MEDICAL RESEARCH INVESTMENT FUND, INC.

                        SUPPLEMENT DATED AUGUST 21, 1995
                                       TO
                       PROSPECTUS DATED DECEMBER 30, 1994
                AS SUPPLEMENTED FEBRUARY 9, 1995 AND JUNE 7, 1995

Effective August 21, 1995 the front-end sales load applicable to purchases of
shares of Medical Research Investment Fund, Inc. (the "Fund") has been
eliminated. All references in the Prospectus to the front-end sales load are
hereby deleted.

                     MEDICAL RESEARCH INVESTMENT FUND, INC.

                       STATEMENT OF ADDITIONAL INFORMATION

                                December 30, 1994
   
                        As Supplemented February 9, 1995
                                       and
                                 August 21, 1995

         This Statement of Additional Information is not a Prospectus but
contains information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated December 30,
1994 and supplemented February 9, 1995 and August 21, 1995. A Prospectus may be
obtained without charge by contacting Capstone Asset Planning Company, by phone
at (800) 262-6631 or by writing to it at 5847 San Felipe, Suite 4100, Houston,
Texas 77057.
    
                                TABLE OF CONTENTS
   
                                                                            PAGE
                                                                            ----
General Information .......................................................    2
Investment Objectives and Policies ........................................    2
Special Considerations ....................................................    3
Investment Restrictions ...................................................    5
Performance Information ...................................................    6
Directors and Executive Officers ..........................................    7
Investment Advisory Agreement .............................................    9
Administration Agreement ..................................................   10
Distributor ...............................................................   11
Portfolio Transactions and Brokerage ......................................   12
Determination of Net Asset Value ..........................................   13
How to Buy and Redeem Shares ..............................................   14
Dividends and Distributions ...............................................   14
Taxes .....................................................................   15
Other Information .........................................................   20
Appendix A ................................................................   21
Appendix B ................................................................   22
Financial Statements ......................................................   26
    
                                        1
GENERAL INFORMATION

         The Fund was incorporated in Maryland on November 7, 1984 and commenced
business on September 5, 1985. It is an "open-end diversified management
investment company" under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund is a member of a family of mutual funds sponsored by
Capstone Asset Management Company (the "Administrator"), which also provides
administrative services to the Fund.

         As stated in the Fund's Prospectus, the primary objective of the Fund
is long-term growth of capital, a goal it seeks to achieve by investing
primarily in common stocks, and securities (including debt and warrants)
convertible into common stocks, of domestic and foreign companies engaged in
medical research and the health care industry. Current income is a secondary
objective.

INVESTMENT OBJECTIVES AND POLICIES

         COVERED CALL OPTIONS. The Fund may write covered call options which are
traded on national securities exchanges with respect to common stocks in its
portfolio (insuring that the Fund at all times will have in its portfolio the
securities which it may be obligated to deliver if the option is exercised).

         In view of the Fund's investment objectives, the Fund generally would
write covered call options only in circumstances where G/A Capital Management,
Inc. (the "Adviser") does not anticipate significant appreciation of the
underlying security in the near future or has otherwise determined to dispose of
the security. The writing of call options could increase the Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate.

         FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell
stock index and foreign currency futures contracts (as well as purchase and sell
related options) as a hedge against changes resulting from market conditions and
exchange rates in the values of the domestic and foreign securities held by the
Fund or which the Fund intends to purchase and where the transactions are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Fund. See Appendix B.

         REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to
the extent deemed advisable by the Adviser. A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller to repurchase
and the Fund to resell such security at a fixed time and price (representing the
Fund's cost plus interest). Repurchase agreements may also be viewed as loans
made by the Fund which are collateralized by the securities subject to
repurchase. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including the accrued
interest, and all repurchase agreements must be marked to market daily. The Fund
bears the risk of loss in the event that the other party to the repurchase
agreement defaults on its obligation and the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities.

         RESTRICTED SECURITIES. The Fund may purchase illiquid securities in
amounts not to exceed 10% of the value of the Fund's net assets. Such securities
may be subject to legal or contractual restrictions on their disposition, and
include repurchase agreements with remaining maturities in excess of seven days
and other securities for which market quotations are not readily available.
Until such time as such securities may be sold publicly, disposition by the Fund
of these securities may require the Fund to sell these securities at a

                                        2

discount from market prices, to sell during periods when such disposition is
undesirable or to make many small sales over a lengthy period of time. Whether
the Fund or the issuer or seller of the restricted securities will pay the
expenses of their registration under the Securities Act of 1933 will in each
case be the subject of negotiation at the time the securities are purchased.

         U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S. Government, its
agencies and instrumentalities may include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association, Export-Import Bank of the United States,
Tennessee Valley Authority, Farmers Home Administration, Federal Home Loan
Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks, Federal
Land Banks, Federal Housing Administration, Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government sponsored instrumentalities if it is not obligated to
do so by law.

         Like other bond investments, the value of the obligations of the
Government National Mortgage Association and other mortgage-related securities
acquired by the Fund will tend to rise when interest rates fall, and fall when
interest rates rise. Their value may also change because of changes in the
markets' perception of the creditworthiness of the agency or instrumentality
that has issued or guaranteed them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies. Furthermore, the relationship between mortgage prepayment and
interest rates may give some high-yielding mortgage-related securities less
potential for growth in value than conventional bonds with comparable
maturities. In addition, in periods of falling interest rates, the rate of
mortgage prepayment tends to increase.

SPECIAL CONSIDERATIONS

PURCHASE OF FOREIGN SECURITIES

         Investors should be aware of the risks involved in investing in the
securities of foreign companies. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting requirements. There may be
less publicly available information about them, and their securities may be less
liquid and more volatile than domestic securities. In addition, foreign stock
markets generally have less volume than the New York Stock Exchange and there
may be less government supervision and regulation of stock exchanges, brokers,
and listed companies. Some price spreads on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when U.S. dollars are used for the purchase of
securities in foreign countries. The Fund may be affected either favorably or
unfavorably by fluctuations in the relative rates of exchange as between the
currencies of different nations. Income from foreign securities may be subject
to withholding taxes in the country which is the source of the income. The Fund
may also be affected by expropriation or confiscatory taxation, imposition of
other foreign taxes, exchange controls, or political or social instability
within foreign nations.
                                        3
HEALTH CARE STOCKS

         There is no guarantee that a portfolio of investments concentrating in
the health care industry will achieve the Fund's investment objectives of
long-term capital appreciation and current income. Since the Fund concentrates
its investments in a single industry, its shares do not represent a complete
investment program. Therefore, before investing in the Fund, potential investors
should consider the risks involved in seeking long-term capital appreciation and
in the concentration of portfolio investments in a single industry. A potential
investor may wish to consult his financial adviser before investing in the Fund.

         The value of the Fund's shares is especially susceptible to factors
affecting the health care industry, and may fluctuate more widely than the value
of shares invested in a broader range of industries. The health care industry is
generally subject to greater governmental regulation than many other industries.
Changes in governmental policies, such as reduction in the funding of third
party payment programs, may have a material affect on the demand for the
products and services of this industry. Regulatory approvals, which may often
entail lengthy application and testing procedures, are generally required before
new drugs and certain medical devices and procedures may be introduced. The
acquisition of additional facilities and equipment by health care providers is
also subject in certain instances to "determinations of need" and other
regulatory approvals. Many of the products and services of this industry are
subject to risks of rapid obsolescence caused by scientific and technological
advances. These are only examples of certain factors which particularly affect
the health care industry.

LOWER RATED AND NON-INVESTMENT GRADE SECURITIES

         The Fund may invest in debt securities convertible into common stock.
Debt purchased by the Fund will consist of obligations of medium grade or
higher, having at least adequate capacity to pay interest and repay principal.
Non-convertible debt obligations will be rated Baa or higher by Moody's
Investors Service, Inc. ("Moody's") and/or BBB or higher by Standard & Poor's
Corporation ("S&P"). Convertible debt obligations will be rated B or higher by
Moody's or S&P. The Fund does not currently intend to invest in securities that,
at the time of investment, are rated less than B by Moody's or S&P. Securities
rated Baa and/or BBB, or lower, entail special risks. A description of the
characteristics of ratings of securities in which the Fund may invest in
attached as Appendix A.

         Securities rated below Baa or BBB ("Non-Investment Grade Securities")
involve a high degree of risk. Non-Investment Grade Securities may be issued in
connection with corporate restructurings, such as leveraged buyouts, mergers,
acquisition, debt recapitalizations, or similar events. The issuers of these
securities are often smaller, less creditworthy companies or highly leveraged
(indebted) firms.

         Non-Investment Grade Securities are considered by major credit-rating
agencies to be predominantly speculative with respect to the issuer's ability to
meet principal and interest payments, and the issuer's ability to make such
payments is much more sensitive to adverse economic conditions than is the case
with higher rated securities. The contribution of such securities to achieving
the Fund's investment objective will depend more on the Adviser's own evaluation
of the issuer than is the case with higher rated securities. Efforts by the Fund
to recover in the event of a default in the payment of principal or interest
will involve additional expense to the Fund and may not be successful.

         The Adviser uses multiple sources in analyzing an issuer's financial
condition. The ratings of credit agencies, research materials prepared by
independent firms ,annual reports of issuers and financial

                                        4

newspapers and magazines are sources on which the Adviser relies. Although the
Adviser considers the ratings of credit-rating agencies, the Adviser realizes
that ratings have no value in forecasting market price movements and that credit
quality in the high-yield bond market can change suddenly and unexpectedly. The
Adviser uses all available sources to monitor an issuer's financial condition on
a continuing basis as information is made available. A security will not be
automatically sold if it drops below a certain credit rating.

         Non-Investment Grade Securities may be more sensitive to perceived, as
well as to actual, adverse economic or industry conditions, with the result that
their market prices may be more volatile than those of investment grade
securities. Additionally, the illiquidity of the secondary market for
Non-Investment Grade Securities may adversely affect the market price of these
securities. There are fewer dealers in the NonInvestment Grade Securities
market, and the range in purchasers of Non-Investment Grade Securities is
narrower, than for higher rated securities. Both price volatility and
illiquidity will make it difficult for the Fund's Board of Directors to value
certain of these securities at certain times. Adverse market conditions may also
make it difficult at times for the Fund to sell certain of these securities.
Since investment companies are, in the aggregate, substantial investors in
Non-Investment Grade Securities, significant redemptions by investors in
investment companies which invest heavily in this type of security would depress
the market prices for Non-Investment Grade Securities, with a resulting negative
effect on the Fund's net asset value.

INVESTMENT RESTRICTIONS

         The Fund has adopted the following restrictions which, along with its
investment objectives, cannot be changed without approval by the holders of a
majority of its outstanding shares. Such majority is defined by the Investment
Company Act of 1940 as the lesser of (i) 67% or more of the voting securities
present in person or by proxy at a meeting, if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy; or (ii)
more than 50% of the outstanding voting securities. In addition to the
fundamental investment limitations set forth in the Fund's Prospectus, the Fund
may not:

         1.       Act as an underwriter of securities within the meaning of the
                  Securities Act of 1933 except insofar as it might be deemed to
                  be an underwriter upon disposition of certain portfolio
                  securities acquired within the limitation on purchases of
                  restricted securities;

         2.       Engage in the purchase or sale of interests in real estate or
                  real estate mortgage loans;

         3.       Make loans, except that the Fund may purchase or hold debt
                  instruments in accordance with its investment objectives and
                  policies, and may enter into repurchase agreements;

         4.       Acquire securities of other investment companies registered
                  under the Investment Company Act of 1940, except in connection
                  with a merger, consolidation, reorganization or acquisition of
                  assets;

         5.       Sell securities short or purchase any securities on margin
                  except that the Fund may enter into futures contracts and
                  related options;

         6.       Issue any senior securities except that the Fund may enter
                  into futures contracts and related options;

                                        5

         7.       Purchase or retain the securities of any issuer if to the
                  knowledge of the Fund any officer or director of the Fund or
                  of its investment adviser own beneficially more than 1/2 of 1%
                  of the outstanding securities of such issuer and together they
                  own beneficially more than 5% of the securities of such
                  issuer;

         8.       Invest in companies for the purpose of exercising control or
                  management;

         9.       Invest in or sell put options, call options, straddles,
                  spreads or any combination thereof, except that the Fund may
                  write covered call options or enter into closing purchase
                  transactions and except that the Fund may enter into futures
                  contracts and related options; or

         10.      Invest in warrants if as a result more than 2% of the value of
                  the Fund's total assets would be invested in warrants which
                  are not listed on a recognized stock exchange, or more than 5%
                  of the Fund's total assets would be invested in warrants
                  regardless of whether listed on such an exchange.

         If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
in the Fund's portfolio securities will not constitute a violation of such
limitation.

PERFORMANCE INFORMATION

         The Fund may from time to time include figures indicating the Fund's
yield, total return or average annual total return in advertisements or reports
to stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a particular 30-day
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share (which includes the maximum sales
charge) on the last day of the period, according to the following formula:

                                   6
                  YIELD = 2[(a-b+1) -1]
                             ---
                             cd

where             a = dividends and interest earned during the period, 

                  b = expenses accrued for the period (net of reimbursements or
                      waivers), 
               
                  c = the average daily number of shares outstanding during the
                      period that were entitled to receive dividends, and

                  d = the maximum offering price per share on the last day of 
                      the period.

         For the 30-day period ended August 31, 1994 the Fund's yield 
was -1.074%.

         Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and capital
gain distributions during the period are reinvested at net asset value in
additional Fund shares. Quotations of the average annual total return reflect
the deduction of the maximum sales charge and a proportional share of Fund
expenses on an annual basis. The results, which are annualized, represent an
average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5 and
                                        6

10 years ending on the most recent calendar quarter (but not for a period
greater than the life of the Fund), calculated pursuant to the following
formula:
                                n
                         P (1+T) =ERV

where             P      =  a hypothetical initial payment of $1,000,
                  T      =  the average annual total return,
                  n      =  the number of years, and
                  ERV    =  the ending redeemable value of a hypothetical $1,000
                            payment made at the beginning of the period.

         For the one year and five year periods ended August 31, 1994 and the
period July 26, 1985 (commencement of operations) to August 31, 1994 the Fund's
average annual total return was -2.685%, 14.065% and 13.547%, respectively.

         Quotations of total return, which are not annualized, represent
historical earnings and asset value fluctuations. Total return figures used in
advertisements or sales literature will not usually reflect the deduction of the
maximum sales charges which if deducted would reduce the Fund's total return.
Total return is based on past performance and is not a guarantee of future
results. For the one year and five year periods ended August 31, 1994 and the
period July 26, 1985 to August 31, 1994 the Fund's total return was 2.685%,
102.669% and 240.041% respectively.

         Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Price Index
("S&P 500 Index"), Dow Jones Industrial Average ("DJIA"), or other appropriate
unmanaged indices of performance of various types of investments, so that
investors may compare the Fund's results with those of indices widely regarded
by investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of dividends, but generally do not reflect deductions
for administrative and management costs and expenses.

         Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objectives and policies, the types and quality of
the Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of the Fund's future performance.

DIRECTORS AND EXECUTIVE OFFICERS

         The names and addresses of the directors and principal officers of the
Fund are set forth below, together with their positions and their principal
occupations during the last five years and, in the case of the directors, their
positions with certain other organizations and companies.

                                        7


                                                  Positions with the Fund, Principal
     Name and Address                            Occupations and Other Affiliations
     ----------------                            -----------------------------------
                                         
*Samuel D. Isaly                            Chairman of the Board and President.  President of G/A
   41 Madison Avenue                           Capital Management, Inc. since 1989; formerly Senior Vice
   40th floor                                  Vice President of S.G. Warburg & Co., Inc. from 1986
   New York, NY  10010-2202                    through 1989 and President of Gramercy Associates, a health
                                               care industry consulting firm, from 1983 through 1986.

John J. Maggio, D.O.                        Director.  Director and Chairman of the Department of Obstetrics
   205 East 69th Street                        and Gynecology at St. Clare'sHospital since 1982; Clinical
   New York, NY  10021                         Associate Professor of Surgery at New York Medical College
                                               since 1982; and Clinical Associate Professor of Obstetrics and
                                               Gynecology at New York College of Osteopathic Medicine since
                                               1986.

Philip C. Smith                             Director.  Private investor.  Director of other Capstone Funds
   87 Lord's Highway                           and Lexington Mutual Funds.
   Weston, CT  06880

Eugene E. Weise, M.D., P.C.                 Director.  Private medical practice since 1972; formerly Assistant
   115 East 61st Street                        Professor of Ophtalmogy at Cornell University School of
   New York, NY  10021                         Medicine from 1974 through 1987.

*Edward L. Jaroski                          Vice President.  Chairman of the Board and Director of the
   5847 San Felipe                             Administrator since 1987; President and Director of the
   Suite 4100                                  Distributor since 1987; President and Director of
   Houston, TX  77057                          Capstone Financial Services, Inc. since 1987; Director/Trustee
                                               and Officer of other Capstone Funds.

Iris R. Clay                                Secretary.  Assistant Secretary of Capstone Financial Services,
   5847 San Felipe                             Inc. since 1990; formerly Compliance Analyst with Capstone
   Suite 4100                                  Financial Services, Inc. from 1987 through 1993;
   Houston, TX  77057                          Secretary of other Capstone Funds.

Linda G. Giuffre                            Treasurer. Treasurer of Capstone Financial Services, Inc. since
   5847 San Felipe                             1990; Treasurer  of other Capstone Funds; formerly Transfer
   Suite 4100                                  Agent Manager with Capstone Financial Services, Inc. from
   Houston, TX  77057                          1987 through 1990; Accounting Supervisor with Tenneco
                                               Financial Services Inc. from 1984 through 1987.

--------------
*  May be deemed to be an "interested person" of the Fund as that term is
   defined in the Investment Company Act of 1940 because of his relationship to
   the Adviser.

         Each director not affiliated with the Adviser is entitled to $125 for
each Board meeting attended, and is paid a $500 annual retainer by the Fund. The
directors and officers of the Fund are also reimbursed for expenses incurred in
attending meetings of the Board of Directors. For the fiscal year ended August
31, 1994, the Fund paid or accrued for the account of its directors and
officers, as a group for services in all

                                        8

capacities, a total of $2,750.
   
         The following table represents the fees paid during the 1994 calendar
year to the directors of the Fund and the total compensation each director
received during that period from the Capstone Funds complex.

                               COMPENSATION TABLE


                                                                                                         Total
                                                                                                     Compensation
                                                                                                         From
                                         Aggregate            Pension or                              Registrant
                                      Compensation            Retirement     Estimated Annual          and Fund
          Name of Person,                  From            Benefits Accrued     Benefits Upon        Complex Paid
             Position                    Registrant*        As Part of Fund       Retirement          to Trustees
          ---------------             --------------       ----------------  ----------------        ------------
                                                                                               
Dr. John J. Maggio, Director               $  875               $0                  $0                  $  875
Philip C. Smith, Director                   1,000                0                   0                    8,000(1)(2)
Dr. Eugene E. Weise, Director               1,000                0                   0                    1,000

-------------- 
 *  Amounts do not include deferred compensation.

(1) Trustee of Capstone International Series Trust.

(2) Director of Capstone Fixed Income Series, Inc., Capstone Series, Inc. and
    Capstone Growth Fund, Inc.
    
INVESTMENT ADVISORY AGREEMENT

         Pursuant to an investment advisory agreement dated August 17, 1989 (the
"Advisory Agreement"), the Fund employs G/A Capital Management, Inc. (the
"Adviser") to furnish investment advisory services. The Adviser, located at 41
Madison Avenue, 40th floor, New York, New York 10010-2202, was incorporated in
Delaware on February 24, 1989 and is principally owned by Samuel D. Isaly, who
serves as the President of G/A Capital Management, Inc. ("G/A") and Chairman of
the Board and President of the Fund. The Fund is the only investment company
registered under the 1940 Act advised by G/A.

         The Advisory Agreement requires the Adviser to provide an investment
program within the limitations of the Fund's investment policies and
restrictions, and to furnish services necessary for the transaction of the
Fund's business. The Advisory Agreement may be continued from year to year
provided its renewal is approved at least annually by the vote of the Board of
Directors of the Fund or the holders of a majority of its outstanding shares,
and by a majority of those directors of the Fund who are not parties to the
Advisory Agreement or "interested persons" of such parties as defined under the
1940 Act, by votes cast in person at a meeting called for the purpose of voting
on such Agreement. The Advisory Agreement was last approved by the Board of
Directors on May 2, 1994.

         The Adviser provides the Fund with investment supervision and
management services and, at its own expense and without reimbursement from the
Fund, bears the cost of executive and clerical personnel and furnishes office
facilities and equipment. The Adviser may also, out of its own resources, pay
unreimbursed sales promotional expenses of the Fund in addition to those
provided under the distribution plan.

         All other expenses not expressly assumed by the Adviser and the Fund's
administrator will be paid by the Fund, including, but not limited to, the fees
of its investment adviser, administrator, distributor, auditor, legal counsel,
custodian and transfer agent, brokerage commissions and distribution plan
payments,
                                        9

the fees and expenses of directors who are not affiliated with the Adviser, the
cost of printing and mailing confirmations, prospectuses, proxies, notices and
reports to existing stockholders, association dues, interest, taxes, certain
insurance premiums, the fees incident to registration and qualification of the
Fund and its shares for distribution under Federal and state securities laws,
and expenses incidental to holding meetings or obtaining ballots of the Fund's
stockholders.

         The Adviser and Administrator have agreed that in any fiscal year the
aggregate expenses of the Fund (including advisory, administrative and transfer
agency fees, but excluding, to the extent permitted by applicable state law,
interest, local, state and Federal taxes, sales charges, distribution plan
expenses and extraordinary expenses as determined by the Fund's directors who
are not "interested persons" of the Administrator or the Fund's investment
adviser as defined in the 1940 Act) exceed the expense limitation of any state
having jurisdiction over the Fund, then the fees paid to the Adviser and
Administrator hereunder will be reduced pro rata (but not below zero) to the
extent required by such expense limitation. The Advisory Agreement and
Administration Agreement provide that each party will bear its pro rata share of
any such fee reduction based on the percentage that the Adviser's and
Administrator's fees bear to the total administration and advisory fees paid by
the Fund. The Adviser will reimburse the Fund for such excess expenses when
payment under the Fund's Advisory Agreement is due.

         The Fund has agreed to pay the Adviser a fee, as compensation for all
advisory services rendered and expenses assumed, computed daily and paid
monthly, at an annual rate of 1% of the Fund's first $30 million in average net
assets; 0.90% of the next $20 million in average net assets, and 0.75% of
average net assets in excess of $50 million. This fee is higher than that paid
by most investment companies but is deemed appropriate by the Board of Directors
based on the expertise necessary to manage a fund with the same investment
objective as the Fund. Effective September 1, 1989 the Adviser has agreed to
reimburse its fees until such time as the Fund can operate within the expense
limitation discussed above. During the fiscal year ended August 31, 1994, the
Fund paid the Adviser $121,553 in advisory fees of which $16,868 was reimbursed
pursuant to the expense limitation. The Adviser also waived advisory fees of
$30,036 and $9,277 it was paid during the fiscal years ended August 30, 1993 and
1992, respectively.

         Samuel D. Isaly is the controlling person of the Adviser by reason of
his ownership of voting securities of the Adviser. He is also an affiliated
person of the Fund and the Adviser. For further information, reference is made
to "Directors and Executive Officers."

ADMINISTRATION AGREEMENT

         Under an agreement ("Administration Agreement") dated March 1, 1988
between the Fund and Capstone Asset Management Company (the "Administrator"),
the Administrator supervises all aspects of the Fund's operations other than the
management of its investments. The Administrator is an affiliate of Capstone
Asset Planning Company, the principal underwriter of the Fund, and a
wholly-owned subsidiary of Capstone Financial Services, Inc. ("CFS").

         The Administrator oversees the performance of administrative and
professional services to the Fund by others; provides office facilities;
prepares reports to stockholders and the Securities and Exchange Commission; and
provides personnel for supervisory, administrative and clerical functions.
Except as noted below, the costs of these services are borne by the
Administrator. For the Administrator's services, the Fund will pay to the
Administrator a fee, calculated daily and payable monthly, equal to an annual
rate of .25% of the Fund's average net assets. Effective September 1, 1989 the
Administrator has voluntarily agreed to waive

                                       10

its fees until such time as the Fund can operate within the expense limitation
discussed above. The Administrator was paid $30,388 for its services during the
fiscal year ended August 31, 1994 of which $4,217 was reimbursed to the Fund.
For the fiscal year ended August 31, 1993, the Administrator reimbursed fees of
$7,509.

         Under the Administration Agreement, the Fund bears the cost of its
accounting services, which includes maintaining its financial books and records
and calculating its daily net asset value. The cost of such accounting services,
which is currently $2,000 per month, includes the salaries and overhead expenses
of personnel of the Administrator and equipment costs attributable to the
provision of accounting services to the Fund. The services are provided at cost
which is allocated among the investment companies administered by the
Administrator. The Fund also pays transfer agency fees, custodian fees, legal
and auditing fees, the costs of printing reports to stockholders and the
Securities and Exchange Commission, and all other ordinary expenses not
specifically assumed by the Administrator or the Adviser.


DISTRIBUTOR

         Capstone Asset Planning Company (the "Distributor") acts as the
principal underwriter of the Fund's shares pursuant to a written agreement,
dated April 22, 1988 (the "Distribution Agreement") which was last approved by
the Fund's Board of Directors, including a majority of the independent
directors, on May 2, 1994. The Distributor receives commissions from sales of
shares of the Fund, which amounts are not an expense of the Fund but represent
the sales commission added to the net asset value of shares purchased from the
Fund. The Distributor has the exclusive right (except for distributions of
shares directly by the Fund) to distribute Fund shares in a continuous offering
through affiliated and unaffiliated dealers. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such Fund shares as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and the cost and expense of supplemental sales
literature, promotion and advertising. The Distribution Agreement is renewable
from year to year if approved (a) by the Fund's Board of Directors or by a vote
of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of directors who are not parties to the
Distribution Agreement or interested persons of any party thereto, by votes cast
in person at a meeting called for such purpose. The Distribution Agreement
provides that it will terminate if assigned (as defined in the 1940 Act), and
that it may be terminated without penalty by either party on 60 days' written
notice. During the fiscal years ended August 31, 1994 and August 31, 1993 the
Distributor received $9,522 and $4,744, respectively, in underwriting
commissions from sales of the Fund's shares.

         On June 11, 1985, the Fund adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 of the Investment Company Act of 1940 which permits the
Fund to absorb certain expenses in connection with the distribution of its
shares. As required by Rule 12b-1, the Fund's 12b-1 Plan and related agreements
were approved by a vote of the Fund's Board of Directors, and by a vote of the
directors who are not "interested persons" of the Fund as defined under the 1940
Act and have no direct or indirect interest in the operation of the Plan or any
agreements related to the Plan (the "Plan Directors"), and by the Fund's
stockholders at the first meeting of stockholders subsequent to the effective
date of the Fund's registration statement. In compliance with the Rule, the
directors requested and evaluated information they thought necessary to make an
informed determination of whether the Plan and related agreements should be
implemented, and concluded, in the exercise of reasonable business judgment and
in light of their fiduciary duties, that there is a reasonable likelihood that
the Plan and related agreements will benefit the Fund and its stockholders. The

                                       11

Plan was reapproved by directors including a majority of the Plan Directors in
June 1986 and June 1987. In April 1988 the Board of Directors including a
majority of the Plan Directors amended the Plan to reflect the replacement of
Medical Research Management Group, Inc. by Capstone Asset Planning Company and
reapproved the Plan to continue for an additional twelve-month period. The Plan
was last approved by a majority of directors and Plan Directors on November 13,
1994.

         As required by Rule 12b-1, the directors review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures.

         The Plan and related agreements may be terminated at any time by a vote
of the Plan Directors. As required by Rule 12b-1, selection and nomination of
disinterested directors for the Fund is committed to the discretion of the
directors who are not "interested persons" as defined under the 1940 Act.

         The Plan and related agreements may be terminated by a vote of the
stockholders. Any change in the Plan that would materially increase the
distribution expenses of the Fund requires stockholder approval, but otherwise,
the Plan may be amended by the directors, including a majority of the Plan
Directors.

         The Plan will continue in effect for successive one year periods
provided that such continuance is specifically approved by a majority of the
directors, including a majority of the Plan Directors.

         Pursuant to the Plan, during the fiscal year ended August 31, 1994 the
Fund paid $30,132 in 12b-1 fees. Of this amount fees, fees of approximately
$10,800 were reallowed to organizations other than the Distributor, G/A Capital
Management received approximately $5,700 for accounts on which they acted as
service providers, and approximately $13,500 was retained by the Distributor.
During the fiscal years ended August 31, 1993 and August 31, 1992, fees of
$16,467 and $10,807, respectively, were reallowed to organizations other than
the Distributor, and during the same periods the Distributor received fees of
$8,988 and $15,399, respectively.


PORTFOLIO TRANSACTIONS AND BROKERAGE
   
         Subject to the supervision of the Board of Directors of the Fund, the
Adviser manages the Fund's investment portfolio as described in the Prospectus
and this Statement of Additional Information. The Adviser determines which
securities and other investments will be purchased, retained or sold by the
Fund, the portion of its assets to be invested or held uninvested in cash or
cash equivalents, and the portion of Fund assets to be invested in securities of
United States and foreign issuers. The Adviser places orders pursuant to its
investment determinations for the Fund either directly with the issuer or with
any broker or dealer. In placing orders with brokers and dealers, the Adviser
attempts to obtain the best net price and the most favorable execution of its
orders. Insofar as it is consistent with its policy of seeking the best price
and most favorable execution, the Adviser, in its discretion, may effect
transactions in portfolio securities with brokers or dealers who provide the
Fund with research advice or other services such as analyses of industry
segments or issuers and statistical or economic information. Such information
may be used by the Adviser in servicing other clients which it may advise.
Currently, the Adviser does not act as investment adviser for any investment
companies other than the Fund. Subject to the Fund's overall brokerage policies,
the Adviser may effect securities transactions through Capstone Asset Planning
Company, TradeStar Investments, Inc. and Williams McKay Jordan & Mills, Inc.
("WMJM"), broker-dealer affiliates of the Administrator. WMJM is deemed to be an
affiliated broker since one of the principals of that firm serves as a director
of CFS the parent company of the Administrator and Capstone Asset Planning
Company.    
                                       12

         Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Board of Directors may determine, the Adviser may consider sales
of Fund shares as a factor in the selection of dealers to execute portfolio
transaction for the Fund.

         During the fiscal year ended August 31, 1994, the Fund incurred
brokerage commissions of $40,651, which represented 0.33% of the assets of the
Fund. During the fiscal years ended August 31, 1993 and August 31, 1992, the
Fund paid $43,706 and $45,540, respectively, in brokerage commissions.

         Transactions on United States and some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign stock exchanges, commissions are fixed. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price of those securities includes an
undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the price
at which securities are purchased from and sold to dealers includes a dealer's
mark-up or mark-down.

         The Fund's portfolio turnover rate is calculated by dividing the lesser
of purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during that particular fiscal year (short-term obligations are excluded for
purposes of this calculation). Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is not expected to exceed 100%. The portfolio
turnover rates for the fiscal years ended August 31, 1994 and August 31, 1993
were 49% and 77%, respectively.

DETERMINATION OF NET ASSET VALUE

         The net asset value per share is computed daily, Monday through Friday,
as of the close of regular trading the New York Stock Exchange, which is
currently 4:00 p.m., Eastern time, except that the net asset value will not be
computed on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. The Fund's net asset value also will be determined on any day in
which there is sufficient trading in its portfolio securities that the net asset
value might be affected materially, but only if on any such day the Fund is
required to sell or redeem shares. The net asset value per share is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including any accrued interest and dividends receivable but not yet
received) minus all liabilities (including accrued expenses) by the total number
of Fund shares outstanding at such time. The net asset value so computed will be
used for all purchase orders and redemption requests received between such
computation and the preceding computation.

         To the extent sales prices are available, securities that are traded on
a recognized stock exchange, whether U.S. or foreign, are valued at the last
sale price on that exchange prior to the time when assets are valued or prior to
the close of trading on the New York Stock Exchange. In the event that there are
no sales, the last available sale price will be used. If a security is traded on
more than one exchange, the Administrator uses the latest price on the exchange
where the stock is primarily traded. If there is no sale that day or if the
security is not listed, the security is valued at its last sale quotation. The
calculation of the Fund's net asset value per share may not take place
contemporaneously with the times noted above for determining the prices of
certain of the Fund's portfolio securities, including foreign securities. If
events materially effecting the value of such securities occur between the time
when their prices are determined and the time the Fund's net

                                       13

asset value is calculated, such securities will be valued at fair value as
determined in good faith by the directors. Also, for any security for which
application of the preceding methods of valuation results in a price for a
security that is deemed not to be representative of the market value of such
security, the security will be valued at fair value in the best judgment of the
Administrator under the supervision and responsibility of the Board of
Directors.

         Futures contracts and call options written on portfolio securities will
be priced at the latest sales price on the principal exchange on which such
options are normally traded or, if there have been no sales on such exchange on
that day, at the closing asked price. Short-term investments having a maturity
of 60 days or less are valued on the basis of amortized cost. All other assets
and securities held by the Fund (including restricted securities) are valued at
fair value as determined in good faith by the Administrator under the
supervision and responsibility of the Board of Directors. Any assets that are
denominated in a foreign currency are translated into U.S. dollars of the last
quoted spot rate of exchange prevailing on each valuation date.

HOW TO BUY AND REDEEM SHARES

         Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized dealers, including Capstone
Asset Planning Company. Certain broker-dealers assist their clients in the
purchase of shares from the Distributor and charge a fee for this service in
addition to the Fund's public offering price.
   
         Shares will be credited to a stockholder's account at the net asset
value next computed after an order is received by the Distributor. Initial
purchases must be at least $200; however, this requirement may be waived by the
Distributor for plans involving continuing investments. There is no minimum for
subsequent purchases of shares. No stock certificates representing shares
purchased will be issued except upon written request to the Fund's Transfer
Agent. The Fund's management reserves the right to reject any purchase order if,
in its opinion, it is in the Fund's best interest to do so. See "Purchasing
Shares" in the Prospectus.
    
         Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Medical Research
Investment Fund, Inc., c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm
Street, Conshohocken, Pennsylvania 19428. In addition, certain expedited
redemption methods are available. See "Redemption and Repurchase of Shares" in
the Prospectus.
       
DIVIDENDS AND DISTRIBUTIONS

         The Fund's policy is to distribute to stockholders substantially all of
its investment company taxable income (which includes, among other items,
dividends, interest and the excess of net short-term capital gains over net
long-term capital losses) in annual dividends. The Fund intends similarly to
distribute to stockholders at least annually any net realized capital gains (the
excess of net long-term capital gains over net short-term capital losses). All
income dividends and capital gain distributions are reinvested in shares of the
Fund at net asset value without sales commission, except that any stockholder
may otherwise instruct the Transfer Agent in writing and receive cash.
Stockholders are informed as to the sources of distributions at the time of
payment. Any dividend or distribution paid shortly after a purchase of shares by
an investor will have the effect of reducing the per share net asset value of
his shares by the amount of the dividend or distribution. All or a portion of
any such dividend or distribution, although in effect a return of capital, may
be taxable, as set forth below.
                                       14
TAXES

         The following summary describes some of the more significant Federal
income tax consequences applicable to investors in the Fund based on existing
Federal tax law. New tax laws may be enacted which might affect the tax
consequences of an investment in the Fund. The following discussion is
necessarily general, and prospective investors are urged to consult their own
tax advisers with respect to the particular tax consequences to the investor of
an investment in the Fund.

         The Fund intends to qualify annually and elect to be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Qualification and election to be taxed as a
regulated investment company involves no supervision of management or investment
policies or practices by any government agency. To qualify as a regulated
investment company the Fund must, with respect to each taxable year, distribute
to stockholders at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, certain foreign currency gains
and the excess of net short-term capital gains over net long-term capital
losses) and meet certain diversification of assets, source of income, and other
requirements of the Code.

         As a regulated investment company, the Fund generally is not subject to
Federal income tax on its investment company taxable income and net capital gain
(net long-term capital gains in excess of net short-term capital losses), if
any, that it distributes to stockholders. The Fund intends to distribute to its
stockholders, at least annually, substantially all of its investment company
taxable income and net capital gain. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the tax, the Fund must
distribute during each calendar year (1) at least 98% of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, (2)
at least 98% of its capital gains in excess of its capital losses for the
twelve-month period ending on October 31 of the calendar year (reduced by
certain net operating losses, as prescribed by the Code), and (3) all ordinary
income and capital gains for previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November or December of
that year to stockholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such distributions will be
taxable to stockholders in the calendar year the distributions are declared,
rather than the calendar year in which the distributions are received. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.

         If the Fund retains net capital gains for reinvestment, although it has
no plans to do so, the Fund may elect to treat such amounts as having been
distributed to stockholders. As a result, the stockholders would be subject to
tax on undistributed capital gain, would be able to claim their proportionate
share of the Federal income taxes paid by the Fund on such gain as a credit
against their own Federal income tax liabilities, and would be entitled to an
increase in their basis in their Fund Shares.

         INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES. The Fund may invest
in stocks of foreign companies that are classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign company is
classified as a PFIC if at least one-half of its assets or 75% or more of its
gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock. The
Fund itself will be subject to tax on that portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income
                                       15

to stockholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.

         The Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election were made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. Alternatively, the Fund may elect to mark- to-market its PFIC stock,
resulting in the stock being treated as sold at fair market value on the last
business day of each taxable year. Any resulting gain would be reported as
ordinary income, and any resulting loss would not be recognized. If this
election were made, the special rules described above with respect to excess
distributions would still apply. The Fund's intention to qualify annually as a
regulated investment company may limit the Fund's elections with respect to PFIC
stock.

         Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject the Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to stockholders and which will be taxed to stockholders as ordinary
income or long-term capital gain may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.

         DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income will be taxable to a stockholder as ordinary income.
Distributions of net capital gains, if any, designated by the Fund as capital
gain dividends, are taxable as long-term capital gains, regardless of how long
the stockholder has held the Fund's shares, and are not eligible for the
dividends received deduction. The alternative minimum tax applicable to
corporations may reduce the benefits of the dividends received deductions.

         Dividends received by corporate stockholders may qualify for the
dividends received deduction to the extent the Fund designates its dividends as
derived from dividends from domestic corporations. The amount designated by the
Fund as so qualifying cannot exceed the aggregate amount of dividends received
by the Fund from domestic corporations for the taxable year. Since the Fund's
income may not consist exclusively of dividends eligible for the corporate
dividends received deduction, its distributions of investment company taxable
income likewise may not be eligible, in whole or in part, for that deduction.
The dividends received deduction may be further reduced if the shares of the
Fund are debt-financed or are deemed to have been held less than 46 days.

         All distributions are taxable to the stockholder whether reinvested in
additional shares or received in cash. Stockholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date. Stockholders will be notified annually as to the
Federal tax status of distributions.

         Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution nevertheless would be taxable to the stockholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.

                                       16

         HEDGING AND OTHER TRANSACTIONS. Certain options and futures contracts
are "section 1256 contracts." Any gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"); however, foreign currency gains or losses (as discussed below)
arising from certain 1256 contracts may be treated as ordinary income or loss.
Also, section 1256 contracts held by the Fund at the end of each taxable year
(and at certain other times prescribed pursuant to the Code) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is generally treated
as 60/40 gain or loss.

         Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to stockholders.

         The Fund may make one or more of the elections available under the Code
which are applicable to straddles and to certain foreign currency options and
regulated futures contracts. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.

         Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.

         Because the tax consequences of straddle transactions to the Fund are
not entirely clear, it may ultimately be determined that the Fund's tax
accounting procedures failed to conform to the straddle rules. Consequently, the
Fund may have inadvertently failed to satisfy one or more of the requirements
for qualification as a regulated investment company. If the Fund has failed to
satisfy the requirement that it distribute at least 90% of its net investment
company taxable income, the Fund may be able to preserve its regulated
investment company status by making a "deficiency dividend" distribution. In
addition, the Fund would have to pay interest and a penalty on the amount of the
deficiency dividend distribution. If the Fund fails to satisfy one of the other
requirements for qualification as a regulated investment company, the Fund would
be taxed as an ordinary corporation, and its distributions, including net
capital gain distributions, would be taxable to stockholders as ordinary
dividends. Moreover, upon any requalification as a regulated investment company,
the Fund might be subject to a corporate-level tax on certain gains.

         Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Fund will be able to engage in transactions in options and futures
contracts.

         FOREIGN CURRENCY EXCHANGES. Under the Code, gains or losses
attributable to fluctuations in foreign currency exchange rates which occur
between the time the Fund accrues interest or other receivables

                                       17

or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
are generally treated as ordinary income or ordinary loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain futures contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to in the
Code as "section 988" gains or losses, may increase or decrease the amount of
the Fund's investment company taxable income to be distributed to its
stockholders as ordinary income. For example, fluctuations in exchange rates may
increase the amount of income that the Fund must distribute in order to qualify
for treatment as a regulated investment company and to prevent application of an
excise tax on undistributed income. Alternatively, fluctuations in exchange
rates may decrease or eliminate income available for distribution. If section
988 losses exceed other investment company taxable income during a taxable year,
the Fund generally would not be able to make ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as
return of capital to stockholders for Federal income tax purposes, rather than
as an ordinary dividend, reducing each stockholder's basis in his Fund shares.

         Income received by the Fund from sources within foreign countries may
be subject to withholding and other similar income taxes imposed by such
countries. Tax conventions between certain countries and the U.S. may reduce or
eliminate these taxes. In addition, the Adviser will manage the Fund with the
intention of minimizing foreign taxation in cases where it is deemed prudent to
do so. If more than 50% of the value of the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to elect to "pass-through" to the Fund's stockholders the amount of
such foreign income and similar taxes paid by the Fund. If this election is
made, a stockholder will be required to include in gross income (in addition to
taxable dividends actually received) his pro rata share of the foreign income
and similar taxes paid by the Fund, and generally will be entitled either to
deduct (as an itemized deduction) his pro rata share of such foreign taxes in
computing his taxable income or to use it (subject to limitations) as a foreign
tax credit against his U.S. Federal income tax liability. No deduction for
foreign taxes may be claimed by a stockholder who does not itemize deductions.
Each stockholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year, and if so, such notification will designate (a) the stockholder's
portion of the foreign taxes paid to foreign countries and (b) the portion of
the dividend which represents income derived from sources outside the U.S.

         Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the stockholder's U.S. Federal income tax attributable to his
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Fund's income flows through to its
stockholders. With respect to the Fund, gains from the sale of securities
generally will be treated as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables will be treated as derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income, such as dividends received from the Fund, and to
certain other types of income. Stockholders may be unable to claim a credit for
the full amount of their proportionate share of the foreign taxes paid by the
Fund. In addition, the foreign tax credit may offset only 90% of the alternative
minimum tax (prior to reduction for the "regular" tax liability for the year)
imposed on corporations and individuals. In addition, foreign taxes may not be
deducted by a stockholder that is an individual in computing alternative minimum
taxable income.

         The foregoing is a general description of the foreign tax credit under
current law. Because application of the credit depends on the particular
circumstances of each stockholder, stockholders are

                                       18

advised to consult their own tax advisers.

         DISPOSITION OF SHARES. Upon disposition (by redemption, repurchase,
sale or exchange) of Fund shares, a stockholder will realize a taxable gain or
loss depending upon his basis in his shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in the stockholder's
hands. Such gain or loss will generally be long-term or short-term depending
upon the stockholder's holding period for the shares. However, a loss realized
by a stockholder on the disposition of Fund shares with respect to which capital
gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held by
the stockholder for six months or less. Further, a loss realized on a
disposition will be disallowed to the extent the shares disposed of are replaced
(whether by reinvestment of distributions or otherwise) within a period of 61
days beginning 30 days before and ending 30 days after the shares are disposed
of. In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.

         Under certain circumstances, the sales charge incurred in acquiring
shares of the Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies where shares of the Fund
are exchanged within 90 days after the date they were purchased and new shares
of a Capstone Fund or another regulated investment company are acquired without
a sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. The portion of the sales charge
affected by this rule will be treated as a sales charge paid for the new shares.

         Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.

         BACKUP WITHHOLDING. The Fund may be required to withhold Federal income
tax at the rate of 31% of all taxable distributions from the Fund and of gross
proceeds from the redemption of shares payable to stockholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate stockholders and
certain other stockholders specified in the Code generally are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the stockholder's Federal income tax liability.

         OTHER TAXES. Distributions also may be subject to additional state,
local and foreign taxes depending on each stockholder's particular situation.
Foreign stockholders may be subject to U.S. tax rules that differ significantly
from those described above, including the likelihood that distributions to them
would be subject to withholding of U.S. tax at a rate of 30% (or at a lower rate
under a tax treaty). Stockholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in the
Fund.
                                       19
OTHER INFORMATION

         CUSTODY OF ASSETS. All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by The Fifth Third Bank, 38 Fountain
Square, Cincinnati, Ohio 45263, as custodian.

         STOCKHOLDER REPORTS. Semi-annual statements are furnished to
stockholders, and annually such statements are audited by the independent
accountants.

         INDEPENDENT ACCOUNTANTS. Tait, Weller & Baker, Two Penn Center, Suite
700, Philadelphia, Pennsylvania 19102-1707, the independent accountants for the
Fund, performs annual audits of the Fund's financial statements.

         LEGAL COUNSEL. Dechert, Price & Rhoads, 1500 K Street, N.W., Suite 500,
Washington, D.C. 20005, is legal counsel to the Fund. 20

                                   APPENDIX A

         COMMERCIAL PAPER RATINGS. A commercial paper rating of Standard &
Poor's Corporation ("S&P") is a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days. Commercial
paper rated A-1 by S&P indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issued determined to
possess overwhelming safety characteristics are denoted A-1+.

         Commercial paper ratings by Moody's Investors Service, Inc. ("Moody's")
are opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. The rating
"Prime-1" is the highest commercial paper rating assigned by Moody's. Issuers
rated "Prime-1" (or related supporting institutions) are considered to have a
superior capacity for repayment of short-term promissory obligations.

         CORPORATE BOND RATINGS. Bonds rated Baa by Moody's are judged by
Moody's to be medium grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.

         Bonds rated B by Moody's are judged by Moody's to generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.

         A bond rating of BBB by S&P is regarded as having adequate capacity to
pay principal and interest. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

         A bond rating of B is regarded by S&P, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protection characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.

                                       21

                                   APPENDIX B

         As stated in the Fund's Prospectus, the Fund may enter into futures
contracts and may purchase and sell related options for hedging purposes. Such
transactions are described in this Appendix.

I.       STOCK INDEX FUTURES CONTRACTS.

         A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market indexes,
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index. In contrast, certain exchanges offer futures contracts on narrower market
indexes, such as the Standard & Poor's 100 or indexes based on an industry or
market segment, such as oil and gas stocks. Futures contracts are traded on
organized exchanges regulated by the Commodity Futures Trading Commission.
Transactions on such exchanges are cleared through a clearing corporation, which
guarantees the performance of the parties to each contract.

         The Fund will sell stock index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Fund may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the Fund
will purchase stock index futures contracts in anticipation of purchases of
securities. Generally, in a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the long futures position, but
a long futures position may be terminated without a corresponding purchase of
securities.

II.      FUTURES CONTRACTS ON FOREIGN CURRENCIES.

         A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by the Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.

III.     MARGIN PAYMENTS.

         Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's custodian an amount of cash or cash equivalents, the value of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, margin, to and from the broker, will be made on a daily basis
as the price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-market. For example, when the Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will

                                       22

be entitled to received from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the future contract has declined in response to a decrease in
the underlying instruments, the position would be less valuable and the Fund
would be required to make a variable margin payment to the broker. At any time
prior to expiration of the futures contract, the Adviser may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.

IV.      RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.

         There are several risks in connection with the use of futures by the
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge would not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund would be
in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage would
be partially offset by the loss on the future. If the price of the future moves
more than the price of the hedged securities, the Fund would experience either a
loss or gain on the futures which will not be completely offset by movements in
the price of the securities which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of securities being
hedged and movements in the price of futures contracts, the Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, or if otherwise deemed to be appropriate by the investment
adviser. Conversely, the Fund may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the investment adviser.
It is also possible that, where the Fund has sold futures to hedge its portfolio
against a decline in the market, the market may advance and the value of
securities held in the Fund may decline. If this occurred, the Fund would lose
money on the future and also experience a decline in value in its portfolio
securities.

         Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund would realize a loss on the
futures contract that is not offset by a reduction in the price of securities
purchased.

         In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a broker to collateralize the position and
thereby ensure that the use of such futures is unleveraged.

         In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which

                                       23

could distort the normal relationship between the cash and futures markets.
Second, with respect to financial futures contracts, the liquidity of the
futures market depends on participants entering into off-setting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced thus
producing distortions. Third, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions. Due to the
possibility of price distortion in the futures market, and because of the
imperfect correlation between the movements in the cash market and movements in
the price of futures, a correct forecast of general market trends or interest
rate movements by the Adviser may still not result in a successful hedging
transaction over a short time frame.

         Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will generally not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.

         Further, it should be noted that 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.

         Successful use of futures by the Fund is also subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund would lose part of all of the benefit to the increased value
of its securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.

V.       OPTIONS ON FUTURES CONTRACTS.

         The Fund may purchase and sell options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
                                       24

         Investments in options on futures contracts involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale 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. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transactions
costs).

VI.      OTHER HEDGING TRANSACTIONS.

         As noted above, the Fund presently intends to use stock index and
foreign currency futures contracts (and related options) in connection with
their hedging activities. Nevertheless, the Fund is authorized to enter into
hedging transactions in any other futures or options contracts which are
currently traded. Such instruments may be employed in connection with the Fund's
hedging strategies if, in the judgment of the Adviser, transactions therein are
necessary or advisable.

VII.     ACCOUNTING.

         Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.

                                       25

                     MEDICAL RESEARCH INVESTMENT FUND, INC.

                    PORTFOLIO OF INVESTMENTS AUGUST 31, 1994
------------------------------------------------------------------------------


                                                                                                   MARKET
                                                                                                    VALUE       PERCENTAGE OF
                                        SHARES                                                   (NOTE 1-A)      NET ASSETS
                                       ---------                                                -------------   -------------
                                                                                                           
        MAJOR CAPITALIZATION              12,000  Johnson & Johnson...........................  $     601,500         4.55%
            North America                 15,000  Merck & Co., Inc............................        511,875         3.87
               12.80%                      8,500  Pfizer, Inc.................................        580,125         4.38
                                                                                                -------------   -------------
                                                                                                    1,693,500        12.80
              SPECIALTY                   23,000  Allergan, Inc...............................        629,625         4.76
           CAPITALIZATION                 30,000  Agouron Pharmaceuticals, Inc.(a)............        337,500         2.55
            North America                 60,000  BioChem Pharma, Inc.(a).....................        630,000         4.76
               39.86%                     25,000  Cephalon, Inc.(a)...........................        312,500         2.36
                                           7,500  Chiron Corp.(a).............................        523,125         3.95
                                          60,000  Cytel Corp.(a)..............................        187,500         1.42
                                          12,000  Genetics Institute, Inc.(a).................        495,000         3.74
                                          40,000  Gilead Sciences, Inc.(a)....................        410,000         3.10
                                          55,000  Immunex Corp.(a)............................        838,750         6.34
                                          50,000  Isis Pharmaceuticals, Inc.(a)...............        237,500         1.80
                                          50,000  SangStat Medical Corp.(a)...................        312,500         2.36
                                          25,000  Vertex Pharmaceuticals, Inc.(a).............        359,375         2.72
                                                                                                -------------   -------------
                                                                                                    5,273,375        39.86
        MAJOR CAPITALIZATION              40,000  Astra 'A'...................................        912,400         6.90
               Europe                      1,000  Schering AG.................................        600,630         4.54
                                                                                                -------------   -------------
               11.44%                                                                               1,513,030        11.44
              SPECIALTY                    1,200  Ares-Serono.................................        648,744         4.90
           CAPITALIZATION                  9,000  Cambridge Antibody Technology,
               Europe                             Ltd.(a)(Note 5).............................        297,000         2.24
               12.34%                     35,000  Ethical Holdings ADR(a).....................        271,250         2.05
                                           1,000  Immuno AG...................................        416,730         3.15
                                                                                                -------------   -------------
                                                                                                    1,633,724        12.34
        MAJOR CAPITALIZATION              25,000  Sankyo Co. Ltd..............................        604,000         4.57
                Asia                      27,000  Fujisawa Pharmaceutical Co..................        288,360         2.18
               12.72%                     25,000  Taisho Pharmaceutical Co., Ltd..............        496,750         3.75
                                          20,000  Teikoku Hormone.............................        293,600         2.22
                                                                                                -------------   -------------
                                                                                                    1,682,710        12.72
              SPECIALTY                   30,000  Rohto Pharmaceutical........................        276,000         2.08
           CAPITALIZATION                100,000  Biota Holdings Limited(a)...................        595,000         4.50
                Asia                      30,000  Fujirebio...................................        335,400         2.54
                                                                                                -------------   -------------
                9.12%                                                                               1,206,400         9.12
                                                  TOTAL INVESTMENTS
                                                  (Cost $12,046,185)..........................     13,002,739        98.28
                                                  OTHER ASSETS, LESS LIABILITIES..............        227,962         1.72
                                                                                                -------------   -------------
                                                  NET ASSETS..................................  $  13,230,701       100.00%
                                                                                                =============   =============

(a) Non-income producing security.

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                     MEDICAL RESEARCH INVESTMENT FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1994
---------------------------------------------------
ASSETS:

Investments in securities at market
    (identified cost
    $12,046,185)(Note 1-A)...........  $ 13,002,739
Cash.................................       267,659
Receivables:
    Capital stock sold...............        19,871
    Dividends........................        11,655
                                       ------------
         Total assets.................    13,301,924
                                       ------------
LIABILITIES:

Payable for capital stock redeemed...            42
Accrued advisory and administration
    fees.............................        47,872
Other accrued expenses...............        23,309
                                       ------------
        Total liabilities............        71,223
                                       ------------
NET ASSETS:..........................  $ 13,230,701
                                       ============
NET ASSET VALUE AND REDEMPTION PRICE
    PER SHARE: ($13,230,701 722,919
    shares outstanding) $.001 par
    value, 1,000,000,000 shares
    authorized.......................  $      18.30
                                       ============
COMPUTATION OF OFFERING PRICE PER
    SHARE: (Net asset value $18.30 x
    100/95.25).......................  $      19.21
                                       ============
SOURCE OF NET ASSETS:

    Paid in capital..................  $ 11,279,933
    Accumulated net realized gain on
       investments...................       994,214
    Net unrealized appreciation of
       investments...................       956,554
                                       ------------
                                       $ 13,230,701
                                       ============

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                     MEDICAL RESEARCH INVESTMENT FUND, INC.

STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1994
-----------------------------------------------------------------------------

INVESTMENT INCOME:

Income:
    Dividends (net of foreign taxes of $7,022)...................  $  103,903
                                                                   ----------
Expenses:
    Investment advisory fees (Note 2)............................     121,553
    Administration fees (Note 2).................................      54,388
    Transfer agent fees..........................................      40,517
    Distribution fees (Note 2)...................................      30,132
    Custodian fees...............................................      25,612
    Audit and legal fees.........................................      24,851
    Registration fees............................................      13,215
    Miscellaneous................................................      14,800
                                                                   ----------
        Total expenses...........................................     325,068
                                                                   ----------

        Less fees waived by: (Note 2)
            Investment Adviser...................................      16,868
            Administrator........................................       4,217
                                                                   ----------
                                                                       21,085
                                                                   ----------
        Net expenses.............................................     303,983
                                                                   ----------
            Net investment loss..................................    (200,080)
                                                                   ----------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS:

Net realized gain from security transactions......................    995,595
Unrealized appreciation (depreciation) of investments:
    Beginning of year............................................ $ 1,577,879
    End of year..................................................     956,554
                                                                  -----------
        Net decrease in unrealized appreciation of investments...    (621,325)
                                                                   ----------
            Net realized and unrealized gain on investments......     374,270
                                                                  -----------
            Net increase in net assets resulting from operations.  $  174,190
                                                                  ===========
 
                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                     MEDICAL RESEARCH INVESTMENT FUND, INC.
 
STATEMENT OF CHANGES IN NET ASSETS
------------------------------------------------------------------------------


                                                                                             YEAR ENDED AUGUST 31,
                                                                                          ----------------------------
OPERATIONS:                                                                                   1994           1993
                                                                                          -------------  -------------
                                                                                                              
Net investment loss.....................................................................  $    (200,080) $    (155,961)
Net realized gain from security transactions............................................        995,595      1,461,488
Net unrealized appreciation (depreciation) of investments...............................       (621,325)       623,718
                                                                                          -------------  -------------
    Net increase in net assets resulting from operations................................        174,190      1,929,245
 
DISTRIBUTIONS TO SHAREHOLDERS:
Distribution from net realized gains from investment transactions.......................       (820,375)    (1,134,855)
 
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share transactions (Note 3)....      3,654,122     (1,986,252)
                                                                                          -------------  -------------
        Total increase (decrease) in net assets.........................................      3,007,937     (1,191,862)
 
NET ASSETS:
Beginning of year.......................................................................     10,222,764     11,414,626
                                                                                          -------------  -------------
End of year (including net investment deficit of $0 and $155,961, respectively).........  $  13,230,701  $  10,222,764
                                                                                          =============  =============

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
 
------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1994
------------------------------------------------------------------------------
 
NOTE 1 --SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    Medical Research Investment Fund, Inc. (the 'Fund') was organized as a
Maryland Corporation on November 7, 1984 and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management company. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.
 
A) SECURITY VALUATION _ Securities listed on a recognized stock exchange,
whether U.S. or foreign, are valued at the last reported sales price on that
exchange prior to the time when assets are valued or prior to the close of
trading on the New York Stock Exchange. In the event there are no sales, the
last available bid price will be used. If a security is traded on more than
one exchange, the security is valued at the last sales price on the exchange
where the stock is primarily traded.
 
B) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS _ Substantially all of the
Fund's net investment income, if any, will be distributed to shareholders
semi-annually and net realized capital gains, if any, will be distributed
annually. Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses.
  
                     MEDICAL RESEARCH INVESTMENT FUND, INC.
 
C) FEDERAL INCOME TAXES _ No provision is made for Federal income taxes as it
is the Fund's intention to continue to qualify as a regulated investment
company and to make the requisite distribution to its shareholders which will
be sufficient to relieve it from all, or substantially all, Federal income
taxes.
 
D) FOREIGN CURRENCY TRANSLATION _ All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at the bid price of such
currencies against U.S. dollars last quoted by a major bank on the valuation
date. The cost of foreign portfolio securities is determined using historical
exchange rates. Income is translated at exchange rates prevailing when earned.
 
E) OTHER _ Security transactions are accounted for on the trade date.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. The cost of investments sold is
determined by use of the specific identification method for both financial
reporting and income tax purposes. Interest income is recorded on an accrual
basis; dividend income is recorded on the ex-dividend date, except that
certain dividends from foreign securities are recorded on the ex-dividend date
or as soon thereafter as the Fund is informed of the dividend.
 
NOTE 2 -- INVESTMENT ADVISORY FEES, ADMINISTRATOR'S FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
 
    Pursuant to the Advisory Agreement, G/A Capital Management, Inc. ('G/ACM')
serves as the Investment Adviser of the Fund. Under this agreement, G/ACM
receives a monthly fee at the annual rate of 1% of the Fund's first $30
million in average net assets, 0.90% of the next $20 million in average net
assets, and 0.75% of average net assets in excess of $50 million. The
Investment Adviser has voluntarily agreed to waive its fee until the assets of
the Fund reach a level permitting the Fund to pay these fees and still
maintain an expense ratio of 2.5% or less. For the fiscal year ended August
31, 1994, G/ACM waived fees of $16,868.
 
    Under an Administration Agreement between the Fund and its Administrator,
Capstone Asset Management Company ('CAMCO'), CAMCO supervises all aspects of
the Fund's operations other than the management of its investments. For its
services, CAMCO is entitled to receive a fee at the annual rate of 0.25% of
the Fund's average daily net assets. CAMCO has voluntarily agreed to waive its
fees until the assets of the Fund reach a level permitting the Fund to pay
these fees and maintain an expense ratio of 2.5% or less. For the fiscal year
ended August 31, 1994, CAMCO voluntarily waived administrative fees of $4,217.
In addition, CAMCO is also paid a monthly fee of $2,000 for costs representing
certain accounting and bookkeeping services. These fees, which amounted to
$24,000 for the year ended August 31, 1994, are not subject to the previously
discussed waiver.
 
    Capstone Asset Planning Company ('CAPCO') serves as Distributor and
Underwriter of the Fund's shares. Commissions and underwriting fees earned on
sales of the Fund's shares during the year ended August 31, 1994 by the
Distributor/Underwriter were $10,287 and $9,522, respectively. CAPCO is an
affiliate of CAMCO, and both are wholly-owned subsidiaries of Capstone
Financial Services, Inc. ('CFS').
 
    Pursuant to a distribution plan established in accordance with Rule 12b-1
under the Investment Company Act of 1940, CAPCO pays certain registered
broker-dealers, financial institutions or other industry professionals
('Service Organizations'), fees at the annual rate of 0.25% of the average
daily net assets of the Fund for whom the Service Organizations are the
dealers or owners of record. The Fund has agreed to reimburse CAPCO for the
payment of such fees, which for the year ended August 31, 1994, amounted to
$30,132. Of this amount, approximately 45% was paid to CAPCO and 19% was paid
to G/ACM for accounts on which they acted as servicers.
 
                     MEDICAL RESEARCH INVESTMENT FUND, INC.
 
    Certain officers of the Fund are also officers and directors of G/ACM,
CAMCO, CAPCO and CFS. During the year ended August 31, 1994, Directors of the
Fund who are not 'interested persons' received Directors' fees of $2,750. All
other officers and Directors serve without compensation from the Fund.
 
NOTE 3 _ CAPITAL STOCK
 
Transactions in capital stock were as follows:
 
                                         YEAR ENDED AUGUST 31,
                           --------------------------------------------------
                                    1994                      1993
                           -----------------------  -------------------------
                            SHARES       AMOUNT       SHARES       AMOUNT
                           ---------  ------------  ----------  -------------
Shares sold..............    229,944  $  4,367,755      80,267  $   1,429,359
Shares issued to
  shareholders in
  reinvestment of
  distributions..........     42,418       790,669      66,675      1,088,137
                           ---------  ------------  ----------  -------------
                             272,362     5,158,424     146,942      2,517,496
Shares redeemed..........    (79,869)   (1,504,302)   (252,751)    (4,503,748)
                           ---------  ------------  ----------  -------------
Net increase (decrease)..    192,493  $  3,654,122    (105,809) $  (1,986,252)
                           =========  ============  ==========  ============= 
 
NOTE 4 -- SECURITIES TRANSACTIONS
 
    Purchases and sales of securities other than short-term notes aggregated
$8,359,410 and $5,812,165, respectively. At August 31, 1994 the cost of
investments for Federal income tax purposes was $12,046,185. Accumulated net
unrealized appreciation on investments was $956,554, consisting of $1,794,937
gross unrealized appreciation and $838,383 gross unrealized depreciation.
 
NOTE 5 _ RESTRICTED SECURITIES
 
    On February 4, 1993, the Fund acquired 9,000 shares of common stock of
Cambrige Antibody Technology, Ltd. at a cost of $297,000. The value of these
securities at August 31, 1994 represents 2.2% of the Fund's net assets. They
are valued by the Board of Directors at cost and have not been registered
under the Securities Act of 1993. Accordingly, they may only be sold or
transferred in the absence of such registration, pursuant to rules or
exemptions permitting such sale or transfer. If and when the Fund sells these
securities, additional costs for registration may be required.
 
 
                     MEDICAL RESEARCH INVESTMENT FUND, INC.
 
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
 
The following table sets forth the per share operating performance data for a
share of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated.


                                                                                           YEAR ENDED AUGUST 31,
                                                                          --------------------------------------------------------
                                                                             1994        1993        1992       1991       1990
                                                                          ----------  ----------  ----------  ---------  ---------
                                                                                                                
PER SHARE DATA(1)
Net asset value at beginning of year....................................  $    19.27  $    17.94  $    17.15  $   14.70  $   13.92
                                                                          ----------  ----------  ----------  ---------  ---------
 Income from investment operations:
    Net investment income (loss)........................................        (.31)       (.27)       (.26)      (.23)      (.33)
    Net realized and unrealized gain (loss) on investments..............         .86        3.72        2.30       4.30       1.83
                                                                          ----------  ----------  ----------  ---------  ---------
Total from investment operations........................................         .55        3.45        2.04       4.07       1.50
                                                                          ----------  ----------  ----------  ---------  ---------
Less distributions from:
    Net investment income...............................................          --          --          --         --         --
    Net realized gain on investments....................................        1.52        2.12        1.25       1.62        .72
                                                                          ----------  ----------  ----------  ---------  ---------
Total distributions.....................................................        1.52        2.12        1.25       1.62        .72
                                                                          ----------  ----------  ----------  ---------  ---------
Net asset value at end of year..........................................  $    18.30  $    19.27  $    17.94  $   17.15  $   14.70
                                                                          ----------  ----------  ----------  ---------  ---------
TOTAL RETURN(+).........................................................        2.69%      21.37%      12.04%     30.60%     11.13%
                                                                          ==========  ==========  ==========  =========  =========
RATIOS/SUPPLEMENTED DATA
Net assets at end of year (in thousands)................................  $   13,231  $   10,223  $   11,415  $   6,955  $   3,771
 
Ratio of operating expenses to average net assets(2):
    Before expense reimbursement........................................        2.67%       2.87%       2.59%      3.74%      4.77%
    After expense reimbursement.........................................        2.50%       2.50%       2.48%      2.50%      3.51%
Portfolio turnover rate.................................................          49%         77%         71%        81%       143%
 
Ratio of Net Investment Loss to Average Net Assets:
    Before expense reimbursement........................................       (1.82)%     (1.90)%     (1.56)%    (2.71)%    (3.51)%
    After expense reimbursement.........................................       (1.65)%     (1.53)%     (1.45)%    (1.47)%    (2.26)%

(1) Based on average month-end shares outstanding.
(2) See Note 2 regarding a limitation on the advisory and administrative fees.
(+) Calculated without sales charge.
 
                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                     MEDICAL RESEARCH INVESTMENT FUND, INC.
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To the Shareholders and Board of Directors
of Medical Research Investment Fund, Inc.
 
     We have audited the accompanying statement of assets and liabilities of
Medical Research Investment Fund, Inc., including the portfolio of
investments, as of August 31, 1994, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended, and financial highlights for each of
the periods presented. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of August 31, 1994, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
     In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Medical Research Investment Fund, Inc. as of August 31, 1994, and
the results of its operations, changes in its net assets and financial
highlights for the periods presented, in conformity with generally accepted
accounting principles.
                                         Tait, Weller & Baker
 
Philadelphia, Pennsylvania
September 30, 1994

                    MEDICAL RESEARCH INVESTMENT FUND, INC.
                         5847 San Felipe, Suite 4100
                             Houston, Texas 77057
                                1-800-262-6631
                        ANNUAL REPORT TO SHAREHOLDERS
                               AUGUST 31, 1994
 
------------------------------------------------------------------------------
 
DIRECTORS                               OFFICERS
 
Samuel D. Isaly                         Samuel D. Isaly
John J. Maggio, M.D.                    President
Philip C. Smith                         Edward L. Jaroski
Eugene E. Weise, M.D., P.C.             Vice President
                                        Sherry M. Cowperthwaite
                                        Vice President
                                        Linda G. Giuffre
                                        Treasurer
                                        Iris R. Clay
                                        Secretary
 
------------------------------------------------------------------------------
 
INVESTMENT ADVISER                      TRANSFER AGENT
G/A Capital Management, Inc.            Fund/Plan Services, Inc.
41 Madison Avenue                       P. O. Box 874
40th Floor                              Conshohocken, PA 19428
New York, NY 10010-2202                 1-800-845-2340

ADMINISTRATOR                           CUSTODIAN
Capstone Asset Management Company       National Westminster Bank NJ
5847 San Felipe, Suite 4100             One Exchange Place
Houston, TX 77057                       Jersey City, NJ 07302

DISTRIBUTOR                             AUDITORS
Capstone Asset Planning Company         Tait, Weller & Baker
5847 San Felipe, Suite 4100             Two Penn Center Plaza, Suite 700
Houston, TX 77057                       Philadelphia, PA 19102-1707
1-800-262-6631