts, options on stock index futures contracts,
currency futures contracts and options on currency futures contracts; and (4)
write covered call and put options on stock indices. In addition, the Asset
Allocation Fund may purchase and

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<PAGE>

sell futures contracts on U.S. government securities and purchase and write
options on such futures contracts.

Use of options and futures transactions may accelerate or adversely
impact the characterization of income to a Fund for federal tax purposes.

Options Transactions

No Fund will write options that are not "covered." A call option is
"covered" if the Fund owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds on a share-for-share
basis a call on the same security as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call written
or greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other high grade short-term
obligations in a segregated account with its custodian. A put option is
"covered" if the Fund segregates cash, Treasury bills or other high grade
obligations with a value equal to the exercise price with its custodian, or else
holds on a share-for-share basis a put on the same security as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written. The premium paid by the purchaser of an
option will reflect, among other things, the relationship of the exercise price
to the market price and volatility of the underlying security, the remaining
term of the option, supply and demand and interest rates.

If the writer of an option wishes to terminate his obligation, he may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he has been notified of the exercise of an option. Likewise, an investor
who is the holder of an option may liquidate his position by effecting a
"closing sale transaction." This is accomplished by selling an option of the
same series as the option previously purchased. There is no guarantee that a
Fund will be able to effect a closing purchase or a closing sale transaction at
any particular time.

Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option

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<PAGE>

will permit the Fund to write another put option to the extent that the exercise
price thereof is secured by depositing cash or high grade obligations. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.

The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. 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 the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.

The Funds which may write options may do so in connection with
buy-and-write transactions; that is, the Fund will purchase a security and then
write a call option against that security. The exercise price of the call the
Fund determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the- money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at- the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.

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<PAGE>

The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price.

No Fund may invest more than 5% of its assets in the purchase of put
and call options.

The extent to which each Fund will be able to write and
purchase call and put options will also be restricted by the
Trust's intention to qualify each Fund as a regulated investment
company under the federal income tax law. See "Taxes."

OTC Options. The staff of the Securities and Exchange Commission has
taken the position that options purchased on the over-the-counter market ("OTC
Options") and the assets used as "cover" for written OTC Options should
generally be treated as illiquid securities. However, if a dealer recognized by
the Federal Reserve Bank as a "primary dealer" in U.S. Government Securities is
the other party to an option contract written by a Fund, and that Fund has the
absolute right to repurchase the option from the dealer at a formula price
established in a contract with the dealer, the Securities and Exchange
Commission staff has agreed that the Fund only needs to treat as illiquid that
amount of the "cover" assets equal to the amount by which (i) the formula price
exceeds (ii) any amount by which the market value of the security subject to the
option exceeds the exercise price of the option (the amount by which the option
is "in-the-money"). Although the Trust does not believe that OTC Options are
generally illiquid, it has agreed that pending resolution of this issue, the
Funds will conduct their operations in conformity with the views of the
Securities and Exchange Commission staff.

Futures Transactions

Futures Contracts. A futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A futures contract purchase
creates an obligation by the purchaser to take delivery of the underlying
financial instrument in a specified delivery month at a stated price. The
specific instruments delivered or taken, respectively, at settlement date are
not determined until at or

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near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. A stock index
futures contract is similar except that the parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
Futures contracts are traded only on commodity exchanges -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.

Although futures contracts by their terms call for actual delivery or
acceptance of securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument and the same
delivery date. If the price of the initial sale of the futures contract exceeds
the price of the offsetting purchase, the seller is paid the difference and
realizes a gain. Conversely, if the price of the offsetting purchase exceeds the
price of the initial sale, the Fund realizes a loss. Similarly, the closing out
of a futures contract purchase is effected by the purchaser entering into a
futures contract sale. If the offsetting sale price exceeds the purchase price,
the purchaser realizes a gain, and if the purchase price exceeds the offsetting
sale price, he realizes a loss.

The purchase (that is, assuming a long position in) or sale (that is,
assuming a short position in) of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, an
amount of cash or U.S. Treasury bills generally not exceeding 5% of the contract
amount must be deposited with the broker. This amount is known as initial
margin. Subsequent payments to and from the broker, known as variation margin,
are made on a daily basis as the price of the underlying futures contract
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as "marking to market." At any time prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker, and the
purchaser realizes a loss or gain. A commission is also paid on each completed
purchase and sale transaction. In addition, a Fund that purchases a futures
contract will segregate liquid assets in an amount at least equal to the
purchase price under the futures contract (less any margin on deposit).

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Alternatively, a fund that purchases a futures contract may cover the position
by purchasing a put option on the same contract with a strike price as high or
higher than the purchase price of the futures contract it covers.

The Funds may engage in transactions in futures contracts and related
options for purposes of reallocating a Fund's exposure to the equity or fixed
income markets and also for the purpose of hedging against changes in the values
of securities they own or intend to acquire. In the case of transactions entered
into for purposes of reallocating a Fund's exposure to the equity or fixed
income markets, the futures contracts may be used to expose a substantial
portion of the Fund to equities and/or fixed income instruments to facilitate
trading and/or to minimize transaction costs. Futures contracts will not be used
to leverage the Fund. For example, in the case of the Asset Allocation Fund, if
the Fund purchases futures contracts relating to equity securities (e.g., S&P
500 index futures), the face amount of the futures contracts plus the value of
the Fund's equity securities will not exceed the Fund's net assets. Similarly,
if the Fund purchases interest rate futures contracts, the face amount of the
futures contracts plus the value of the Fund's fixed income securities will not
exceed the Fund's net assets. In the case of transactions in futures contracts
for hedging purposes, the Funds may sell such futures contracts in anticipation
of a decline in the value of its investments. The risk of such a decline can be
reduced without employing futures as a hedge by selling portfolio securities and
either reinvesting the proceeds in securities subject to lesser risk or by
holding assets in cash. This strategy, however, entails increased transaction
costs in the form of brokerage commissions and dealer spreads and will typically
reduce a Fund's total return or, with respect to futures on fixed income
securities, yield. The sale of futures contracts provides an alternative means
of hedging a Fund against a decline in the value of its investments. As such
values decline, the value of a Fund's position in the futures contracts will
tend to increase, thus offsetting all or a portion of the depreciation in the
market value of a Fund's securities which are being hedged. While the Fund will
incur commission expenses in establishing and closing out futures positions,
commissions on futures transactions may be significantly lower than transaction
costs incurred in the purchase and sale of securities. Employing futures as a
hedge may also permit a Fund to assume a defensive posture without reducing its
total return or yield.

Call Options on Futures Contracts. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the futures contract upon which it is based, or upon the price of the
underlying securities, it may or may not be less risky than

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ownership of the futures contract or underlying securities. As with the purchase
of a futures contract, a Fund may purchase a call option on a futures contract
to hedge against a market advance when the Fund is not fully invested.

The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings.

Put Options on Futures Contracts. The purchase of put options on a
futures contract is similar in some respects to the purchase of put options on
portfolio securities. Each Fund may purchase put options on futures contracts to
hedge the Fund's portfolio against the risk of rising interest rates or
declining stock market prices.

A Fund may write a put option on a futures contract as a partial hedge
against increasing prices of the assets which are deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
assets that the Fund intends to purchase.

Currency Futures and Related Options. Each Fund (other than the
Short-Term Government Securities and Money Market Funds) may invest in currency
futures contracts and related options thereon to hedge its portfolio investments
and to protect itself against changes in foreign exchange rates. A currency
futures contract sale creates an obligation by the Fund, as seller, to deliver
the amount of currency called for in the contract at a specified future time for
a specified price. A currency futures contract purchase creates an obligation by
the Fund, as purchaser, to take delivery of an amount of currency at a specified
future time at a specified price. Although the terms of currency futures
contracts specify actual delivery or receipt, in most instances the contracts
are closed out before the settlement date without the making or taking of
delivery of the currency. Closing out of a currency futures contract is effected
by entering into an offsetting purchase or sale transaction.

Unlike a currency futures contract, which requires the parties to buy
and sell currency on a set date, an option on a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract. If the holder decides not to enter into the contract, the premium paid
for the option is lost. Since the value of the option is fixed at the

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<PAGE>

point of sale, there are no daily payments of cash in the nature of "variation"
or "maintenance" margin payments to reflect the change in the value of the
underlying contract as there are by a purchaser or seller of a currency futures
contract. The value of the option does not change and is reflected in the net
asset value of the Fund.

The Funds will write only covered put and call options on currency
futures. This means that each such Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. Set forth below is a description of
methods of providing cover that the Funds currently expect to employ, subject to
applicable exchange and regulatory requirements. If other methods of providing
appropriate cover are developed, the Funds reserve the right to employ them to
the extent consistent with applicable regulatory and exchange requirements.

A Fund will, so long as it is obligated as the writer of a call option
on currency futures, own on a contract-for-contract basis an equal long position
in currency futures with the same delivery date or a call option on currency
futures with the difference, if any, between the market value of the call
written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, Treasury bills, or other high-grade short-term
obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the call purchased by the Fund falls
below 100% of the market value of the call written by the Fund, the Fund will so
segregate an amount of cash, Treasury bills or other high grade short-term
obligations equal in value to the difference. Alternatively, the Fund may cover
the call option through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.

In the case of put options on currency futures written by a Fund, the
Fund will hold the aggregate exercise price in cash, Treasury bills, or other
high grade short-term obligations in a segregated account with its custodian, or
own put options on currency futures or short currency futures, with the
difference, if any, between the market value of the put written and the market
value of the puts purchased or the currency futures sold maintained by the Fund
in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures sold by
the Fund falls below 100% of the market value of the put options written by the
Fund, the Fund will so segregate an amount

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<PAGE>

of cash, Treasury bills or other high grade short-term obligations equal in
value to the difference.

Stock Index Futures. The Growth, Value, International, Small Cap and
Asset Allocation Funds may also purchase and sell United States and foreign
stock index futures contracts and options thereon in order to reallocate their
equity market exposure or to hedge themselves against changes in market
conditions. A stock index assigns relative values to the common stocks
comprising the index. A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value at the close of the last trading day of the contract and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.

As indicated above, the Funds may engage in transactions in stock index
futures contracts and related options for the purpose of reallocating a Fund's
exposure to the equity markets and also for the purpose of hedging against
changes resulting from market conditions in the values of securities held in the
Fund's portfolio or which the Fund intends to purchase. If a transaction
involves the purchase of stock index futures contracts (for example, in a
transaction designed to increase a Fund's equity market exposure), the Fund will
deposit an amount of cash and cash equivalents, equal to the market value of the
futures contracts, in a segregated account with its custodian and/or in a margin
account with a broker. Each Fund will cover any options it writes on stock index
futures in the manner described above with respect to currency futures.

Limitations on the Use of Options and Futures Portfolio
Strategies

No Fund will "over-hedge," that is, no Fund will maintain open short
positions in futures contracts if, in the aggregate, the value of its open
positions (marked to market) exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on such open positions,
adjusted for the historical volatility relationship between the portfolio and
futures contracts. A Fund will not use futures contracts for leveraging
purposes. Thus, when a Fund uses futures contracts to reallocate the Fund's
exposure to equity (or fixed income) markets, that Fund will not maintain open
long positions in stock index (or interest rate) futures contracts if, in the
aggregate, the face amount of the contracts plus the Fund's equity (or fixed
income) securities would exceed the Fund's net assets.

A Fund's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in certain options

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<PAGE>

and futures are relatively new and still developing. It is impossible to predict
the amount of trading interest that may exist in various types of options or
futures. Therefore, no assurance can be given that a Fund will be able to
utilize these instruments effectively for the purposes set forth above.
Furthermore, a Fund's ability to engage in options and futures transactions may
be limited by tax considerations and CFTC rules.

No Fund may enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the market
value of the Fund's total assets.

Risk Factors in Options and Futures Transactions

Options Transactions. The option writer has no control over when the
underlying securities must be sold, in the case of a call option, or purchased,
in the case of a put option, since the writer may be assigned an exercise notice
at any time prior to the termination of the obligation. If an option expires
unexercised, the writer realizes a gain in the amount of the premium. Such a
gain, of course, may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill the obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security.

An exchange-traded option may be closed out only on a national
securities exchange (an "Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing sale transaction with respect to a particular
option with the result that the Fund would have to exercise the option in order
to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an Exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an Exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of

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<PAGE>

an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading volume; or (vi) one or more Exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that Exchange (or in that class or series
of options) would cease to exist, although outstanding options on that Exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that Exchange would continue to be exercisable in accordance with their
terms.

The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Trust and other clients of the Manager and
Subadvisers may be considered to be such a group. These position limits may
restrict the Funds' ability to purchase or sell options on a particular
security.

Futures Transactions. Investment by a Fund in futures contracts
involves risk. In the case of hedging transactions, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation. For
example, if the price of the futures contract moves more than the price of the
hedged security, a Fund would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater dollar amount than the hedged securities if
the volatility of the hedged securities is historically greater than the
volatility of the futures contracts. Conversely, a Fund may purchase or sell
fewer contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches.

As noted above, a Fund may purchase futures contracts to hedge against
a possible increase in the price of securities which the Fund anticipates
purchasing, or options thereon. In such instances, it is possible that the
market may instead decline. If the Fund does not then invest in such securities
because of concern as to possible further market decline or for other reasons,
the Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased. In the case of futures
contracts purchased to increase a Fund's exposure to the equity (or fixed
income) markets, the Fund could suffer a loss on the futures contracts similar
to the loss which the Fund would have suffered if,

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<PAGE>

instead, it had actually purchased equity or fixed income
securities.

The amount of risk a Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.

The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days.

The successful use of transactions in futures and related options also
depends on the ability of the Manager or relevant Subadviser to forecast
correctly the direction and extent of market and interest rate movements within
a given time frame. In the case of hedging transactions, to the extent market
prices or interest rates remain stable during the period in which a futures
contract or related option is held by a Fund or such prices or rates move in a
direction opposite to that anticipated, a Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, a Fund's total return for such period may
be less than if it had not engaged in the hedging transaction.

MISCELLANEOUS INVESTMENT PRACTICES

Lower-rated Securities. The Fixed Income Fund may invest up to 5% of
its total assets in lower-rated fixed-income securities (commonly known as "junk
bonds"), provided that the dollar-weighted average credit quality of its debt
portfolio (excluding short-term investments) is at least A by either Moody's
Investors Service, Inc. or Standard & Poor's. The lower ratings of certain
securities held by the Fund reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payment of interest and principal would
likely make the values of securities held by the Fund more volatile and could
limit the Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of a liquid
trading market

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<PAGE>

for securities held by it, the Fund may be unable at times to establish the fair
value of such securities. The rating assigned to a security by Moody's Investors
Service, Inc. or Standard & Poor's (or by any other nationally recognized
securities rating organization) does not reflect an assessment of the volatility
of the security's market value or the liquidity of an investment in the
security. See Appendix A to this Statement for a description of security
ratings.

Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Fund's debt securities. Conversely, during periods of rising interest rates, the
value of the Fund's debt securities will generally decline. In addition, the
values of fixed income securities are also affected by changes in general
economic conditions and business conditions affecting the specific industries of
their issuers. Changes by recognized rating services in their ratings of any
fixed income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments. Changes
in the value of portfolio securities generally will not affect cash income
derived from such securities, but will affect the Fund's net asset value. The
Fund will not necessarily dispose of a security when its rating is reduced below
its rating at the time of purchase, although CIML or the relevant Subadviser
will monitor the investment to determine whether its retention will assist in
meeting the Fund's investment objective.

Portfolio Turnover. A change in securities held by a Fund is known as
"portfolio turnover" and almost always involves the payment by the Fund of
brokerage commissions or dealer markup and other transaction costs on the sale
of securities as well as on the reinvestment of the proceeds in other
securities. These transactions may also result in the realization of taxable
capital gains. As a result of the investment policies of the Funds, under
certain market conditions their portfolio turnover may be higher than those of
many other investment companies. It is, however, impossible to predict portfolio
turnover in future years. Portfolio turnover rates in excess of 100% are
generally considered to be high. For purposes of reporting portfolio turnover
rates, all securities the maturities of which at the time of purchase are one
year or less are excluded, so that it is expected that the policies of the Money
Market Fund will result in a reported portfolio turnover rate of zero for that
Fund, although it is anticipated that, like other funds with similar portfolios,
it will change the securities in its portfolio frequently.

Forward Commitments. As described in the Prospectus following the
caption "General Policies and Risk Considerations--

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<PAGE>

Forward Commitments, When-Issued and Delayed Delivery Transactions," all of
the Funds except the Money Market Fund may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments"), if the Fund either (i) holds, and segregates until the settlement
date, liquid assets in an amount sufficient to meet the purchase price or (ii)
enters into an offsetting contract for the forward sale of securities of equal
value that it owns. Each Fund may simultaneously be obligated with respect to
forward commitment purchase and sale contracts and may sell a portfolio security
or enter into a forward commitment sale contract (a "dollar-roll transaction")
if that sale or forward commitment is coupled with an agreement by the Fund,
including a forward commitment, to repurchase the security at a later date.
Forward commitments may be considered securities in themselves. They 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 value of
the Fund's other assets. A Fund may dispose of a commitment prior to settlement
and may realize short-term profits or losses upon such disposition.

Repurchase Agreements. A repurchase agreement is a contract under which
a Fund would acquire a security for a relatively short period (usually not more
than one week) subject to the obligation of the seller to repurchase and the
Fund to resell such security at a fixed time and price (representing the Fund's
cost plus interest). The value of the underlying securities (or collateral) will
be at least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities. The Manager (in the case of the Small Cap and Short-Term
Government Securities Funds) and the Subadvisers (in the case of the other
Funds), as appropriate, will monitor the creditworthiness of the counterparties.

Securities Loans. Each Fund (other than the Money Market Fund) may make
secured loans of its portfolio securities amounting to no more than 33 1/3% of
its total assets. 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.
However, such loans will be made only to broker-dealers that are believed by the
Manager (in the case of the Small Cap and Short-Term Government Securities
Funds) and the Subadvisers (in the case of the other Funds) to be of relatively
high credit standing. Securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral in
cash or U.S. Government

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<PAGE>

Securities at least equal at all times to the market value of the securities
lent. The borrower pays to the lending Fund an amount equal to any dividends or
interest received on the securities lent. The Fund may invest the cash
collateral received in interest-bearing, short-term securities or receive a fee
from the borrower. Although voting rights or rights to consent with respect to
the loaned securities pass to the borrower, the Fund 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 the Fund if the holders of such securities are asked
to vote upon or consent to matters materially affecting the investment. A Fund
may also call such loans in order to sell the securities involved.

Warrants. Each of the Growth, Value, International, Small Cap and Asset
Allocation Funds may invest up to 5% of its total assets in warrants which
entitle the holder to buy equity securities at a specific price for a specified
period of time, provided that no more than 2% of its assets are invested in
warrants not listed on the New York or American Stock Exchanges.

Foreign Currency Transactions. Each of the Funds (other than the
Short-Term Government Securities and the Money Market Funds) may enter into
forward foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. Since investment in
foreign companies will usually involve currencies of foreign countries, and
since a Fund may temporarily hold funds in bank deposits in foreign currencies
during the course of investment programs, the value of the assets of a Fund as
measured in United States dollars may be affected by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversion between various currencies.

A Fund may enter into forward contracts only under two circumstances.
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the investment is purchased or sold and the
date on which payment is made or received.

Second, when the Subadviser of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the

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<PAGE>

Fund's portfolio investments denominated in such foreign currency if the Fund
either (i) holds, and segregates until the settlement date, liquid assets in an
amount sufficient to meet the purchase price or (ii) enters into an offsetting
forward currency contract for the forward sale of securities of equal value that
it owns. The precise matching of the forward contract amounts and the value of
the 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 value of those investments between the date the forward
contract is entered into and the date it matures.

The Funds generally will not enter into a forward contract
with a term of greater than one year. The Funds' ability to
engage in forward contracts may be limited by tax considerations.
The Funds may also engage in currency futures contracts and
related options. See "Options and Futures Transactions: Currency
Futures and Related Options."

When-Issued and Delayed Delivery Transactions. As described in the text
of the Prospectus following the caption "General Policies and Risk
Considerations--Forward Commitments, When- Issued and Delayed Delivery
Transactions," the Short-Term Government Securities Fund may enter into
agreements with banks or broker-dealers for the purchase or sale of securities
at an agreed-upon price on a specified future date. Such agreements might be
entered into, for example, when the Fund anticipates a decline in interest rates
and is able to obtain a more advantageous yield by committing currently to
purchase securities to be issued later. When the Fund purchases securities on a
when-issued or delayed delivery basis, it is required to either (i) segregate
and maintain with the Fund's custodian cash, U.S. Government securities or other
high grade debt obligations in an amount equal on a daily basis to the amount of
the Fund's when- issued or delayed delivery commitments or (ii) enter into an
offsetting forward sale of securities it owns equal in value to those purchased.
The Fund will only make commitments to purchase securities on a when-issued or
delayed-delivery basis with the intention of actually acquiring the securities.
However, the Fund may sell these securities before the settlement date if it is
deemed advisable as a matter of investment strategy. When the time comes to pay
for when-issued or delayed-delivery securities, the Fund will meet its
obligations from then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the when-issued
or delayed delivery securities themselves (which may have a value greater or
less than the Fund's payment obligation).

AMORTIZED COST VALUATION AND DAILY DIVIDENDS

The valuation of the Money Market Fund's portfolio instruments at
amortized cost is permitted in accordance with

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Securities and Exchange Commission Rule 2a-7 and certain procedures adopted by
the Trustees. The amortized cost of an instrument is determined by valuing it at
cost originally and thereafter amortizing any discount or premium from its face
value at a constant rate until maturity, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although the amortized
cost method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund would
receive if the instruments were sold. Consequently, changes in the market value
of portfolio instruments during periods of rising or falling interest rates will
not normally be reflected either in the computation of net asset value of the
Fund's portfolio or in the daily computation of net income. Under the procedures
adopted by the Trustees, the Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less and invest in securities determined by
the Trustees to be of high quality with minimal credit risks. The Trustees have
also established procedures designed to stabilize, to the extent reasonably
possible, the Fund's price per share as computed for the purpose of
distribution, redemption and repurchase at $1.00. These procedures include
review of the Fund's portfolio holdings to determine whether the Fund's net
asset value calculated by using readily available market quotations deviates
from $1.00 per share, and, if so, whether such deviation may result in material
dilution or is otherwise unfair to existing shareholders. In the event the
Trustees determine that such a deviation exists, or in any event if the
deviation exceeds .5%, they will take such corrective action as they regard as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; redemption of shares in kind; or establishing a
net asset value per share by using readily available market quotations.

Since the net income of the Money Market Fund is declared as a dividend
each time it is determined, the net asset value per share of the Fund remains at
$1.00 per share immediately after such determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund representing
the reinvestment of dividend income is reflected by an increase in the number of
shares of the Fund in the shareholder's account at the end of each month. It is
expected that the Fund's net income will be positive each time it is determined.
However, if because of realized losses on sales of portfolio investments, a
sudden rise in interest rates, or for any other reason the net income of the
Fund determined at any time is a negative amount, the Fund will offset such
amount allocable to each then shareholder's account from dividends accrued
during the month with respect to such account. If at the time of payment of a
dividend (either at the regular monthly dividend payment date, or, in the case
of a

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shareholder who is withdrawing all or substantially all of the shares in an
account, at the time of withdrawal), such negative amount exceeds a
shareholder's accrued dividends, the Fund will reduce the number of outstanding
shares by treating the shareholder as having contributed to the capital of the
Fund that number of full and fractional shares which represent the amount of the
excess. Each shareholder is deemed to have agreed to such contribution in these
circumstances by his or her investment in the Fund.

EXCHANGE PRIVILEGE

As described in the Prospectus under the caption "Exchanging and
Redeeming Shares," a shareholder may exchange shares of any Fund for shares of
any other Fund on the basis of their respective net asset values beginning 10
days after their purchase on any day the New York Stock Exchange is open. Orders
for exchanges accepted by the Distributor prior to 4:00 p.m. (Eastern Time) on
any day the Trust is open for business will be executed at the respective net
asset values determined as of the close of business that day. Orders for
exchanges received after 4:00 p.m. (Eastern Time) on any business day will be
executed at the respective net asset values determined at the close of the next
business day.

An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to restrict exchanges to one purchase and redemption of shares in the
same Fund during any 120-day period.

The Trust reserves the right to modify or discontinue the exchange
privilege at any time. Except as otherwise permitted by SEC regulations, the
Trust will give 60 days' advance written notice to shareholders of any
termination or material modification of the exchange privilege.

HOW TO BUY

The procedures for purchase of Trust shares are summarized in the text
of the Prospectus under the caption "How to Buy Shares." The Trust reserves the
right to reject any purchase orders.

Each Fund has authorized one or more brokers to receive on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to receive purchase and redemption orders on the Fund's behalf.
Each Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, receives
the order and, accordingly, orders received by an authorized broker or the
broker's authorized designee will be

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priced at the Fund's net asset value next computed after they are received by
the authorized broker or the broker's authorized designee.

In addition to the methods described therein, shares may be purchased
through regular payroll deductions, provided that such deductions are available
through the relevant employer. The minimum initial investment and minimum
additional investment through regular payroll deduction is $50. For more
information about purchasing Trust shares through regular payroll deductions,
please call Investor Services at 1-800-662-4769.

HOW TO REDEEM

The procedures for redemption of Trust shares are summarized in the
text of the Prospectus under the caption "Exchanging and Redeeming Shares."

The Trust may suspend the right of redemption and may postpone payment
only when the New York Stock Exchange is closed for other than customary
weekends and holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during any emergency which makes it impracticable for the Trust to dispose of
its securities or to determine fairly the value of its net assets, or during any
other period permitted by order of the Securities and Exchange Commission.

The Trust reserves the right to redeem shares and mail the proceeds to
the shareholder if at any time the net asset value of the shares in the
shareholder's account in any Fund falls below a specified level due to
redemptions, currently set at $1,000. Shareholders will be notified and will
have 60 days to bring the account up to the required level before any redemption
action will be taken by the Trust. The Trust also reserves the right to redeem
shares in a shareholder's account in excess of an amount set from time to time
by the Trustees. No such limit is presently in effect, but such a limit could be
established at any time and could be applicable to existing as well as future
shareholders.

HOW NET ASSET VALUE IS DETERMINED

As described in the text of the Prospectus following the caption
"Determination of Net Asset Value and Pricing," the net asset value of shares of
each Fund of the Trust will be determined once on each day on which the New York
Stock Exchange is open, as of the close of regular trading on the Exchange. The
Trust expects that the days, other than weekend days, that the Exchange will not
be open are New Year's Day, Rev. Dr. Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.

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Portfolio securities, options, futures and options on futures for which market
quotations are readily available are valued at market value, which is determined
by using the last reported sale price, or, if no sales are reported, the last
reported bid price. Over-the-counter options are valued at fair value, as
determined in good faith by the Trustees or by persons acting at their
direction, based on prices supplied by a broker, usually the option
counterparty. Obligations having remaining maturities of 60 days or less and
securities held in the Money Market Fund portfolio are valued at amortized cost.
The amortized cost value of a security is determined by valuing it at cost
originally and thereafter amortizing any discount or premium from its face value
at a constant rate until maturity, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although the amortized
cost method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund would
receive if the instruments were sold. Consequently, changes in the market value
of portfolio instruments during periods of rising or falling interest rates will
not be reflected either in the computation of the net asset value of the Fund's
portfolio or, in the case of the Money Market Fund, in the daily computation of
net income.

As described in the Prospectus, certain securities and assets of the
Funds are valued at fair value as determined in good faith by the Trustees or by
persons acting at their direction. The fair value of any securities from time to
time held by any Fund of the Trust for which no ready market exists is
determined in accordance with procedures approved by the Trustees. The Trustees,
however, are ultimately responsible for such determinations. The fair value of
such securities is generally determined as the amount which the Trust 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, and may include receiving a quote
from a broker and the use of a pricing service. Consideration may also be 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 Trust in connection with such disposition). In addition, such specific
factors may also be considered as the cost of the investment, 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 foreign securities, as well as corporate bonds,
U.S. Government Securities and money market instruments is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in determining the net asset value of a Fund's

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<PAGE>

shares are computed as of such times. Foreign currency exchange rates are also
generally determined 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 the
Fund's net asset value. If events materially affecting the value of a Fund's
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Trustees.

CALCULATION OF YIELD AND TOTAL RETURN

Yield of the Money Market Fund. The "Yield" of the Money Market Fund
for a seven-day period (the "base period") will be computed by determining the
"net change in value" (calculated as set forth below) of a hypothetical account
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the base
period to obtain the base period return, and multiplying the base period return
by 365/7 with the resulting yield figure carried to the nearest hundredth of one
percent. Net changes in value of a hypothetical account will include the value
of additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares,
but will not include realized gains or losses or unrealized appreciation or
depreciation on portfolio investments. Yield may also be calculated on a
compound basis (the "Effective Yield") which assumes that net income is
reinvested in Fund shares at the same rate as net income is earned by the Fund
for the base period.

The Money Market Fund's Yield and Effective Yield will vary in response
to fluctuations in interest rates. For comparative purposes the current and
Effective Yields should be compared to current and effective yields offered by
competing money market funds for that base period only and calculated by the
methods described above.

Yields of the Asset Allocation, Fixed Income and Short-Term Government
Securities Funds. Yields of these Funds will be computed by analyzing net
investment income for a recent 30-day period and dividing that amount by the
maximum offering price (reduced by any undeclared earned income expected to be
paid shortly as a dividend) on the last trading day of that period. Net
investment income will reflect amortization of any market value premium or
discount of fixed income securities (except for obligations backed by mortgages
or other assets) and may include recognition of a pro rata portion of the stated
dividend rate of dividend paying portfolio securities. The Funds' Yields will
vary from time to time depending upon market conditions, the composition of the
Funds' portfolios and operating expenses of the Trust allocated to each Fund.
These factors, and possible

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<PAGE>

differences in the methods used in calculating yield, should be considered when
comparing a Fund's Yield to yields published for other investment companies and
other investment vehicles. Yield should also be considered relative to changes
in the value of the Funds' shares and to the relative risks associated with the
investment objectives and policies of the Funds.

At any time in the future, yields may be higher or lower than past
yields and there can be no assurance that any historical results will continue.

Investors in these Funds are specifically advised that the net asset
value per share of each Fund will vary just as Yields for each Fund will vary.
An investor's focus on the Yield to the exclusion of the consideration of the
value of shares of that Fund may result in the investor's misunderstanding the
Total Return he or she may derive from that Fund.

Calculation of Total Return. Total Return with respect to a Fund is a
measure of the change in value of an investment in such Fund over the period
covered, which assumes any dividends or capital gains distributions are
reinvested immediately rather than paid to the investor in cash. The formula for
Total Return used herein includes four steps: (1) adding to the total number of
shares purchased by a hypothetical $10,000 investment in the Fund all additional
shares which would have been purchased if all dividends and distributions paid
or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $10,000 as of
the end of the period by multiplying the total number of shares owned at the end
of the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $10,000 investment.

PERFORMANCE COMPARISONS

Yield and Total Return. Each Fund may from time to time include the
Total Return of its shares in advertisements or in information furnished to
present or prospective shareholders. Each of the Asset Allocation, Fixed Income
and Short-Term Government Securities Funds may from time to time include the
Yield and/or Total Return of its shares in advertisements or information
furnished to present or prospective shareholders. The Money Market Fund may from
time to time include its Yield and Effective Yield in advertisements or
information furnished to present or prospective shareholders. Each Fund may from
time to time include in advertisements or information furnished to present or
prospective shareholders (i) the ranking of performance figures relative to such
figures for groups of mutual funds categorized by Lipper Analytical Services,
Inc. as having the same investment objectives,(ii) the rating assigned to the

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<PAGE>

Fund by Morningstar, Inc. based on the Fund's risk-adjusted performance relative
to other mutual funds in its broad investment class, and/or (iii) the ranking of
performance figures relative to such figures for mutual funds in its general
investment category as determined by CDA/Weisenberger's Management Results.

Performance information may be quoted numerically or may be presented
in a graph, table or other illustration.

Performance information may also be used to compare the performance of
the Fund against certain widely acknowledged standards or indices for stock and
bond market performance, including those listed below.

EAFE Index. The Europe, Australia & Far East Index contains over 1000
stocks from 20 different countries with Japan (approximately 50%), United
Kingdom, France and Germany being the most heavily weighted.

IBC's Money Fund Report Average -- Taxable (commonly known as
Donoghue's Taxable Money Market Fund Average). An average of approximately 750
taxable money market funds published by IBC/Donoghue, Inc.

Lehman Brothers Government/Corporate Bond Index. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged list of publicly issued U.S.
Treasury obligations, debt obligations of the U. S. Government and its agencies
(excluding mortgage-backed securities), fixed-rate, non-convertible,
investment-grade corporate debt securities and U.S. dollar-denominated, SEC-
registered non-convertible debt issued by foreign governmental entities or
international agencies used as a general measure of the performance of fixed
income securities.

Lehman Brothers Long-Term Treasury Index. The Lehman Brothers Long-Term
Treasury Index is a market weighted index of all publicly held Treasury issues
with maturities greater than 10 years.

Merrill Lynch 1-3 Year Treasury Index. The Index contains
primarily all U.S. Treasury Notes and Bonds with remaining
maturities of one to three years.

90-Day Treasury Bill Index. The index is calculated using a one-bill
portfolio containing the most recently auctioned 90-day Treasury bill.

Russell 2000 Index. The index contains the 2000 smallest of the 3000
largest U.S.-domiciled corporations, ranked by market capitalization.

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<PAGE>

S&P 500 Index. The S&P 500 is the most common index for the
overall U.S. stock market. It is comprised of 500 of the largest
U.S. companies representing all major industries.

Salomon Brothers Broad Investment Grade Index. The Index
contains 5000 U.S. Treasury, Agency, Mortgage and Corporate
Bonds. Credit quality must be investment grade (AAA-BBB by
Standard & Poor's).

65% S&P Index/30% Lehman Brothers Long-Term Treasury Index/5% 90-day
Treasury Bills. The 65% S&P 500 Index/30% Lehman Brothers Long-Term Treasury
Index/5% 90-day Treasury Bills is a benchmark representing a hypothetical
portfolio 65% of which is invested in the S&P 500, 30% of which is invested in
the Lehman Brothers Long-Term Treasury Index, and 5% of which is invested in
90-day Treasury Bills.

From time to time, articles about the Funds regarding performance,
rankings and other characteristics of the Funds may appear in national
publications including, but not limited to, the Wall Street Journal, Forbes,
Fortune, CDA Investment Technologies and Money Magazine. In particular, some or
all of these publications may publish their own rankings or performance reviews
of mutual funds, including the Funds. References to or reprints of such articles
may be used in the Funds' promotional literature. References to articles
regarding personnel of the Manager or the Subadvisers who have portfolio
management responsibility may also be used in the Funds' promotional literature.

PERFORMANCE DATA

The manner in which Total Return and Yield of the Funds will be
calculated for public use is described above. The following table summarizes the
calculation of Total Return and Yield for the Funds, where applicable, (i) for
the one-year period ended June 30, 1999, (ii) for the five-year period ended
June 30, 1999 and (iii) since the commencement of operations (July 1, 1992 for
all Funds other than the Small Cap Fund, and November 1, 1995 for the Small Cap
Fund) through June 30, 1999.

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<PAGE>

PERFORMANCE DATA

Average
Annual Average
Total Annual
Average Return Total
Annual for the Return
Total Return Five- from the
for the Year Commencement
Current SEC One-Year Period Period of Operations
Yield ended ended through
FUND at 6/30/99+ 6/30/99 6/30/99 6/30/99
<S> <C> <C> <C> <C>
Growth N/A 30.56% 28.15% 23.19%
Value N/A 6.59% 22.86% 18.47%
International N/A 7.21% 11.30% 11.04%
Small Cap N/A -19.07% N/A 10.72%*
Asset Allocation N/A 17.19% 19.98% 15.76%
Fixed Income 6.19% 1.07% 6.81% 6.54%
Short-Term 5.36% 3.27% 5.12% 4.67%
Government
Securities
Money Market 4.56% 4.89% 5.20%** 4.51%**
</TABLE>

*Performance for the Small Cap Fund would have been lower if an expense
limitation had not been in effect. In the absence of this expense limitation,
actual performance would have been ____% for the period since commencement of
operations (November 1, 1995).

**Performance for the Money Market Fund would have been lower if a portion of
the management fee had not been waived by the Manager during the period January
1, 1993 to October 31, 1995. In the absence of this limitation, actual
performance would have been ____% for the five-year period and ____% for the
period since commencement of operations (July 1, 1992).

+The yield shown for the Fixed Income and Short-Term Government Securities Funds
is the 30-day current yield as of 6/30/99. The yield shown for the Money Market
Fund is a seven-day current yield as of 6/30/99, in accordance with Securities
and Exchange Commission rules for reporting yields of money market funds. The
Money Market Fund's seven-day effective yield as of June 30, 1999 was 4.66%.

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<PAGE>

TAXES

The tax status of the Trust and the distributions which it
may make are summarized in the Prospectus under the heading
"Taxes."

Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order so to qualify, each Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or 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) each year
distribute at least 90% of its dividend, interest (including tax-exempt
interest), certain other income and the excess, if any, of its net short-term
capital gains over its net long-term capital losses; and (c) diversify its
holdings so that, at the end of each fiscal quarter (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items, U.S.
Government securities, securities of other regulated investment companies, and
other securities, limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and 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 one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses. By so qualifying, each Fund will not be subject to
federal income taxes to the extent that its net investment income, net realized
short-term capital gains and net realized long-term capital gains are
distributed to shareholders.

If a Fund 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 a Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, the Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by the Fund in January of a year generally is
deemed to have been paid by the Fund 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. Each Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.

In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part

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<PAGE>

as a return of capital. A return of capital is not taxable to a shareholder and
has the effect of reducing the shareholder's basis in the shares. To the extent
such distributions exceed a shareholder's basis in the shares the distributions
will be taxed to the shareholder as capital gain.

Hedging Transactions. If a Fund engages in certain 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, constructive sale and short sale rules),
the effect of which may be to accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund'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 Fund engaging in such transactions will endeavor to make any
available elections pertaining to such transactions in a manner believed to be
in the best interests of the Fund.

Certain of a Fund's hedging activities (including its transactions in
foreign currencies) are likely to produce a difference between its book income
and its taxable income. If a Fund'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 Fund's remaining earnings and profits, 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 the Fund's book income is less than its taxable income, the Fund could be
required to make distributions exceeding book income to qualify as a regulated
investment company that is accorded special tax treatment.

Foreign Currency-Denominated Securities and Related Hedging
Transactions. A Fund's transactions in foreign currency- denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts 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.

Zero-Coupon and Payment-in-Kind Securities. Current federal tax law
requires the holder of a Treasury or other fixed income zero-coupon security to
accrue as income each year a portion of the discount at which the security was
purchased, even though the holder receives no interest payment in cash on the
security during the year. In addition, so-called payment-in-kind securities give
rise to income which is required to be distributed and is taxable even though
the Fund holding the security receives no interest payments in cash on the
security during the year. Accordingly, each Fund that holds these kinds of
securities may be required to pay out as an income distribution each year an
amount which is greater than the total

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<PAGE>

amount of cash interest the Fund actually received. These distributions may be
made from the cash assets of the Fund or by liquidation of portfolio securities,
if necessary. The Fund may realize gains or losses from these liquidations. If a
Fund realizes net capital gains from these transactions, its shareholders may
receive a larger capital gain distribution than they would have received in the
absence of these transactions.

Distributions from Net Realized Capital Gains. As described in the
Prospectus, the Trust's policy is to distribute substantially all of the net
realized capital gain, if any, of each Fund, after giving effect to any
available capital loss carryover. Net realized capital gain for any Fund is the
excess of net realized long-term capital gain over net realized short-term
capital loss. Each Fund of the Trust is treated as a separate entity for federal
income tax purposes and accordingly its net realized gains or losses will be
determined separately, and capital loss carryovers will be determined and
applied on a separate Fund basis. Each of the Funds distributes its net realized
capital gains annually, although the Money Market Fund may distribute any net
realized long-term capital gains more frequently if necessary in order to
maintain a net asset value of $1.00 per share for the shares of that Fund.

Sixty percent of any gain or loss realized by any Fund (i) from net
premiums, from expired nonequity listed options and from closing purchase
transactions, (ii) with respect to listed nonequity options upon the exercise
thereof, and (iii) from transactions in certain foreign currency contracts,
regulated futures contracts and nonequity listed options thereon generally will
constitute long-term capital gains or losses and the balance will be short-term
gains or losses.

Since Funds which invest in zero-coupon securities will not receive
cash interest payments thereon, to the extent shareholders of these Funds elect
to take their distributions in cash, the relevant Fund may have to generate the
required cash from the disposition of non-zero-coupon securities, or possibly
from the disposition of some of its zero-coupon securities that it otherwise
would have continued to hold.

Taxation of Shareholders. For federal income tax purposes,
distributions paid from net investment income and from any net realized
short-term capital gain (that is, net gains on securities held for not more than
a year), including premiums from expired options and gains from any closing
purchase transactions with respect to options written by the Trust for any Fund,
are taxable to shareholders at ordinary income rates, whether received in cash
or in additional shares. Distributions designated by a Fund as deriving from net
gains on securities held for more than one year will be taxable to shareholders
as such (generally at a 20 percent rate for noncorporate

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<PAGE>

shareholders), regardless of how long a shareholder has held his
or her shares.

All dividends and distributions of a Fund, whether received in shares
or cash, are taxable for U.S. federal income tax purposes to the shareholder who
receives them and must be reported by such shareholder on his or her federal
income tax return. A dividend or capital gains distribution received after the
purchase of a Fund's shares reduces the net asset value of the shares by the
amount of the dividend or distribution and will be subject to federal income
taxes. A subsequent loss on the sale of shares held for six months or less will
be treated as a long-term capital loss for federal income tax purposes to the
extent of any long-term capital gain distribution made with respect to such
shares.

Dividends and distributions on a Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed a Fund's
realized income and gains, even though such dividends and distributions may
economically represent a return of a particular shareholder's investment. Such
distributions are likely to occur in respect of shares purchased at a time when
a Fund's net asset value reflects gains that are either unrealized, or realized
but not distributed.

Annually, shareholders will receive information as to the tax status of
distributions made by the Trust in each calendar year.

The Trust is required to withhold and remit to the U.S. Treasury 31% of
all dividend income earned by any shareholder account for which an incorrect or
no taxpayer identification number has been provided or where the Trust is
notified that the shareholder has under-reported income in the past (or the
shareholder fails to certify that he or she is not subject to such withholding).
In addition, the Trust will be required to withhold and remit to the U.S.
Treasury 31% of the amount of the proceeds of any redemption of shares of a
shareholder account for which an incorrect or no taxpayer identification number
has been provided.

The foregoing relates to U.S. federal income taxation. Distributions
only may also be subject to state and local taxes. The Trust is organized as a
Massachusetts business trust. Under current law, so long as each Fund qualifies
for the federal income tax treatment described above, it is believed that
neither the Trust nor any Fund will be liable for any income or franchise tax
imposed by Massachusetts.

Statements and Reports. You will receive a confirmation statement after
every transaction that affects the share balance in any of your accounts.

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<PAGE>

By January 31 of each year, The Preferred Group will send you the
following reports which may be used to complete your U.S.
income tax return:

Form 1099-DIV Reports taxable distributions during the preceding calendar year.

Form 1099-B Reports redemption proceeds during the preceding calendar year.

Form 1099-R Reports distributions from IRAs and 403(b) plans during the
preceding calendar year.

By the end of February of each year, The Preferred Group will send you
a semiannual report that includes unaudited financial statements for the six
months ending the preceding December 31, as well as a list of portfolio holdings
as of that date.

By the end of August each year, The Preferred Group will send you an
annual report that includes audited financial statements for the fiscal year
ending the preceding June 30, as well as a list of portfolio holdings as of that
date.

MANAGEMENT OF THE TRUST

Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:

Name, Address and Age Position(s) Held with the Principal Occupation(s) During
Trust Past 5 Years
F. Lynn McPheeters*, 57, Trustee Vice President and Chief
100 N.E. Adams Street Financial Officer, Caterpillar
Peoria, IL 61629-5330 Inc., 1998 to present;
Treasurer, Caterpillar Inc.,
1996 to 1998; Executive Vice
President, Caterpillar
Financial Services Inc., 1990
to 1996

David Bomberger, 44, President President and Director,
411 Hamilton Boulevard Caterpillar Investment
Peoria, IL 61602 Management Ltd.; President and
Director, Caterpillar
Securities Inc.; Vice
President, Commercial
Mortgages, Commercial
Federal Bank; Senior
Vice President of
Finance, Senior Vice
President of Investments,
Treasurer and Chief
Investment Officer, The
Guarantee Life
Companies, Inc.

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<PAGE>

Gary Michael Anna, 46, Trustee Vice President, Business
1501 W. Bradley Avenue Affairs, Bradley University
Peoria, IL 61625
William F. Bahl, 48, Trustee Chairman of the Board, Bahl &
212 E. Third Street Gaynor, Inc. (a registered
Suite 200 investment adviser)
Cincinnati, OH 45202
Kenneth J. Zika*, 52, Trustee Treasurer, Caterpillar Inc.,
100 N.E. Adams Street 1998 to present; Cost
Peoria, IL 61629-5330 Management and Business
Services Manager, Caterpillar
Inc., 1997-1998; Business
Resource Manager, Caterpillar
Inc., 1994-1997
Dixie Louise Mills, 51, Trustee Dean, College of Business,
Illinois State University Illinois State University
15 Williams Hall
Normal, IL 61790-5500
Fred L. Kaufman, 52, Vice President and Treasurer Treasurer, Caterpillar
411 Hamilton Boulevard Investment Management Ltd.;
Peoria, IL 61602 Treasurer and Director,
Caterpillar Securities Inc.
Richard P. Konrath, 38, Clerk Securities Counsel,
100 N.E. Adams Street Caterpillar Inc.
Peoria, IL 61629-5330
</TABLE>

* Messrs. McPheeters and Zika are each "interested persons" (as defined
in the 1940 Act) of the Trust, the Manager and the Distributor and,
therefore, may benefit from the management fees paid to the Manager.

The mailing address of each of the officers and Trustees is c/o the
Trust, 411 Hamilton Boulevard, Suite 1200, Peoria, Illinois 61602.

The Trust's Agreement and Declaration of Trust provides that the Trust
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his or her duties. The Trust,
at its expense, will provide liability insurance for the benefit of its Trustees
and officers.

Trustees other than those who are interested persons of the Manager
receive an annual fee of $10,000 plus $1,500 for each Trustees' meeting
attended. The table below shows the compensation paid to the Trust's Trustees
and officers for the year ended June 30, 1999.

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<PAGE>

Name of Person, Aggregate Pension or Estimated Annual Total
Position Compensation from Retirement Benefits Upon Compensation from
the Trust Benefits Accrued Retirement the Trust and
as Part of Fund Fund Complex Paid
Expenses to Trustees
<S> <C> <C> <C> <C>
Gary Michael $16,000 $0 $0 $16,000
Anna, Trustee
William F. Bahl, $16,000 $0 $0 $16,000
Trustee
Dixie Louise $16,000 $0 $0 $16,000
Mills, Trustee
</TABLE>

At the date of this Statement, the Trust believes that the officers and
Trustees as a group own less than 1% of the outstanding shares of any Fund. As
of September 30, 1999, the following entities were the recordholders of the
following percentages of outstanding securities of the following Funds:

Percentage Ownership
as of September 30, 1999

Caterpillar Caterpillar Caterpillar Preferred
Investment Inc. Supp- Insurance Stable
Trust lemental Company Principal
401(k) Plan Unemploy- Ltd. Collective
ment and Insurance Trust
Benefits Reserves1
Group
Insurance
Trust A
and
Caterpillar
Group
Insurance
Trust B
FUND % TOTAL % TOTAL % TOTAL % TOTAL

Growth _____% _____%
Value _____% _____%
International _____% _____% _____%
Small Cap _____% _____% _____%
Asset Allocation _____% _____%
Fixed Income _____% _____% _____%
Short-Term Government
Securities _____% _____%
Money Market _____% _____%

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<PAGE>

1 Does not include _____% of the outstanding shares of the Short-Term Government
Securities Fund held of record by American Bankers' Insurance Co.
for the benefit of Caterpillar Insurance Company Ltd.

To the extent either Caterpillar Investment Trust 401(k) Plan,
Caterpillar Inc. Supplemental Unemployment and Benefits Group Insurance Trust A
or Caterpillar Group Insurance Trust B, each a trust formed under the laws of
Illinois for the benefit of employees of Caterpillar Inc., beneficially owns
more than 25% of a Fund, it may be deemed to "control" such Fund. As a result,
it may not be possible for matters subject to a vote of a majority of the
outstanding voting securities of a Fund to be approved without the affirmative
vote of such shareholders, and it may be possible for such matters to be
approved by such shareholders without the affirmative vote of any other
shareholders.

The address of each of the recordholders listed above is 100 N.E. Adams
Street, Peoria, Illinois 61629, except for Caterpillar Insurance Company Ltd.,
the address of which is 3322 West End Avenue, Nashville, Tennessee 37203-1031.
As of September 30, 1999, the Trust believes that no other person, other than
Marshall & Ilsley Trust Company, which owns of record _____% of the outstanding
shares of the Value Fund,_____% of the outstanding shares of the Fixed Income
Fund, and _____% of the outstanding shares of the Asset Allocation Fund, owns
beneficially more than 5% of the outstanding shares of any Fund.

The Manager and the Subadvisers

Under written Management Contracts between the Trust and the Manager
with respect to each Fund, subject to such policies as the Trustees of the Trust
may determine, the Manager, at its expense, will furnish continuously an
investment program for the Trust and will make investment decisions on behalf of
the Funds and place all orders for the purchase and sale of portfolio securities
subject always to applicable investment objectives, policies and restrictions
provided. In order to assist it in carrying out its responsibilities, the
Manager has retained Subadvisers to render advisory services to each Fund other
than the Small Cap Fund and the Short-Term Government Securities Fund.

The Manager has advised the Funds since inception, and the Manager and
its subsidiaries have provided investment advisory services to other entities
since 1989. The Manager and the Subadvisers have managed assets for the
Caterpillar Inc. $_____ billion pension fund. The Manager currently manages more
than $823 million of assets in various stock and bond portfolios for the
Caterpillar Inc. pension fund, Caterpillar Insurance Company Ltd., Caterpillar
Inc. Supplemental Unemployment and Benefits Group Insurance Trust A and
Caterpillar Group Insurance Trust B, and other Caterpillar Inc. subsidiaries. In
addition, the

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<PAGE>

Manager manages more than $285 million in pension plan assets in its pension
group trust created in 1990 to serve the pension investment needs of Caterpillar
Inc. dealers and suppliers. The Manager is a wholly-owned subsidiary of
Caterpillar, Inc. Certain entities listed in Exhibit 21 to the most recent
Annual Report or Form 10-K under the Securities Exchange Act of 1934 of
Caterpillar Inc. (File No. 33-46194) may be deemed to be affiliates of both the
Manager and the Trust.

Subject to the control of the Trustees, the Manager also manages,
supervises and conducts the other affairs and business of the Trust, furnishes
office space and equipment, provides bookkeeping and certain clerical services
and pays all salaries, fees and expenses of officers and Trustees of the Trust
who are affiliated with the Manager. As indicated under "Portfolio Transactions
- -- Brokerage and Research Services," the Trust's portfolio transactions may be
placed with broker-dealers which furnish the Manager or the Subadvisers, without
cost, certain research, statistical and quotation services of value to them or
their respective affiliates in advising the Trust or their other clients. In so
doing, a Fund may incur greater brokerage commissions than it might otherwise
pay.

Each Fund pays the Manager a monthly Management Fee based on the
average net assets of the Fund at the following annual rates:

Annual Percentage of
Fund Average Net Assets
Growth....................................................... .75%
Value........................................................ .75
International................................................ .95
Small Cap.................................................... .75
Asset Allocation............................................. .70
Fixed Income................................................. .50*
Short-Term Government Securities............................. .35
Money Market................................................. .30

* CIML's fee with respect to the Fixed Income Fund is paid at an annual rate
equal to the lesser of (i) .50% of the average net assets of the Fixed Income
Fund and (ii) the rate at which (A) the excess of (I) the fee paid by the Fixed
Income Fund to CIML over (II) the fee paid by CIML to J.P. Morgan Investment
Management Inc. ("Morgan") with respect to the Fixed Income Fund (see below)
equals (B) the excess that would have existed under the advisory and subadvisory
fee schedules in effect with respect to the Fixed Income Fund prior to November
1, 1996.

For the fiscal years ended June 30, 1999, 1998, and 1997, the Funds
paid to the Manager the following amounts as Management Fees pursuant to the
relevant Management Contracts and, with respect to the Fixed Income Fund, a
management contract in effect

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<PAGE>

prior to November 1, 1996, under which the Manager was paid at the annual rate
of .65% of average net assets:

Fund Management Fees

Fiscal Year Ended June 30,
1999 1998 1997
---- ---- ----
Growth............... 4,114,809 $3,631,767 $2,983,971
Value................ 2,963,544 2,912,039 2,331,391
International........ 2,634,044 2,506,446 2,020,096
Small Cap1........... 843,965 918,583 507,435
Asset Allocation ... 1,453,411 1,023,199 773,756
Fixed Income......... 828,737 747,105 724,846
Short-Term
Government
Securities......... 222,980 199,653 187,517
Money Market......... 436,915 298,521 301,906

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

1 The Manager waived $69,005 in management fees during the fiscal year ended
June 30, 1997.

Under the Subadviser Agreement for each Fund between the Manager and the
Subadviser for such Fund (the "Subadviser Agreements"), subject always to the
control of the Trustees of the Trust, each Subadviser's obligation is to furnish
continuously an investment program for the Fund, to make investment decisions on
behalf of the Fund and to place all orders for the purchase and sale of
portfolio securities and all other investments for the Fund.

In performing their duties under the Subadviser Agreements, each Subadviser
is subject to the control of the Trustees, the policies determined by the
Trustees, the provisions of the Trust's Agreement and Declaration of Trust and
By-laws and any applicable investment objectives, policies and restrictions in
effect from time to time.

The Management Contracts for all of the Funds and the Subadviser Agreements
were approved by the Trustees of the Trust (including all of the Trustees who
are not "interested persons" of the Manager or the relevant Subadvisers). The
Management Contracts and the Subadviser Agreements continue in force with
respect to the relevant Fund for two years from their respective dates, and from
year to year thereafter, but only so long as their continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority of those Trustees who are not "interested persons" of the Trust,
the Manager or the relevant Subadviser, and by (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding shares
of that Fund. Each of the Management

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<PAGE>

Contracts and the Subadviser Agreements automatically terminates on assignment,
and each is terminable upon notice by the Trust. In addition, the Management
Contracts may be terminated on not more than 60 days' notice by the Manager to
the Trust, and the Subadviser Agreements may be terminated upon 60 days' notice
by the Manager or 90 days' notice by the Subadviser.

The Trust pays, in addition to the Management Fees described above, all
expenses not assumed by the Manager, including, without limitation, fees and
expenses of Trustees who are not "interested persons" of the Manager or the
Trust, interest charges, taxes, brokerage commissions, expenses of issue or
redemption of shares, fees and expenses of registering and qualifying the Trust
and shares of the respective Funds for distribution under federal and state laws
and regulations, charges of custodians, auditing and legal expenses, expenses of
determining the net asset value of the Trust's shares, reports to shareholders,
expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, proxy statements and proxies to existing shareholders, and
insurance premiums and professional association dues or assessments. The Trust
is also responsible for such nonrecurring expenses as may arise, including
litigation in which the Trust may be a party, and other expenses as determined
by the Trustees. The Trust may have an obligation to indemnify its officers and
Trustees with respect to such litigation.

Each Management Contract provides that the Manager shall not be subject to
any liability in connection with the performance of its services thereunder in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.

The Subadvisers. In order to assist it in carrying out its
responsibilities, the Manager has retained various Subadvisers to render
advisory services to the Funds, under the supervision of the Manager and the
Trust's Trustees. The Manager pays the fees of each of the Subadvisers. The fee
paid to the Subadvisers (other than Morgan, with respect to the Money Market
Fund) is based on the Fund assets managed or advised by such Subadviser (the
"Fund Assets") together with any other assets managed or advised by the
Subadviser, at the time the Subadviser Agreement was entered into or as agreed
by CIML and the Subadviser, relating to Caterpillar Inc. or any of its
affiliates (other than the Money Market Fund). (The Fund Assets together with
such other assets are collectively referred to as the "Combined Assets.") The
subadvisory fee is calculated by applying the average quarterly net asset value,
as of the last business day of each month in the calendar quarter, of the
Combined Assets to the annual rates for each Subadviser (other than Morgan, with
respect to the Money Market Fund), as set forth below. This amount is then
adjusted based upon the ratio of Fund Assets to Combined

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<PAGE>

Assets. The subadvisory fee paid to Morgan with respect to the
Money Market Fund is based solely on the average net assets of
the Fund.

Oppenheimer Capital ("Oppenheimer") is a Delaware general partnership
formed on July 1, 1987. Its address is 1345 Avenue of the Americas, New York,
New York 10105. Oppenheimer Capital is an indirect subsidiary of PIMCO Advisors
LP, a registered investment advisor with over $200 billion in assets under
management through its various subsidiaries. Oppenheimer provides investment
advice to individuals, state and local government agencies, pension and profit
sharing plans, trusts, estates, businesses and other organizations. The Manager
pays Oppenheimer for its subadvisory services with respect to the Value Fund a
fee, calculated as described above, at the annual rate of 0.50% of the first $50
million of Combined Assets, 0.375% of the next $50 million of Combined Assets
and 0.25% of Combined Assets in excess of $100 million. The Manager has informed
the Trust that for the fiscal years ended June 30, 1999, 1998, and 1997,
Oppenheimer earned $__________, $1,051,909 and $875,258, respectively, in
subadvisory fees.

Jennison Associates LLC("Jennison") provides investment advice to mutual
funds, institutional accounts and other entities. Its principal place of
business is 466 Lexington Avenue, New York, New York 10017. Jennison is a
wholly-owned subsidiary of The Prudential Insurance Company of America, a mutual
insurance company and a registered investment adviser. The Manager pays Jennison
for its subadvisory services with respect to the Growth Fund a fee, calculated
as described above, at the annual rate of 0.75% of the first $10 million of
Combined Assets, 0.50% of the next $30 million of Combined Assets, 0.35% of the
next $25 million of Combined Assets, 0.25% of the next $335 million of Combined
Assets, 0.22% of the next $600 million of Combined Assets and 0.20% of Combined
Assets in excess of $1 billion. The Manager has informed the Trust that for the
fiscal years ended June 30, 1999, 1998 and 1997, Jennison earned $1,323,163,
$1,185,328 and $994,791, respectively, in subadvisory fees with respect to the
Growth Fund.

Mellon Capital Management Corporation ("Mellon"), a Delaware corporation,
is located at 595 Market Street, Suite 3000, San Francisco, California 94105.
Mellon was founded in 1983 and as of June 30, 1999, manages over $80.6 billion
in funds. Mellon is a wholly-owned, indirect subsidiary of Mellon Bank
Corporation, Pittsburgh, Pennsylvania, a bank holding company which engages in
the businesses of retail banking, wholesale banking, and service products.
Mellon serves as an investment adviser and manager for institutional clients.
The Manager pays Mellon for its subadvisory services with respect to the Asset
Allocation Fund a fee, calculated as described above, at the annual rate of
0.50% of the first $200 million of Combined Assets and 0.20% of

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<PAGE>

Combined Assets in excess of $200 million. The Manager has informed the Trust
that for the fiscal years ended June 30, 1999, 1998, and 1997, Mellon earned
$207,483, $215,940 and $169,192, respectively, in subadvisory fees.

PanAgora Asset Management, Inc.'s ("PanAgora") principal place of business
is 260 Franklin Street, Boston, Massachusetts 02110. Fifty percent of the
outstanding voting stock of PanAgora is owned by each of Nippon Life Insurance
Company, a mutual life insurance company, and Putnam Investments, an investment
advisory firm. PanAgora currently provides asset allocation, indexing and
related investment advisory services to a variety of endowment funds, pension
accounts, other institutions and investment companies, with total assets under
management in excess of $16 billion. The Manager pays PanAgora for its
subadvisory services with respect to the Asset Allocation Fund a fee, calculated
as described above, at the annual rate of 0.50% of the first $10 million of
Combined Assets, 0.40% of the next $40 million of Combined Assets, 0.20% of the
next $50 million of Combined Assets and 0.10% of Combined Assets in excess of
$100 million. The Manager has informed the Trust that for the fiscal years ended
June 30, 1999, 1998, and 1997 PanAgora earned $134,213, $94,155 and $77,664,
respectively, in subadvisory fees.

Mercator Asset Management, L.P. provides investment advice to mutual funds
and other entities. Its principal place of business is 2400 East Commercial
Blvd., Ft. Lauderdale, Florida 33308. Mercator Asset Management, L.P. is a
limited partnership a minority portion of the limited partnership interest in
which is owned by The Prudential Insurance Company of America, a mutual
insurance company and a registered investment adviser. The Manager pays Mercator
Asset Management, L.P. for its subadvisory services with respect to the
International Fund a fee, calculated as described above, at the annual rate of
0.75% of the first $50 million of Combined Assets, 0.60% of the next $250
million of Combined Assets, and 0.45% of Combined Assets in excess of $300
million. The Manager has informed the Trust that for the fiscal years ended June
30, 1999, 1998, and 1997 Mercator Asset Management L.P. earned $_________,
$1,356,689 and $1,165,898, respectively, in subadvisory fees.

Morgan provides investment advice to mutual funds and other entities. Its
principal place of business is 522 Fifth Avenue, New York, New York 10036.
Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, an
international financial services corporation. The Manager pays Morgan for its
subadvisory services with respect to the Money Market Fund a fee computed and
paid quarterly at the annual rate of 0.15% of the average quarterly net assets,
as of the last business day of each month in the calendar quarter, of the Money
Market Fund. The Manager pays Morgan for its subadvisory services with respect
to the Fixed Income Fund a fee computed and paid quarterly at the

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<PAGE>

annual rate of 0.25% of the first $75 million of Combined Assets, 0.225% of the
next $75 million of Combined Assets, 0.175% of the next $150 million of Combined
Assets, 0.125% of the next $100 million of Combined Assets, and 0.10% of
Combined Assets in excess of $400 million. The Manager paid Morgan for its
subadvisory services with respect to the Short Term Government Securities Fund a
fee computed and paid quarterly at the annual rate of 0.50% of the first $10
million of Combined Assets, 0.40% of the next $40 million of Combined Assets,
0.20% of the next $50 million of Combined Assets, and 0.10% of Combined Assets
in excess of $100 million. The Manager has informed the Trust that for the
fiscal years ended June 30, 1999, 1998, and 1997, pursuant to the subadvisory
agreement described above and a subadvisory agreement in effect prior to
November 1, 1996, under which Morgan was paid quarterly at the annual rate of
0.30% of the average quarterly net assets of the Fixed Income Fund, as of the
last business day of each month in the calendar quarter, of the first $75
million of such assets, 0.25% of the next $75 million of such assets, 0.22% of
the next $150 million of such assets, and 0.15% of such assets in excess of $300
million, Morgan earned $_________, $186,150 and $240,532, respectively, in
subadvisory fees with respect to the Fixed Income Fund. The Manager has informed
the Trust that for the fiscal years ended June 30, 1999, 1998, and 1997, Morgan
earned $_________, $134,077 and $143,165, respectively, in subadvisory fees with
respect to the Money Market Fund. In addition, the Manager has informed the
Trust that for the fiscal year ended June 30, 1998, Morgan earned $41,022 in
subadvisory fees with respect to the Short Term Government Securities Fund.
Morgan is no longer the subadviser to the Short-Term Government Securities Fund.

Each of the Subadvisers also serves as investment adviser to certain
separate accounts with minimum balances ranging from $10 million to $50 million.
Jennison has informed the Trust that its separate account minimum balance is
typically $50 million.

The Subadvisers are registered as investment advisers with the Securities
and Exchange Commission. This registration does not involve supervision of
management or investment policy by any federal agency.

INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.

The Trust's independent accountants are _______________________, 160 Federal
Street, Boston, MA 02110. _______________________ conducts an annual audit of
the Trust, assists in the preparation of each Fund's federal and state income
tax returns and consults with the Trust as to matters of accounting and federal
and state income taxation. The financial statements included in the Trust's
Annual Report for the period ended June 30, 1999, filed electronically on August
27, 1999 (File No. 811-06602) are incorporated by reference ito this Statement
of Additional Information.

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<PAGE>

OTHER SERVICES

Custodial Arrangements. State Street Bank and Trust Company ("State
Street"), P.O. Box 1713, Boston, MA 02101, is the custodian for all Funds of the
Trust. As such, State Street holds in safekeeping certificated securities and
cash belonging to the Trust and, in such capacity, is the registered owner of
securities in book-entry form belonging to the Trust. Upon instruction, State
Street receives and delivers cash and securities of the Trust in connection with
Fund transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. State Street also maintains certain
accounts and records of the Trust. In addition, State Street has contracted with
various foreign banks and depositories to hold portfolio securities outside of
the United States on behalf of certain of the Funds. State Street also
calculates the total net asset value, total net income and net asset value per
share of each Fund on a daily basis (and as otherwise may be required by the
1940 Act) and performs certain accounting services for all Funds of the Trust.

As compensation for its services as custodian, the Funds accrued expenses
in the following amounts to be paid to State Street for the periods indicated:

Custodian
Year ended June 30
----------------------------------------
Fund 1999 1998 1997
----

Growth $127,000 $128,000 $117,000
Value $ 89,000 $ 91,000 $ 78,000
International $505,000 $501,000 $434,000
Small Cap $ 85,000 $ 93,000 $ 75,000
Asset
Allocation $197,000 $175,000 $180,000
Fixed Income $110,000 $107,000 $102,000
Short-Term
Government
Securities $ 49,000 $ 48,000 $ 44,000
Money Market $ 65,000 $ 65,000 $ 58,000

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<PAGE>

Transfer Agent. Boston Financial Data Services, Inc., The BFDS Building,
Two Heritage Drive, Quincy, MA 02171, acts as the Trust's transfer agent and
dividend disbursing agent.

As compensation for its services as transfer agent, the Funds accrued
expenses in the following amounts to be paid to Boston Financial Data Services,
Inc. for the periods indicated:

Transfer Agent
Year ended June 30
----------------------------------------
Fund 1999 1998 1997
----

Growth $162,000 $ 96,000 $ 93,000
Value $154,000 $ 92,000 $ 79,000
International $ 88,000 $ 71,000 $ 73,000
Small Cap $ 34,000 $ 25,000 $ 22,000
Asset
Allocation $ 96,000 $ 54,000 $ 56,000
Fixed Income $ 67,000 $ 52,000 $ 56,000

Short-Term
Government
Securities $ 26,000 $ 25,000 $ 26,000
Money Market $ 68,000 $ 49,000 $ 48,000

Distributor. Caterpillar Securities Inc. ("CSI"), a wholly-
owned subsidiary of CIML, is the Trust's principal underwriter.
CSI is not obligated to sell any specific amount of shares of the
Trust and will purchase shares for resale only against orders
therefor.

PORTFOLIO TRANSACTIONS

Investment Decisions. Investment decisions for the Trust and for the other
investment advisory clients of the Manager and the Subadvisers are made with a
view to achieving their respective investment objectives. The Manager and the
Subadvisers operate independently in providing services to their respective
clients. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, for example, 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

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<PAGE>

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 happens that two or more clients may simultaneously buy
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 opinion of the Manager or the relevant
Subadviser 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.

Brokerage and Research Services. Transactions on stock exchanges and other
agency transactions involve the payment by the Trust of brokerage commissions.
In the United States and certain foreign countries, such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction. There
is generally no stated commission in the case of securities, such as U.S.
Government securities, traded in the over-the-counter markets, but the price
paid by the Trust usually includes an undisclosed dealer commission or mark-up.
It is anticipated that most purchases and sales of portfolio securities for the
Money Market Fund will be with the issuer or with major dealers in money market
instruments acting as principals. Accordingly, it is not anticipated that the
Short- Term Government Securities or Money Market Funds will pay significant
brokerage commissions. In underwritten offerings, the price paid includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
Securities firms may receive brokerage commissions on transactions involving
options, futures and options on futures and the purchase and sale of underlying
securities upon exercise of options. The brokerage commissions associated with
buying and selling options may be proportionately higher than those associated
with general securities transactions.

When the Manager or a Subadviser places orders for the purchase and sale of
portfolio securities for a particular Fund and buys and sells securities for
such Fund it is anticipated that such transactions will be effected through a
number of brokers and dealers. In so doing, the Manager or the relevant
Subadviser, as the case may be, intends to use its best efforts to obtain for
each Fund the most favorable price and execution available, except to the extent
that it may be permitted to pay higher brokerage commissions as described below.
In seeking the most favorable price and execution, the Manager or the relevant
Subadviser, as the case may be, 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, the amount of commission, the timing of
the transaction taking into

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<PAGE>

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.

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 research, statistical and quotation services from broker-dealers
which execute portfolio transactions for the clients of such advisers.
Consistent with this practice, the Manager and the Subadvisers may receive
research, statistical and quotation services from many broker-dealers with which
the Trust's portfolio transactions are placed. These services, which in some
instances could also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews, evaluations
of securities and recommendations as to the purchase and sale of securities.
Some of these services may be of value to the Manager or the Subadvisers in
advising various of its clients (including the Trust), although not all of these
services are necessarily useful and of value in managing the Trust or any
particular Fund. The fees paid to the Manager and the Subadvisers are not
reduced because they receive such services.

As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Management Contracts and the Subadviser Agreements, the Manager and the
Subadvisers may cause a Fund to pay a broker-dealer which provides "brokerage
and research services" (as defined in the Securities Exchange Act of 1934) to
the Manager or the Subadvisers an amount of disclosed commission for effecting a
securities transaction for a Fund on an agency basis in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
The authority of the Manager and the Subadvisers to cause the Funds to pay any
such greater commissions is subject to such policies as the Trustees may adopt
from time to time.

The aggregate brokerage commissions paid by the Funds during the fiscal
years ended June 30, 1999, 1998, and 1997 and the amounts of brokerage
commissions allocated to persons or firms supplying research, statistical and
quotation services during such fiscal years are set forth below:
<TABLE>
<CAPTION>

Fiscal year ended June 30, 1999:

Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services

<S> <C> <C> <C>
Growth $611,267 $249,392,661 $252,974
Value 211,496 117,514,470 152,854

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<PAGE>

International 216,816 0 0
Small Cap 602,826 0 0
Asset Allocation 2,961 0 0
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0

</TABLE>

Fiscal year ended June 30, 1998:
Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services

<S> <C> <C> <C>
Growth $ 613,345 $303,884,643 $306,660
Value 55,691 21,835,794 27,404
International 279,567 0 0
Small Cap 497,411 0 0
Asset Allocation 1,437 0 0
Fixed Income 0 0 0
Short-Term
Gov't Securities 0 0 0
Money Market 0 0 0

</TABLE>

Fiscal year ended June 30, 1997:

Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services

<S> <C> <C> <C>
Growth $465,218 $174,031,891 $244,172
Value 67,421 9,384,874 13,200
International 326,670 0 0
Small Cap 322,594 0 0
Asset Allocation 4,457 0 0
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
</TABLE>

The Funds may from time to time place orders for the purchase or sale of
securities with brokers that may be affiliated with the Manager or a Subadviser.
In such instances, the placement of orders with such brokers would be consistent
with the Funds' objective of obtaining the best execution and could not be
dependent upon the fact that such brokers are affiliates of the Manager or a
Subadviser. With respect to orders placed with

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<PAGE>

affiliated brokers for execution on a national securities exchange, commissions
received must conform to Section 17(e)(2)(A) of the 1940 Act and Rule 17e-1
thereunder, which permit an affiliated person of a registered investment company
(such as the Trust), or any affiliated person of such person, to receive a
brokerage commission from such registered investment company provided that such
commission is reasonable and fair compared to the commissions received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time.

During the fiscal year ended June 30, 1999, the Growth Fund placed
orders for the purchase or sale of securities with J.P. Morgan Securities, Inc.,
an affiliate of Morgan. These brokerage transactions are set forth below:

Fiscal year ended June 30, 1999

% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions

Growth J.P. Morgan
Securities, Inc. $53,619 8.76% 6.78%

During the fiscal year ended June 30, 1998, the Growth Fund
placed orders for the purchase and sale of securities with J.P.
Morgan Securities, Inc., and Oppenheimer & Co., Inc., an
affiliate of Oppenheimer, and the Value Fund placed orders for
the purchase and sale of securities with Oppenheimer & Co. These
brokerage transactions are set forth below.

Fiscal year ended June 30, 1998
<TABLE>
<CAPTION>

% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions

<S> <C> <C> <C> <C>
Value Fund Oppenheimer $8,115 14.57% 16.77%
& Co.

Growth Fund J.P. Morgan 14,518 2.37% 3.49%
Securities,
Inc.

Oppenheimer 4,061 0.66% 0.69%
& Co.
</TABLE>

During the fiscal year ended June 30, 1997, the Growth Fund placed
orders for the purchase and sale of securities with J.P.

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<PAGE>

Morgan Securities, Inc., an affiliate of Morgan, and Oppenheimer & Co., Inc., an
affiliate of Oppenheimer, the Value Fund placed orders for the purchase and sale
of securities with Oppenheimer & Co., and the International Fund placed orders
for the purchase and sale of securities with J.P. Morgan. These brokerage
transactions are set forth below.

Fiscal year ended June 30, 1997
<TABLE>
<CAPTION>

% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions

<S> <C> <C> <C> <C>
Growth Fund J.P. Morgan $ 5,835 1.25% 0.97%
Securities, Inc.

Oppenheimer $ 3,906 0.84% 0.79%
& Co., Inc.

Value Fund Oppenheimer $12,316 18.27% 18.92%
& Co., Inc.

International
Fund J.P. Morgan $ 322 0.10% 0.10%
Securities, Inc.
</TABLE>

ORGANIZATION AND CAPITALIZATION OF THE TRUST

The Trust was established as a Massachusetts business trust under the
laws of Massachusetts by an Agreement and Declaration of Trust dated November
19, 1991. A copy of the Agreement and Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Trust's fiscal year
ends on June 30.

The Preferred Group has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series of such shares which, in turn, may be subdivided into
an unlimited number of classes of shares. The Preferred Group currently consists
of eight series of shares, each series of which represents interests in a
separate Fund. Each Fund is an open-end diversified management investment
company. The Funds' shares are not currently divided into classes.

Shares of the Trust are each entitled to one vote per share (with
proportional voting for fractional shares) on such matters as shareholders are
entitled to vote. Shareholders vote by individual Fund on all matters except (i)
when required by the law, shares shall be voted as a single class, and (ii) when
the Trustees have determined that the matter affects only the

-51-

<PAGE>

interests of one or more Funds, then only shareholders of such Funds affected
shall be entitled to vote thereon. There will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees have been elected by the shareholders, at
which time the Trustees then in office will call a shareholders' meeting for the
election of Trustees. In addition, Trustees may be removed from office by a
written consent signed by the holders of two-thirds of the outstanding shares of
the Trust and filed with the Trust's custodian or by a vote of the holders of
two-thirds of the outstanding shares of the Trust at a meeting duly called for
the purpose, which meeting shall be held upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders, who have been such for at least six months, and who hold
shares constituting 1% of the outstanding shares, stating that such shareholders
wish to communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Trust has undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting shareholders). Except as
set forth above, the Trustees shall continue to hold office and may appoint
their successors.

Shareholder Liability

Under Massachusetts law, shareholders could, under certain
circumstances, be held 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 Fund's property for all loss and expense of any
shareholder of that Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund of which
he is or was a shareholder would be unable to meet its obligations.

ADDITIONAL INFORMATION

Retirement Plan Services. The Preferred Group of Mutual Funds was
developed with an employee benefit perspective in mind. For individual
participants in employer-sponsored retirement plans, The Preferred Group
provides a flexible and diversified range of investment choices. Employers may
enhance their current plans by adding one or more of the funds. If a plan is
built

-52-

<PAGE>

around The Preferred Group and offers all or most of the funds,
two additional benefits are available: award-winning
communication materials and a 404(c) compliance program.

For more comprehensive services, The Preferred Group Retirement Plan
Services offers a turnkey 401(k) service with support from plan design and
enrollment to investment information, employee account information,
recordkeeping, trusteeship, administration, compliance and more. In addition,
several arrangements featuring world-class third-party administrators and
trustees are available for retirement plans desiring an unbundled approach.

IRAs and a direct rollover program are available to employees leaving a
retirement plan.

Investment Advisers. The Preferred Group brings to the mutual fund
marketplace the highly respected institutional investment advisers who service
the Caterpillar pension fund and who have demonstrated consistently superior
long-term performance. Collectively, they manage over $400 billion in assets.
Most were not previously available to institutions or individuals in a no-load
mutual fund. The Manager has represented to the Trust that the Funds' expense
ratios are competitive and believes that they are typically below average for
each Fund's Morningstar category.

Contact Information. The funds are available for a wide variety of
institutional and retail applications, including endowments, foundations,
corporations, insurance reserves and personal investing. Investors may contact
The Preferred Group of Mutual Funds directly at (800) 662-4769. Institutional
investors may call (309) 675-8147.

-53-

<PAGE>

APPENDIX A

TAX EXEMPT BOND, CORPORATE BOND AND COMMERCIAL PAPER RATINGS

Tax Exempt and Corporate Bond Ratings

Description of Moody's Investors Service, Inc.'s Corporate Bond
Ratings:

Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds 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.

B -- Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.

-54-

<PAGE>

Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.

C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

Description of Standard & Poor's Corporate Bond Ratings:

AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.

AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.

A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.

BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.

BB-B-CCC-CC-C -- Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major risk exposures to adverse
conditions.

D -- Bonds rated D are in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used on the filing of a bankruptcy petition if debt service
payments are jeopardized.

-55-

<PAGE>

Ratings of Commercial Paper

Description of Moody's Investors Service, Inc.'s Commercial Paper
Ratings:

Moody's Investors Service, Inc. evaluates the salient features that
affect a Commercial Paper issuer's financial and competitive position. Its
appraisal includes, but is not limited to, the review of such factors as:
quality of management, industry strengths and risks, vulnerability to business
cycles, competitive position, liquidity measurements, debt structure, operating
trends and access to capital markets. Differing degrees of weight are applied to
these factors as deemed appropriate for individual situations. Commercial Paper
issuers rated "Prime-1" are judged to be of the best quality. Their short-term
debt obligations carry the smallest degree of investment risk. Margins of
support for current indebtedness are large or stable with cash flow and asset
protection well assured. Current liquidity provides ample coverage of near-term
liabilities and unused alternative financing arrangements are generally
available. While protective elements may change over the intermediate or longer
term, such changes are most unlikely to impair the fundamentally strong position
of short-term obligations. Issuers in the Commercial Paper market rated
"Prime-2" are of high quality. Protection for short-term note holders is assured
with liquidity and value of current assets as well as cash generation in sound
relationship to current indebtedness. They are rated lower than the best
commercial paper issuers because margins of protection may not be as large or
because fluctuations of protective elements over the near or intermediate term
may be of greater amplitude. Temporary increases in relative short and overall
debt load may occur. Alternate means of financing remain assured. Issuers rated
Prime-1 and Prime-2 categories are judged to be investment grade.

Description of Standard & Poor's Commercial Paper Ratings:

Standard & Poor's describes its highest ("A") rating for commercial
paper as follows, with numbers 1, 2 and 3 being used to denote relative strength
within the "A" classification: Liquidity ratios are adequate to meet cash
requirements. Long- term senior debt rating should be "A" or better; in some
instances "BBB" credits may be allowed if other factors outweigh the "BBB". The
issuer should be well-established and the issuer should have a strong position
within its industry. The reliability and quality of management should be
unquestioned.

-56-

<PAGE>

APPENDIX B

DESCRIPTION OF MONEY MARKET FUND INVESTMENTS

Obligations Backed by Full Faith and Credit of the U.S. Government --
are bills, certificates of indebtedness, notes and bonds issued by (i) the U.S.
Treasury or (ii) agencies, authorities and instrumentalities of the U.S.
Government or other entities and backed by the full faith and credit of the U.S.
Government. Such obligations include, but are not limited to, obligations issued
by the Government National Mortgage Association, Farmers' Home Administration
and the Small Business Administration.

Other U.S. Government Obligations -- are bills, certificates of
indebtedness, notes, and bonds issued by agencies, authorities and
instrumentalities of the U.S. Government which are supported by the right of the
issuer to borrow from the U.S. Treasury or by the credit of the agency,
authority or instrumentality itself. Such obligations include, but are not
limited to, obligations issued by the Tennessee Valley Authority, the Bank for
Cooperatives, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks and the Federal National Mortgage Association.

Repurchase Agreements -- are agreements by which a Fund purchases a
U.S. Treasury or agency obligation and obtains a simultaneous commitment from
the seller (a domestic commercial bank or, to the extent permitted by the 1940
Act, a recognized securities dealer) to repurchase the security at an agreed
upon price and date. The resale price is in excess of the purchase price and
reflects an agreed upon market rate unrelated to the coupon rate on the
purchased security. Such transactions afford an opportunity for the Fund to earn
a return on temporarily available cash at no market risk, although the Fund may
be subject to various delays and risks of loss if the seller is unable to meet
its obligation to repurchase.

Certificates of Deposit -- are certificates issued against funds
deposited in a bank, are for a definite period of time, earn a specified rate of
return, and are normally negotiable.

Bankers' Acceptances -- are short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are term
"accepted" when a bank guarantees their payment at maturity.

Eurodollar Obligations -- obligations of foreign branches of
U.S. banks.

Yankeedollar Obligations -- obligations of domestic branches of foreign
banks.

-57-

<PAGE>

Commercial Paper -- refers to promissory notes issued by corporations
in order to finance their short-term credit needs.

Corporate Obligations -- include bonds and notes issued by corporations
in order to finance longer term credit needs.

-58-

<PAGE>

THE PREFERRED GROUP OF MUTUAL FUNDS

PART C. OTHER INFORMATION

Item 23. Exhibits

(a)(1). Agreement and Declaration of Trust -- incorporated
by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement.

(a)(2). Amendment No. 1 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(a)(3). Amendment No. 2 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(a)(4). Amendment No. 3 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(a)(5). Amendment No. 4 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(b). By-laws -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(c). Portions of the Registrant's Agreement and
Declaration of Trust and By-laws pertaining to
shareholder's rights -- incorporated by reference
to Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.

(d)(1). Form of Management Contract between The Preferred
Group of Mutual Funds (the "Trust") and
Caterpillar Investment Management Ltd. (the
"Manager" or "CIML") with respect to the Preferred
Growth Fund -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(d)(2). Form of Management Contract between the Trust and
the Manager with respect to the Preferred Value
Fund -- incorporated by reference to Post-

-1-

<PAGE>

Effective Amendment No. 11 to the Registrant's
Registration Statement.

(d)(3). Form of Management Contract between the Trust and
the Manager with respect to the Preferred
International Fund -- incorporated by reference to
Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.

(d)(4). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Small Cap Fund -- incorporated
by reference to Post- Effective Amendment No. 11 to the
Registrant's Registration Statement.

(d)(5). Form of Management Contract between the Trust and
the Manager with respect to the Preferred Asset
Allocation Fund -- incorporated by reference to
Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.

(d)(6). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Fixed Income Fund --
incorporated by reference to Post- Effective Amendment No. 13
to the Registrant's Registration Statement.

(d)(7). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Short- Term Government
Securities Fund -- incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration Statement.

(d)(8). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Money Market Fund --
incorporated by reference to Post- Effective Amendment No. 11
to the Registrant's Registration Statement.

(d)(9). Form of Subadviser Agreement between the Manager
and Jennison Associates Capital Corp. ("Jennison")
-- incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement.

(d)(10). Form of Subadviser Agreement between the Manager
and Oppenheimer Capital ("Oppenheimer") --
incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement.

(d)(11). Form of Subadviser Agreement between the Manager
and Mercator Asset Management, L.P. ("Mercator") -
- incorporated by reference to Post-Effective

-2-

<PAGE>

Amendment No. 11 to the Registrant's Registration
Statement.

(d)(12). Form of Subadviser Agreement between the Manager
and Mellon Capital Management Corporation
("Mellon") -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(d)(13). Form of Subadviser Agreement between the Manager
and PanAgora Asset Management, Inc. ("PanAgora") -
- incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement.

(d)(14). Form of Subadviser Agreement between the Manager
and J.P. Morgan Investment Management Inc.
("Morgan") with respect to the Preferred Fixed
Income Fund -- incorporated by reference to Post-
Effective Amendment No. 13 to the Registrant's
Registration Statement.

(d)(15). Form of Subadviser Agreement between the Manager and Morgan
with respect to the Preferred Money Market Fund --
incorporated by reference to Post- Effective Amendment No. 11
to the Registrant's Registration Statement.

(e). Form of Distributor's Contract between the Trust
and Caterpillar Securities Inc. -- incorporated by
reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement

(f). None.

(g). Form of Custodian Contract between the Trust and
State Street Bank and Trust Company ("State
Street") -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.

(h). Form of Transfer Agency and Service Agreement
between the Trust and State Street -- incorporated
by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement.

(i). Opinion and Consent of Ropes & Gray --
incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement.

(j). Consent of PricewaterhouseCoopers LLP.

(k). None.

-3-

<PAGE>

(l). Form of Initial Capital Agreement -- incorporated
by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement.

(m). None.

(n). None.

(o). Power of Attorney.

Item 24. Persons Controlled by or Under Common Control with
Registrant

The Registrant may be deemed to be controlled by Caterpillar Inc., a
Delaware corporation, which owns 100% of the outstanding voting securities of
CIML and Caterpillar Insurance Company Ltd., each of which may be deemed to
control one or more series of the Registrant, and for the benefit of the
employees of which Caterpillar Investment Trust 401(k) Plan, Caterpillar Inc.
Supplemental Unemployment and Benefits Group Insurance Trust A and Caterpillar
Group Insurance Trust B, which may be deemed to control one or more series of
the Registrant, were established. To the extent any of these entities may be
deemed to control the Registrant, the various entities listed in Exhibit 21 to
the most recent Annual Report on Form 10-K under the Securities Exchange Act of
1934 of Caterpillar Inc. (File No. 33-46194) may be deemed to be under common
control with the Registrant.

Item 25. Indemnification

Article VIII of the Registrant's Agreement and Declaration of Trust
provides as follows:

Section 1. Trustees, Officers, Etc. The Trust shall indemnify each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered

-4-

<PAGE>

Person's office. Expenses, including counsel fees so incurred by any such
Covered Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), shall be paid from time to time by Trust
in advance of the final disposition of any such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such Covered Person to repay
amounts so paid to the Trust if it is ultimately determined that indemnification
of such expenses is not authorized under this Article, provided, however, that
either (a) such Covered Person shall have provided appropriate security for such
undertaking, (b) the Trust shall be insured against losses arising from any such
advance payments or (c) either a majority of the disinterested Trustees acting
on the matter (provided that a majority of the disinterested Trustees then in
office act on the matter), or independent legal counsel in a written opinion,
shall have determined, based upon a review of readily available facts (as
opposed to a full trial type inquiry) that there is reason to believe that such
Covered Person will be found entitled to indemnification under this Article.

Section 2. Compromise Payment. As to any matter disposed of (whether by
a compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial type inquiry) that such Covered
Person is not liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry) to the effect that
such indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. Any approval pursuant to this Section shall not
prevent the recovery from any Covered Person of any amount paid to such Covered
Person in accordance with this Section as indemnification if such Covered Person
is subsequently adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.

-5-

<PAGE>

Section 3. Indemnification Not Exclusive. The right of indemnification
hereby provided shall not be exclusive of or affect any other rights to which
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and administrators
and a "disinterested Trustee" is a Trustee who is not an "interested person" of
the Trust as defined in Section 2(a)(19) of the 1940 Act (or who has been
exempted from being an "interested person" by any rule, regulation or order of
the Commission), and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person; provided, however, that the Trust shall
not purchase or maintain any such liability insurance in contravention of
applicable law, including without limitation the 1940 Act.

* * *

The Trust, at its expense, provides liability insurance for the benefit
of its Trustees and officers.

* * *

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Trust pursuant to the foregoing provisions or otherwise, the Trust has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Trust of
expenses incurred or paid by a Trustee, officer or controlling person of the
Trust in the successful defense of any action, suit or proceeding) is asserted
against the Trust by such Trustee, officer or controlling person in connection
with the securities being registered, the Trust will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.

Item 26. Business and Other Connections of Investment Adviser

(a) The Manager is the investment adviser to the Trust and its business
is summarized under the caption "Management of The Preferred Group" in the
Prospectus constituting Part A of this

-6-

<PAGE>

Registration Statement, which summary is incorporated herein by reference.

The directors and officers of the Manager have been engaged during the
last two fiscal years in no business, vocation or employment of a substantial
nature other than as directors or officers of the Manager or certain of its
corporate affiliates. Certain officers of the investment adviser serve as
officers of the Trust. The address of the Manager, its corporate affiliates and
the Trust is 411 Hamilton Boulevard, Peoria, Illinois 61629.

NAME AND POSITION
WITH MANAGER

David Bomberger
President, Director

Robert C. Frantz
Vice President, Director

Richard P. Konrath
Clerk

Fred L. Kaufman
Treasurer

(b) Jennison is the subadviser to the Preferred Growth Fund and its
business is summarized under the caption "Management of The Preferred Group" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference.

The list required by this Item 28 of officers and directors of
Jennison, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules A
and D of Form ADV filed by Jennison pursuant to the Advisers Act (SEC File No.
801-5608).

(c) Oppenheimer Capital is the subadviser to the Preferred Value Fund
and its business is summarized under the caption "Management of The Preferred
Group" in the Prospectus constituting Part A of this Registration Statement,
which summary is incorporated herein by reference.

Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Oppenheimer Capital is or has been,
at any time during the past two fiscal years, engaged for his own account or in
the capacity of director, officer, employee, partner or trustee is as follows:

NAME AND POSITION BUSINESS AND
WITH OPPENHEIMER OTHER CONNECTIONS

-7-

<PAGE>

Robert J. Bluestone None
Managing Director

Charles H. Brunie None
Chairman Emeritus

Mark Degenhart Director of Research,
Vice President Palisade Capital Management

Linda S. Ferrante None
Managing Director

Herbert S. Fitz Gibbon, II None
Managing Director

Richard J. Glasebrook, II None
Managing Director

Colin J. Glinsman None
Chief Investment Officer

Louis P. Goldstein None
Senior Vice President

Jonathan K. Greenberg None
Senior Vice President

Matthew Greenwald None
Senior Vice President

Alan Gutman None
Senior Vice President

Vikki Y. Hanges None
Senior Vice President

Joseph M. LaMotta None
Chairman Emeritus

Frank A. Lecates, Jr. None
Managing Director, Director
of Research

John G. Lindenthal None
Managing Director

James McCaughan President, UBS Brinson
Chief Operating Officer (formerly UBS Asset
Management)(New York), Inc.
prior to May 1998

Timothy McCormack None
Senior Vice President

-8-

<PAGE>

William P. McDaniel None
Managing Director

Kenneth H. Mortenson None
Managing Director

Julius A. Nicolai None
Managing Director

Nancy O. Preiss None
Senior Vice President

John Rowley None
Vice President

Philip T. Rodilosso None
Managing Director

David G. Santry None
Senior Vice President

Thomas Scerbo None
Senior Vice President

Jeffrey Tarnoff None
Senior Vice President

Robert Urquhart Managing Director,
Senior Vice President Pilgrim Baxter & Associates

Jeffrey Whittington None
Senior Vice President

Sturgis Woodberry None
Vice President

The principal business address of Oppenheimer Capital is 1345 Avenue of
the Americas, New York, New York 10105.

The principal business address of UBS Brinson is 209 South LaSalle
Street, Chicago, IL 60604.

The principal business address of Palisade Capital Management is 1
Bridge Plaza, Fort Lee, NJ 07024.

The principal business address of Pilgrim Baxter & Associates is 825
Duportail Road, Wayne, PA 19087.

(d) Mercator is the subadviser to the Preferred International Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.

-9-

<PAGE>

Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Mercator is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
<TABLE>
<CAPTION>

NAME AND POSITION BUSINESS AND
WITH MERCATOR OTHER CONNECTIONS

<S> <C>
John G. Thompson None
President, JZT Corp., General
Partner

Peter F. Spano None
President, PXS Corp., General
Partner

Kevin J. Shaver None
President, KXS Corp., General
Partner

Michael A. Williams
President, MXW Corp., General Sole Stockholder, Director and
Partner Officer of Newbrook, Inc. and
affiliated companies, which own
and manage commercial real
estate (leased to unaffiliated
businesses).

</TABLE>

The principal business address of Newbrook, Inc. is 401 The Hill,
Suite 201, Portsmouth, New Hampshire 03801.

(e) Mellon is a subadviser to the Preferred Asset Allocation Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.

The list required by this Item 28 of officers and directors of Mellon,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by Mellon pursuant to the Advisers Act (SEC File No. 801-8147).
Additional information required by this Item 28 and not included in the Form ADV
referenced above is as follows:

The principal business address of Mellon Bank, N.A. is One
Mellon Bank Center, Suite 4700, Pittsburgh, Pennsylvania 15258.

The principal business address of Mellon Capital Management
Corporation is 595 Market Street, Suite 3000, San Francisco,
California 94105.

-10-

<PAGE>

The principal business address of The Dreyfus Corporation is 200 Park
Avenue, New York, New York 10166.

The principal business address of Certus Asset Advisors
Corporation is One Bush Street, Suite 450, San Francisco,
California 94104.

The principal business address of Boston Safe Advisors, Inc.
is One Boston Place, Boston, Massachusetts 02108-4402.

The principal business address of Mellon Bond Associates, LLP
is One Mellon Bank Center, Suite 4135, Pittsburgh, Pennsylvania
15258.

The principal business address of The Boston Company Asset Management,
LLC is One Boston Place, Boston, Massachusetts 02106.

The principal business address of Mellon Bank Corporation is
One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania
15258.

The principal business address of The Boston Company, Inc. is
One Boston Place, Boston, Massachusetts 02106.

The principal business address of Laurel Capital Advisors, LLP
is One Mellon Bank Center, Suite 3935, Pittsburgh, Pennsylvania
15258.

The principal business address of Franklin Portfolio Holdings,
Inc. is Two International Place, 22d Floor, Boston, Massachusetts
02110.

The principal business address of The Boston Company Financial
Strategies Group, Inc. is One Boston Place, Boston, Massachusetts
02108-4402.

The principal business address of Mellon Asia Limited is Plaza Business
Center, 35/F Harbor Road, Central Plaza, Hong Kong.

The principal business address of CCF-Mellon Partners is One Mellon
Bank Center, Suite 4150, Pittsburgh, Pennsylvania 15258.

The principal business address of Mellon-France Corporation is One
Mellon Bank Center, Suite 4000, Pittsburgh, Pennsylvania 15258.

The principal business address of Mellon Global Investing
Corp. is One Mellon Bank Center, Suite 1935, Pittsburgh,
Pennsylvania 15258.

The principal business address of Pareto Partners is One Mellon Bank
Center, Suite 4040, Pittsburgh, Pennsylvania 15258.

The principal business address of Wellington-Medford II
Properties, Inc. is One Boston Place, Boston, Massachusetts 02106.

-11-

<PAGE>

The principal business address of TBC Securities Co., Inc. is
One Boston Place, Boston, Massachusetts 02106.

The principal business address of Boston Safe Deposit and Trust Company
is One Boston Place, Boston, Massachusetts 02106.

The principal business address of Mellon Financial Services Corporation
#17 is One Executive Drive, Fort Lee, New Jersey 07024.

The principal business address of Mellon Accounting Services,
Inc. is Three Mellon Bank Center, Suite 3102, Pittsburgh,
Pennsylvania 15259.

The principal business address of Mellon Financial Company is One
Mellon Bank Center, Suite 747, Pittsburgh, Pennsylvania 15258.

The principal business address of APT Holdings Corporation is
Pike Creek Operations Center, 4500 New Linden Hill Road,
Wilmington, Delaware 19808.

The principal business address of Allomon Corporation is Suite 329, Two
Mellon Bank Center, Pittsburgh, Pennsylvania 15259.

The principal business address of Beaver Valley Leasing
Corporation is Suite 4444, One Mellon Bank Center, Pittsburgh,
Pennsylvania 15258.

The principal business address of Mellon Financial Services
Corporation 4 and 13 is Suite 4444, One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258-0001.

The principal business address of Mellon Leasing Corporation
is Suite 4444, One Mellon Bank Center, Pittsburgh, Pennsylvania
15258-0001

The principal business address of Mellon International Leasing
Company is 4500 New Linden Hill Road, Suite 210, Wilmington,
Delaware 19808.

The principal business address of Mellon Overseas Investment
Corporation is 10th and Market Street, Second Floor, Wilmington,
Delaware 19801.

The principal business address of Mellon Securities Limited is
Suite 400, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258-
0001.

The principal business address of Mellon Securities Trust Company is
120 Broadway, New York, New York 10271.

The principal business address of Mellon Ventures, Inc. is
Suite 3200, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.

-12-

<PAGE>

The principal business address of Pontus, Inc. is 4500 New
Linden Hill Road, Suite 210, Wilmington, Delaware 19808.

The principal business address of RECR, Inc. is Mellon Bank
Center, 8th Floor, Legal Affairs, 1735 Market Street,
Philadelphia, Pennsylvania 19103.

The principal business address of Bridgewater Land Company,
Inc. is One Boston Place, Boston, Massachusetts 02108-4402.

The principal business address of Mellon Preferred Capital Corporation
is One Boston Place, Boston, Massachusetts 02108-4402.

The principal business address of AP Colorado, Inc., AP Colorado, Inc.
#2, AP Colorado, Inc. #3, AP Rural Land, Inc., AP Properties Minnesota, Inc., AP
Wheels, Inc., APD Chimney Lakes, Inc., APD Cross Creek, Inc., APD Crossings,
Inc., APD Cypress Springs, Inc., APU Chimney Lakes, Inc., APU Cross Creek, Inc.,
APU Cypress Springs, Inc., Cacalaba, Inc., FSFC, Inc., Festival, Inc., Holiday
Properties, Inc., Laplace Land Company, Inc., Lucien Land Company, Inc.,
Melnamor Corporation, Promenade, Inc., SKAP #7, Inc., Texas AP, Inc., Trilem,
Inc. and Vacation Properties, Inc. is Suite 1535, One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258.

The principal business address of Baltimore Realty Corporation
is Suite 325, One Mellon Bank Center, Pittsburgh, Pennsylvania
15258.

The principal business address of Central Valley Management
Co., Inc. and Mellon Mortgage Company is 3100 Travis Street,
Houston, Texas 77006.

The principal business address of Dreyfus Financial Services
Corporation is Suite 0179, Two Mellon Bank Center, Pittsburgh,
Pennsylvania 15259.

The principal business address of Dreyfus Investment Services
Corporation is Suite 0179, Two Mellon Bank Center, Pittsburgh,
Pennsylvania 15259.

The principal business address of Meritor Mortgage Corporation -- East
is 3100 Travis Street, Houston, TX 77006.

The principal business address of Mellon International Investment
Corporation is Caladonian Bank and Trust, Ltd., Caladonian House, P.O. Box 1043,
Cayman Island BWI.

The principal business address of Buck Consultants, Inc. is 2 Penn
Plz., 23rd Fl., New York, NY 10121-0001.

The principal business address of TBCAM Holdings, Inc. is One
Boston Place, Boston, MA 02108.

-13-

<PAGE>

The principal business address of Mellon Europe Ltd. is 12
Devonshire Sq., London, England EC2.

The principal business address of APT Holdings Corporation is
Pike Creek Operations Center, 4500 New Linden Hill Road,
Wilmington, DE 19808.

The principal business address of Mellon Insurance Agency,
Inc. is One Mellon Bank Center, Suite 2890, Pittsburgh, PA 15258-
0001.

(f) PanAgora is a subadviser to the Preferred Asset Allocation Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.

Other business, profession, vocation or employment of a substantial
nature in which each director or officer of PanAgora is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
<TABLE>
<CAPTION>

NAME AND POSITION BUSINESS AND
WITH PANAGORA OTHER CONNECTIONS
<S> <C>
John F. Boneparth Managing Director and Chief of
Director International Distribution for
Putnam Investments, Inc.

Gary N. Coburn Director and Senior Managing
Director Director of Putnam Investments,
Inc.

Hideichiro Kobayashi Director and General Manager
Director for the Americas of Nippon Life
Insurance Company

Robert F. Lucey Director, Senior Managing and
Director Chief of Operations Director of
Putnam Investments, Inc.

Takashi Minagawa Director and General Manager
Director for Europe of Nippon Life
Insurance Company

Toru Morishige Director of PanAgora Asset
Managing Director, Management Limited
Director, Vice Chairman

Tadao Nishioka Senior Managing Director of
Director Nippon Life Insurance Company

-14-

<PAGE>

Edgar E. Peters None
Chief Investment
Strategist and Chief
Investment Officer

William J. Poutsiana Chief Executive Officer of
President and Chief PanAgora Asset Management
Executive Officer Limited

Steven Spiegel Director, Senior Managing and
Director Chief of Corporate Development
Director of Putnam Investments,
Inc.

Michael H. Turpin None
Treasurer, Director of
Administration
</TABLE>

The principal business address of PanAgora Asset Management Limited is
3 Finsbury Avenue, London, England EC2M 2PA.

The principal business address of Putnam Investments, Inc. is
One Post Office Square, Boston, MA 02109-2106.

The principal business address of Nippon Life Insurance
Company and NLI International, Inc. Life Insurance Company is 5-12,
Imbashi, 3-Chome, Chuo-Ku, Osaka, Japan.

(g) Morgan is the subadviser to the Preferred Fixed Income Fund and the
Preferred Money Market Fund and its business is summarized under the caption
"Management of The Preferred Group" in the Prospectus constituting Part A of
this Registration Statement, which summary is incorporated herein by reference.

Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Morgan is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
<TABLE>
<CAPTION>

NAME AND POSITION BUSINESS AND
WITH MORGAN OTHER CONNECTIONS
<S> <C>
Kenneth W. Anderson Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York

Jeff M. Garrity Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York

</TABLE>

-15-

<PAGE>

<S> <C>

Keith M. Schappert Managing Director, Morgan
President, Chairman, Guaranty Trust Company of New
Director, Managing York
Director

John W. Schmidlin Managing Director, Morgan
Director Guaranty Trust Company of New
York

Isabel H. Sloane Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York

Gilbert Van Hassel Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York

Hendrik Van Riel Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York

</TABLE>

The principal business address of Morgan Guaranty Trust
Company of New York and of J.P. Morgan & Co. Incorporated is 60
Wall Street, New York, New York 10260-0060.

Item 27. Principal Underwriter

(a) Caterpillar Securities Inc., the Registrant's Principal
Underwriter, does not serve as underwriter for any other investment companies.

(b) Information with respect to directors and officers of the Principal
Underwriter is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>

Positions and Offices Positions and
Names and Principal with Principal Offices with
Business Addresses Underwriter Registrant

David L. Bomberger President, Director President
Caterpillar
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602

Frederick L. Kaufman Treasurer, Director Vice President,
Caterpillar Treasurer
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602

</TABLE>

-16-

<PAGE>

(c) The Registrant has no principal underwriter that is not an
affiliated person of the Registrant or an affiliated person of such an
affiliated person.

Item 28. Location of Accounts and Records

Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include Registrant's Clerk,
Richard P. Konrath; Registrant's investment adviser, CIML; Registrant's
Custodian, State Street; Registrant's Transfer Agent and Shareholder Servicing
Agent, State Street; and each of the Registrant's subadvisers. The address of
the Clerk is 100 N.E. Adams Street, Peoria, Illinois 61629; the address of CIML
is 411 Hamilton Boulevard, Suite 1200, Peoria, IL 61602; the address of the
Custodian, Transfer Agent and Shareholder Servicing Agent is P.O. Box 1713,
Boston, Massachusetts 02110; and the addresses of the Registrant's subadvisers
are as follows: Oppenheimer, 1345 Avenue of the Americas, New York, New York
10105; Jennison, 466 Lexington Avenue, New York, New York 10017; Mellon, 595
Market Street, Suite 3000, San Francisco, California 94105; PanAgora, 260
Franklin Street, Boston, Massachusetts 02110; Mercator, 2400 East Commercial
Boulevard, Suite 810, Fort Lauderdale, Florida 33308; and Morgan, 522 Fifth
Avenue, New York, New York 10036.

Item 29. Management Services

None.

Item 30. Undertakings

(a) The undersigned Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the removal of a Trustee or Trustees
when requested in writing to do so by the holders of at least 10% of the
Registrant's outstanding voting securities and in confirmation with the
provisions of Section 16(c) of the Investment Company Act of 1940 relating to
shareholder communications.

(b) The undersigned Registrant hereby undertakes to provide to each
person to whom a Prospectus is delivered a copy of its Annual Report without
charge upon request.

NOTICE

A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of State of The Commonwealth of Massachusetts and notice is
hereby given that this instrument is executed on behalf of the Trust by an
officer of the Trust as an officer and not individually and the obligations of
or arising out of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
each of the respective constituent series of the Trust.

-17-

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485 under the Securities Act of 1933 and has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Peoria and the State of Illinois on the
27th day of August, 1999.

THE PREFERRED GROUP OF MUTUAL FUNDS

By: /s/ David L. Bomberger*
Title: President

Pursuant to the Securities Act of 1933, this Amendment has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature Title Date

<S> <C> <C>
/s/ David L. Bomberger* President August 27, 1999
David L. Bomberger (Principal Executive Officer)

/s/ Gary M. Anna* Trustee August 27, 1999
Gary M. Anna

/s/ William F. Bahl* Trustee August 27, 1999
William F. Bahl

/s/ Kenneth J. Zika* Trustee August 27, 1999
Kenneth J. Zika

/s/ F. Lynn McPheeters* Trustee August 27, 1999
F. Lynn McPheeters

/s/ Dixie L. Mills* Trustee August 27, 1999
Dixie L. Mills

/s/ Fred L. Kaufman* Treasurer and Vice August 27, 1999
Fred L. Kaufman President (Principal
Financial and Principal
Accounting Officer)
</TABLE>

*By:/s/ Fred L. Kaufman
Fred L. Kaufman
Attorney-in-Fact Pursuant to
Powers of Attorney Filed
Herewith and for Himself

-18-

<PAGE>

THE PREFERRED GROUP OF MUTUAL FUNDS

Index to Exhibits

Exhibit No. Description

(j) Consent of
PricewaterhouseCoopers
LLP. (To be provided in a
Post-Effective amendment.)

(o) Power of Attorney

-19-

Exhibit (o) THE PREFERRED GROUP OF MUTUAL FUNDS

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Fred L. Kaufman, David L. Bomberger and Richard
P. Konrath, as his or her true and lawful attorneys-in-fact and agents, each
acting along, with full powers of substitution, for him or her in his or her
name, place and stead, in any and all capacities, to sign any or all
post-effective amendments to this Registration Statement of The Preferred Group
of Mutual Funds, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, of the Securities Act of 1933, File No. 33-
46479 and The Investment Company of Act 1940, File No. 811-06602, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his or her substitute may lawfully do or cause
to be done by virtue hereof.

Signature Title Date

/s/ Gary M. Anna
Gary M. Anna Director August 27, 1999

/s/ William F. Bahl
William F. Bahl Director August 27, 1999

/s/ F. Lynn McPheeters
F. Lynn McPheeters Director August 27, 1999

/s/ Dixie L. Mills
Dixie L. Mills Director August 27, 1999

/s/ Kenneth J. Zika
Kenneth J. Zika Director August 27, 1999

/s/ David L. Bomberger
David L. Bomberger President August 27, 1999
(Principal Executive Officer)

/s/ Fred L. Kaufman Vice President August 27, 1999
Fred L. Kaufman and Treasurer
(principal financial
and accounting
officer)
</TABLE>

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