MORGAN STANLEY UNIVERSAL FUNDS INC, 497, 1997-02-05

MORGAN STANLEY UNIVERSAL FUNDS INC
497, 1997-02-05

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<PAGE>

SUPPLEMENT DATED JANUARY 31, 1997
TO
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 1, 1996

MORGAN STANLEY UNIVERSAL FUNDS, INC.
P.O. BOX 2798
BOSTON, MA 02208-2798
------------------------------

The following paragraphs replace the last three paragraphs of the second
column of Page 1 of the Statement of Additional Information:

Statement of Additional Information dated October 1, 1996, relating to:

Prospectus dated January 31, 1997 for the Money Market, Fixed Income, High
Yield, Core Equity, Growth, Value, Mid Cap Growth, Mid Cap Value, U.S. Real
Estate, International Fixed Income, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity, Asian Equity, Balanced and
Multi-Asset-Class Portfolios.

Prospectus dated January 31, 1997 for the U.S. Real Estate, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios.

Prospectus dated January 13, 1997 for the Fixed Income, High Yield, Growth,
Value, Mid Cap Value, Global Equity, International Magnum and Emerging
Markets Equity Portfolios.

Prospectus dated October 1, 1996 for the Emerging Markets Equity Portfolio.

PLEASE RETAIN THIS SUPPLEMENT FOR
FUTURE REFERENCE
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THE FUND OFFERS 17
PORTFOLIOS MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM") OR
MILLER ANDERSON & SHERRERD, LLP ("MAS"). THE FUND MAKES AVAILABLE IN A SINGLE
PRODUCT THE COMBINED STRENGTH OF THESE LEADING INVESTMENT MANAGEMENT FIRMS.

THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND'S INVESTMENTS AND
SERVICES. YOU SHOULD READ IT BEFORE INVESTING, AND KEEP IT ON FILE FOR FUTURE
REFERENCE ALONG WITH THE PROSPECTUS OF THE SEPARATE ACCOUNT OF THE SPECIFIC
INSURANCE PRODUCT WHICH ACCOMPANIES THIS PROSPECTUS.

A STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 1, 1996, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") AND IS INCORPORATED
HEREIN BY REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS.
FOR A FREE COPY, CONTACT THE FUND OR YOUR INSURANCE COMPANY.

SHARES OF EACH PORTFOLIO MAY BE PURCHASED ONLY BY INSURANCE COMPANIES FOR THEIR
SEPARATE ACCOUNTS FOR THE PURPOSE OF FUNDING VARIABLE ANNUITY CONTRACTS AND
VARIABLE LIFE INSURANCE POLICIES AND BY CERTAIN TAX-QUALIFIED INVESTORS.
PARTICULAR PORTFOLIOS MAY NOT BE AVAILABLE IN YOUR STATE DUE TO VARIOUS
INSURANCE REGULATIONS. PLEASE CHECK WITH YOUR INSURANCE COMPANY FOR AVAILABLE
PORTFOLIOS. INCLUSION OF A PORTFOLIO IN THIS PROSPECTUS WHICH IS NOT AVAILABLE
IN YOUR STATE IS NOT TO BE CONSIDERED A SOLICITATION.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

THE FUND'S PORTFOLIOS:

U.S. FIXED INCOME PORTFOLIOS

Money Market High Yield
Fixed Income

U.S. EQUITY PORTFOLIOS

Core Equity Mid Cap Growth
Growth Mid Cap Value
Value U.S. Real Estate

GLOBAL PORTFOLIOS

International International Magnum
Fixed Emerging Markets Equity
Income Asian Equity
Emerging Markets Debt
Global Equity

ASSET ALLOCATION PORTFOLIOS

Balanced Multi-Asset-Class

AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES. THE MONEY MARKET PORTFOLIO ATTEMPTS TO MAINTAIN A STABLE $1.00 NET
ASSET VALUE PER SHARE BUT THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO
SO.

THE HIGH YIELD AND EMERGING MARKETS DEBT PORTFOLIOS MAY INVEST WITHOUT
LIMITATION IN LOWER-QUALITY DEBT SECURITIES, SOMETIMES CALLED "JUNK BONDS." YOU
SHOULD CONSIDER THAT THESE SECURITIES CARRY GREATER RISKS, SUCH AS THE RISK OF
DEFAULT, THAN OTHER DEBT SECURITIES. REFER TO "SECURITIES AND INVESTMENT
TECHNIQUES--HIGH YIELD SECURITIES" FOR FURTHER INFORMATION.

THE EMERGING MARKETS DEBT AND EMERGING MARKETS EQUITY PORTFOLIOS MAY INVEST IN
EQUITY SECURITIES OF RUSSIAN COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION
AND CUSTODY INVOLVES CERTAIN RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED
WITH INVESTMENTS IN OTHER SECURITIES MARKETS. SEE "SECURITIES AND INVESTMENT
TECHNIQUES--RUSSIAN SECURITIES."

Prospectus dated January 31, 1997
Morgan Stanley Universal Funds, Inc.
P.O. Box 2798, Boston, MA 02208-2798
<PAGE>

THE FUND

The Fund is an open-end management investment company, or mutual fund. At
present it offers 17 separate investment portfolios (each, a "Portfolio"), each
with a distinct investment objective. The following pages describe the types of
securities and investment techniques each Portfolio uses to seek its objective,
as well as the risks inherent in those types of securities and investment
techniques.

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the
following Portfolios:

Money Market Global Equity
Growth International Magnum
U.S. Real Estate Emerging Markets
Emerging Markets Debt Equity
Asian Equity

MSAM conducts a worldwide investment advisory business. As of November 30,
1996, MSAM and its investment advisory affiliates (exclusive of MAS and Van
Kampen American Capital, Inc. ("Van Kampen")) managed assets of approximately
$70 billion. MAS and Van Kampen became affiliates of MSAM in January, 1996 and
October, 1996, respectively.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the following
Portfolios:

Fixed Income Mid Cap Value
High Yield International Fixed
Core Equity Income
Value Balanced
Mid Cap Growth Multi-Asset-Class

MAS's institutional investment advisory business was established in 1969. As of
November 30, 1996, MAS managed assets of approximately $40 billion. Also as of
November 30, 1996, MSAM and MAS, and all of their affiliated asset management
companies, managed assets totaling approximately $170 billion.

OFFERING OF SHARES

The Fund is intended to be a funding vehicle for all types of variable annuity
contracts and variable life insurance policies offered by various insurance
companies. Shares of the Fund may also be offered to certain tax-qualified
investors, including qualified pension and retirement plans. It is possible
that material conflicts among the various insurance companies and other
investors in the Fund may arise. The Fund's Board of Directors will monitor
events in order to identify the existence of any material conflicts and to
determine what action, if any, should be taken in response to any such
conflicts.

PROSPECTUS OUTLINE Page
----

PORTFOLIO SUMMARIES 3

For each Portfolio, the investment objective and a summary of strategy,
potential investors, and investment characteristics and risks.

THE PORTFOLIOS' INVESTMENTS 6
- ---------------------------

A more detailed review of how each Portfolio invests and investment
characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 15
- ------------------------------------

More information about the types of investment strategies that may be used
by some or all of the Portfolios and information about investment risks and
limitations.

FUNDAMENTAL INVESTMENT LIMITS 31
- -----------------------------

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 31
- ----------------------

General information about the organization and operations of the Fund,
including details about MSAM, MAS and the individual portfolio managers, as
well as fees, expenses and performance calculations.

ACCOUNT POLICIES 40
- ----------------

Information on net asset value calculation, income and gain distributions,
taxes and share purchases and redemptions.

2
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PORTFOLIO SUMMARIES
- -------------------

Certain investment terms used below have initial capital letters ("Money Market
Instruments," for example). These terms are further described under "Securities
and Investment Techniques" below.

U.S. FIXED INCOME PORTFOLIOS

MONEY MARKET PORTFOLIO

OBJECTIVE AND STRATEGY: Maximize current income and preserve capital while
maintaining high levels of liquidity through investing in high quality Money
Market Instruments with effective maturities of 397 days or less. While the
Portfolio is managed with the goal of keeping its share price stable at $1.00,
there can be no assurance this goal will be achieved. The rate of income will
vary from day-to-day, generally reflecting short-term interest rates.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking to
earn income at current money market rates while preserving the value of their
investment.

RISK PROFILE: Low potential risk and reward. The Portfolio seeks a conservative
rate of return in exchange for capital preservation.

FIXED INCOME PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Mortgage-Backed Securities ("MBSs"),
Foreign Bonds and other Fixed Income Securities and Derivatives. The
Portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between five and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of Fixed Income Securities.

RISK PROFILE: Moderate potential risk and reward. The Portfolio will focus on
medium- to high-quality investments of intermediate maturity. The level of
risk, and potential reward, depends on the quality and maturity of the
investments. The Portfolio's share price can be expected to vary inversely to
changes in prevailing interest rates. While securities with longer maturities
tend to produce higher yields, the prices of longer maturity securities are
also subject to greater market fluctuations as a result of changes in interest
rates.

HIGH YIELD PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of High Yield
Securities, including Corporate Bonds and other Fixed Income Securities and
Derivatives. High Yield Securities are rated below investment grade and are
commonly referred to as "junk bonds." The Portfolio's average weighted maturity
will ordinarily exceed five years and will usually be between five and fifteen
years.

INVESTOR PROFILE: The Portfolio may be appropriate for long-term, aggressive
investors who understand the potential risks and rewards of investing in lower-
quality securities, including defaulted securities, and are willing to accept
their greater price movements and credit risks.

RISK PROFILE: High potential risk and reward. Securities rated below investment
grade, as well as unrated securities of lower quality, usually entail greater
risk (including the possibility of default or bankruptcy of the issuers), and
generally involve greater price volatility and risk of principal and income,
and may be less liquid than securities in higher rated categories.

U.S. EQUITY PORTFOLIOS

CORE EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Common
Stocks and other Equity Securities of companies that are deemed by MAS to have
earnings growth potential greater than the economy in general and greater than
the expected rate of inflation.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from Common Stocks of companies that represent a well-
diversified exposure to the U.S. stock market.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in the stock market and economic conditions.

GROWTH PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of medium and large capitalization companies that, in
MSAM's judgment, provide above-average potential for capital growth.

INVESTOR PROFILE: The Portfolio is designed for those who want to be invested
in the stock market for its long-term growth potential and who want to
diversify over a large number of individual stocks.

3
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RISK PROFILE: Moderate to high potential risk and reward. An investor in the
Portfolio should be comfortable with the volatility of the U.S. stock market
and able to ride out market fluctuations in anticipation of greater long-term
growth.

VALUE PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Common
Stocks and other Equity Securities that are deemed by MAS to be relatively
undervalued based on various measures such as price/earnings ratios and
price/book ratios.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from Common Stocks of issuers with equity capitalizations
usually greater than $300 million that are deemed to be undervalued in the
marketplace.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in market, economic and Foreign Currency
exchange conditions.

MID CAP GROWTH PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital growth by investing primarily in
Common Stocks and other Equity Securities of issuers with equity
capitalizations in the range of the companies represented in the Standard &
Poor's Ratings Group ("S&P") MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who are
willing to ride out stock market fluctuations in pursuit of potentially greater
long-term returns and who understand that investments in small- and medium-
size companies may result in greater price fluctuations than the stock market
in general.

RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.

MID CAP VALUE PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing in Common Stocks and other Equity Securities of
issuers with equity capitalizations in the range of the companies represented
in the S&P MidCap 400 Index. Such range is currently $100 million to $8 billion
but the range fluctuates over time with changes in the equity market.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average total return from Common Stocks of medium-size companies that are
deemed to be undervalued in the marketplace.

RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.

U.S. REAL ESTATE PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average current income and long-term capital
appreciation by investing primarily in Equity Securities of U.S. and non-U.S.
companies principally engaged in the U.S. real estate industry, including real
estate investment trusts ("REITs").

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek
above-average current income and long-term capital appreciation by investing in
Equity Securities of U.S. and non-U.S. companies principally engaged in the
U.S. real estate industry, including REITs.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, the Portfolio's investments may be subject to the risks
associated with the direct ownership of real estate and direct investments of
REITs.

GLOBAL PORTFOLIOS

INTERNATIONAL FIXED INCOME PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in investment grade Foreign Bonds and
other Fixed Income Securities of foreign issuers and Derivatives. The
Portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between three and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from high-grade Foreign Bonds and willing to accept
currency risk.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price can be expected to vary inversely to changes in prevailing interest
rates. In addition, the performance of the Portfolio will be affected by
Foreign Currency values, the political and regulatory environment, greater
volatility of securities exchanges and overall political and economic factors
in the countries in which the Portfolio invests.

EMERGING MARKETS DEBT PORTFOLIO

OBJECTIVE AND STRATEGY: High total return by investing primarily in Fixed
Income Securities of government and government-related issuers located in
emerging market countries, which securities provide a high level of current
income, while at the same time holding the potential for capital appreciation
if the perceived creditworthiness of the issuer improves due to improving
economic, financial, political, social or other conditions in the country in
which the issuer is located.

INVESTOR PROFILE: The Portfolio is designed for those who seek a high level of
current income from Emerging Market Country Securities that are Fixed Income
Securities, while holding the potential for capital appreciation.

4
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RISK PROFILE: Very high potential risk and reward. The Portfolio's performance
is subject to high risk and will not be required to meet a minimum rating
standard and may purchase securities that are not rated for creditworthiness by
any internationally recognized credit rating organization. These types of debt
obligations are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with their terms and generally
involve a greater risk of default and of volatility in price than securities in
higher rating categories. In addition, international investing involves
different or increased risks. The performance of the Portfolio will be affected
by Foreign Currency values, the political and regulatory environment, greater
volatility of securities exchanges, risks in connection with registration,
clearing and settlement of securities transactions and overall political and
economic factors in the countries in which the Portfolio invests.

GLOBAL EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of issuers throughout the world, including U.S. issuers,
using an approach that is oriented to the selection of individual stocks that
MSAM believes are undervalued.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets throughout the world, including the
United States. By including international investments in their portfolio,
investors can achieve additional diversification and participate in growth
opportunities around the world.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by Foreign Currency
values, the political and regulatory environment, greater volatility of
securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.

INTERNATIONAL MAGNUM PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of non-U.S. issuers in accordance with the EAFE country
(defined herein) weightings determined by MSAM.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets outside the United States. By
including international investments in their portfolio, investors can achieve
additional diversification and participate in growth opportunities around the
world.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by Foreign Currency
values, the political and regulatory environment, greater volatility of
securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of emerging market country issuers with a focus on those
in which MSAM believes the economies are developing strongly and in which the
markets are becoming more sophisticated.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
achieve long-term capital appreciation by investing in Emerging Market Country
Securities. By including emerging market country investments in their
portfolio, investors can achieve additional diversification and participate in
growth opportunities in emerging market countries.

RISK PROFILE: Very high potential risk and reward. In addition to the general
risks involved in Equity Securities, including fluctuations in the stock market
and changes in the economy, international investing involves different or
increased risks. The performance of the Portfolio will be affected by Foreign
Currency values, the political and regulatory environment, the greater
volatility of securities exchanges and overall political and economic factors
in the countries in which the Portfolio invests.

ASIAN EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of Asian issuers (excluding Japan) using an approach that
is oriented to the selection of individual stocks that the Adviser believes are
undervalued. The Portfolio intends to invest in Equity Securities that are
traded on recognized stock exchanges of countries in Asia and in Equity
Securities of companies organized under the laws of an Asian country whose
business is conducted principally in Asia.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets of Asian countries other than Japan.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, international investing involves different or
increased risks. The performance of the Portfolio will be affected by Foreign
Currency values, the political and regulatory environment, greater volatility
of securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.
5
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ASSET ALLOCATION PORTFOLIOS

BALANCED PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Equity and
Fixed Income Securities and Derivatives. The average weighted maturity of the
fixed income portion of the Portfolio ordinarily will exceed five years and
will usually be between three and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of both Equity Securities and
a wide range of Fixed Income Securities.

When MAS judges the relative outlook for each asset class to be neutral, the
mix of assets will be 60% Equity Securities and 40% Fixed Income Securities,
although the Portfolio may hold between 45-75% Equity Securities and between
25-55% Fixed Income Securities.

The Adviser will continually review the Portfolio's holdings and rebalance the
securities held by the Portfolio to attempt to maintain the appropriate asset
mix.

RISK PROFILE: Moderate potential risk and reward. The Portfolio's equity
investments will fluctuate with changes in the stock market and changes in the
economy. The value of the Portfolio's Fixed Income Securities can be expected
to vary inversely to changes in prevailing interest rates. While securities
with longer maturities tend to produce higher yields, the prices of longer
maturity securities are also subject to greater market fluctuations as a result
of changes in interest rates.

MULTI-ASSET-CLASS PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Equity and
Fixed Income Securities (including High Yield Securities) of domestic and
foreign issuers and Derivatives. The average weighted maturity of the fixed
income portion of the Portfolio will ordinarily exceed five years and will
usually be between three and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of both Equity Securities of
domestic and foreign issuers and a wide range of domestic and foreign Fixed
Income Securities ranging from high yield to high grade.

When MAS judges the relative outlook for each asset class to be neutral, the
mix of assets will be 50% in Equity Securities of domestic issuers, 14% in
Equity Securities of foreign issuers, 24% in Fixed Income Securities of
domestic issuers, 6% in Fixed Income Securities of foreign issuers, and 6% in
High Yield Securities. However, the normal ranges for these different asset
classes will be:

<TABLE>
<S> <C>
Equity Securities-domestic issuers 70%-30%
Equity Securities-foreign issuers 25%-5%
Fixed Income Securities-domestic issuers 60%-15%
Fixed Income Securities-foreign issuers 12%-0%
High Yield Securities 12%-0%
</TABLE>
The Adviser will continually review the Portfolio's holdings and actively
rebalance the securities held by the Portfolio.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's
Equity Securities will fluctuate with changes in the stock market and changes
in the economy. The value of the Portfolio's Fixed Income Securities can be
expected to vary inversely to changes in prevailing interest rates. While
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are also subject to greater market fluctuations as a
result of changes in interest rates. Securities rated below investment grade,
as well as unrated securities, usually entail greater risk (including the
possibility of default or bankruptcy of the issuers), and generally involve
greater price volatility and risk of principal and income, and may be less
liquid, than securities in higher rated categories. In addition, international
investing involves different or increased risks. The performance of the
Portfolio will be affected by currency values, the political and regulatory
environment, greater volatility of securities exchanges and overall political
and economic factors in the countries in which the Portfolio invests.

THE PORTFOLIOS' INVESTMENTS
- ---------------------------

INVESTMENT CHARACTERISTICS AND RISKS

The value of each Portfolio's investments and the income they generate will
vary from day-to-day and generally reflect market conditions, interest rates,
and other company, political, or economic news both in the United States and
abroad.

Each Portfolio spreads investment risk by limiting its holdings in any one
company or industry. Nevertheless, each Portfolio, other than the Money Market
Portfolio, will experience price volatility the extent of which will be
affected by the types of securities and techniques the particular Portfolio
uses. (The Money Market Portfolio expects to maintain a net asset value ("NAV")
of $1.00 per share but there can be no assurance of that result.) In the short
term, stock prices can fluctuate dramatically in response to these factors.
Over time, however, stocks have shown greater growth potential than other types
of securities. The prices of bonds also fluctuate and generally move in the
opposite direction from interest rates.

Investments in foreign securities may involve risks in addition to those of
U.S. investments. The performance of the

6
<PAGE>

Portfolios investing in foreign securities will be affected by Foreign Currency
values, the political and regulatory environment, and overall economic factors
in the countries in which investments are made.

Because the International Fixed Income, International Magnum, U.S. Real Estate,
Emerging Markets Equity and Emerging Markets Debt Portfolios are non-
diversified portfolios and are permitted greater flexibility to invest their
assets in the obligations of a single issuer, they are exposed to increased
risk of loss if such an investment underperforms expectations. See "Non-
Diversified Status" in this Prospectus and "Investment Limitations" in the
Statement of Additional Information ("SAI").

Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. MSAM and MAS may use various investment techniques
to hedge risks, including the use of Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.

Each Portfolio will be invested according to its investment strategy. However,
the Portfolios also have the ability to invest without limitation in high-
quality Money Market Instruments or Temporary Investments for temporary,
defensive purposes. See "Securities and Investment Techniques" below.

U.S. FIXED INCOME PORTFOLIOS

MONEY MARKET PORTFOLIO

The Portfolio seeks to realize maximum current income and preserve capital
while maintaining high levels of liquidity through investing in high-quality
Money Market Instruments which have effective maturities of 397 days or less.
The Portfolio's average maturity (on a dollar-weighted basis) will not exceed
90 days. The Portfolio is expected to maintain a net asset value of $1.00 per
share, but there can be no assurance of this result.

The Portfolio utilizes the amortized cost method of valuation in accordance
with regulations issued by the SEC. Accordingly, the Portfolio will limit its
portfolio investments to those instruments that present minimal credit risks
and are of "eligible quality" as determined by the Adviser under the
supervision of the Board of Directors in accordance with regulations of the
SEC, as they may from time to time be amended. For this purpose, "eligible
quality" means a security rated in one of the two highest rating categories
(i) by at least two nationally recognized statistical rating organizations
(each an "NRSRO") assigning a rating to the security or issuer, or (ii) if only
one NRSRO has assigned a rating, by that NRSRO, or if the security is unrated,
of comparable quality as determined by the Adviser. The Money Market Portfolio
will not purchase any bank or corporate obligation unless it is rated at least
Aa or Prime-1 by Moody's Investors Service, Inc. ("Moody's") or AA or A-1 by
S&P, or it is unrated, and in the determination of the Adviser, it is of
comparable quality.

The Portfolio may invest in Repurchase Agreements, Reverse Repurchase
Agreements to a limited extent, may purchase securities on a When-Issued or
Delayed Delivery basis, and may lend its portfolio securities. For additional
investment information, see "Securities and Investment Techniques" below.

FIXED INCOME PORTFOLIO

The Portfolio seeks to achieve above-average total return over a market cycle
of three to five years by investing in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Foreign Bonds, MBSs of domestic
issuers, and other Fixed Income Securities and Derivatives. The Portfolio's
average weighted maturity will ordinarily exceed five years and will usually be
between five and fifteen years.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Fixed Income Securities, not more than 20% of which will be below
investment grade (commonly referred to as High Yield Securities or junk bonds).
Permissible investments include Municipals, Loan Participations and
Assignments, Investment Company Securities, When-Issued and Delayed Delivery
Securities and Derivatives, including but not limited to CMOs, Structured
Notes, Foreign Currency, Forward Foreign Currency Exchange Contracts, Futures,
Options and Swaps. For additional investment information, see "Securities and
Investment Techniques" below.

The Adviser's approach is to actively manage the maturity and duration
structure of the Portfolio in anticipation of long-term trends in interest
rates and inflation. Investments are diversified among a wide variety of Fixed
Income Securities in all market sectors. For additional information about
strategies employed in managing the Portfolio, see "Maturity and Duration
Management," "Value Investing," "Mortgage Investing," "High Yield Investing,"
"Foreign Fixed Income Investing" and "Foreign Investing" in "Securities and
Investment Techniques" below.

HIGH YIELD PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing at least 65% of its

7
<PAGE>

total assets in High Yield Securities of U.S. and foreign issuers including
Corporate Bonds and other Fixed Income Securities. High Yield Securities are
rated below investment grade and are commonly referred to as high yield bonds
or junk bonds. The Portfolio expects to achieve its objective through
maximizing current income, although the Portfolio may seek capital growth
opportunities when consistent with its objective. The Portfolio's average
weighted maturity ordinarily will exceed five years and will usually be between
five and fifteen years.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in High Yield Securities. The Portfolio may also invest in investment
grade Fixed Income Securities of domestic and foreign issuers, including
Eastern European and Emerging Market Country Securities, and in Foreign
Currency, Investment Company Securities, Foreign Equities, Loan Participations
and Assignments, Municipals, Brady Bonds, Asset-Backeds, When-Issued or Delayed
Delivery Securities, and Derivatives, including but not limited to SMBSs, CMOs,
Structured Notes, Forwards, Futures, Options and Swaps. For risks associated
with High Yield Securities and additional information about investments, see
"Securities and Investment Techniques" below.

The Adviser's approach is to use equity and fixed income valuation techniques
and analyses of economic and industry trends to determine portfolio structure.
Individual securities are selected and monitored by fixed income portfolio
managers who specialize in credit analysis of Fixed Income Securities and use
in-depth financial analysis to uncover opportunities in undervalued issues. For
additional information about strategies employed in managing the Portfolio, see
"High Yield Investing," "Maturity and Duration Management," "Value Investing,"
"Mortgage Investing," "Foreign Fixed Income Investing," "Foreign Investing" and
"Emerging Markets Investing" in "Securities and Investment Techniques" below.

U.S. EQUITY PORTFOLIOS

CORE EQUITY PORTFOLIO

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency, Investment Company
Securities, securities purchased on a When-Issued and Delayed Delivery basis,
and Derivatives, including but not limited to Forwards, Futures, Options and
Swaps. For additional information about investments, see "Securities and
Investment Practices" below.

The Adviser's approach entails selecting Equity Securities of companies which
are deemed by the Adviser to demonstrate long-term earnings growth that is
greater than the economy in general and greater than the expected rate of
inflation. The Adviser evaluates both short-term and long-term economic trends
and their impact on corporate profits and the relative value offered by
different sectors and securities within the equity markets. Individual
securities are selected based on fundamental business and financial factors
(such as earnings growth, financial position, price volatility, and dividend
payment records) and the measurement of those factors relative to the current
market price of the security.

GROWTH PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
growth-oriented Common and Preferred Stocks, Convertible Securities, Rights and
Warrants to purchase Common Stocks, Depositary Receipts and other Equity
Securities.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may also invest in Foreign Currency,
Non-Publicly Traded Securities, Private Placements, Restricted Securities,
Money Market Instruments, Investment Company Securities, Repurchase Agreements,
When-Issued and Delayed Delivery Securities, other Fixed Income Securities and
Derivatives, including but not limited to Forwards, Futures, Options and Swaps,
and may lend its portfolio securities. For additional information about
investments, see "Securities and Investment Techniques" below.

The Portfolio will focus its investments on Equity Securities of medium and
large capitalization U.S. corporations and, subject to an overall 25% limit,
Foreign Equities. The Portfolio may invest in securities of foreign issuers
directly or in the form of Depositary Receipts. Since the Portfolio invests in
both Common Stocks and Convertible Securities (when due to market conditions,
it is more advantageous to purchase Convertible Securities), the risks of
investing in the general equity markets may be tempered to a degree by the
Portfolio's investments in Convertible Securities which are often not as
volatile as Common Stock.

The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objectives. In selecting stocks for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high-quality
companies and lower, but accelerating, earnings growth situations. The
Adviser's universe of potential investments generally comprises companies with
market capitalizations of $500 million or more. The Adviser concentrates on
companies with strong, communicative managements and clearly defined strategies
for growth. In addition, the Adviser rigorously assesses company developments,
including changes in

8
<PAGE>

strategic direction, management focus and current and likely future earnings
results. Valuation is important to the Adviser but is viewed in the context of
prospects for sustainable earnings growth and the potential for positive
earnings surprises vis-a-vis consensus expectations. The Portfolio may invest
in any Equity Security that, in the Adviser's judgment, provides above-average
potential for capital appreciation.

In selecting investments for the Portfolio, the Adviser emphasizes individual
security selection. The Portfolio's investments will generally be diversified
by number of issues but concentrated sector positions may result from the
investment process. The Portfolio has a long-term investment perspective;
however, the Adviser may take advantage of short-term opportunities that are
consistent with the Portfolio's objective by selling recently purchased
securities which have increased in value.

VALUE PORTFOLIO

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency, Investment Company
Securities, When-Issued or Delayed Delivery Securities and Derivatives,
including but not limited to Forwards, Futures, Options and Swaps. For
additional information about investments, see "Securities and Investment
Techniques" below.

The Adviser's approach is to select Equity Securities that are deemed to be
undervalued relative to the stock market in general as measured by the S&P 500
Index ("S&P 500"), based on value measures such as price/earnings ratios and
price/book ratios, as well as fundamental research. While capital return will
be emphasized somewhat more than income return, the Portfolio's total return
will consist of both capital and income returns. Stocks that are deemed to be
under-valued in the marketplace have, under most market conditions, provided
higher dividend income returns than stocks that are deemed to have long-term
earnings growth potential which normally sell at higher price/earnings ratios.
For additional information about strategies employed in managing the Portfolio,
see "Value Stock Investing" in "Securities and Investment Techniques."

MID CAP GROWTH PORTFOLIO

The Portfolio seeks long-term capital growth by investing primarily in Common
and Preferred Stocks, Convertible Securities, Rights and Warrants to purchase
Common Stocks, ADRs and other Equity Securities of issuers with equity
capitalizations in the range of the companies represented in the S&P MidCap 400
Index. Such range is currently $100 million to $8 billion but the range
fluctuates over time with changes in the equity market. Due to its emphasis on
long-term capital growth, dividend income for the Portfolio may be lower than
for the other equity Portfolios.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities of smaller and medium-size companies. The Portfolio
may invest up to 5% of its total assets in Foreign Equities (other than ADRs).
The Portfolio may also invest in U.S. Governments and Agencies, Corporate
Bonds, Foreign Bonds, Zero Coupons, Repurchase Agreements, Cash Equivalents,
Foreign Currency, Investment Company Securities, When-Issued and Delayed
Delivery Securities and Derivatives, including but not limited to Forwards,
Futures, Options and Swaps. For additional information about investments, see
"Securities and Investment Techniques" below.

The Adviser uses a four-part process combining quantitative, fundamental and
valuation analysis with a strict sales discipline. Equity Securities that pass
an initial screen based on estimate revisions undergo detailed fundamental
research. Valuation analysis is used to eliminate the most overvalued
securities. Holdings are sold when their estimate-revision scores fall to
unacceptable levels, when fundamental research uncovers unfavorable trends, or
when their valuations exceed the level that the Adviser believes is reasonable
given their growth prospects.

MID CAP VALUE PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, ADRs and other
Equity Securities of issuers with equity capitalizations in the range of the
companies represented in the S&P MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.

Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in Equity Securities of mid-cap companies deemed to be undervalued.
The Portfolio may invest up to 5% of its total assets in Foreign Equities
(other than ADRs). The Portfolio may also invest in U.S. Governments and
Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons, Repurchase Agreements,
Cash Equivalents, Foreign Currency, Investment Company Securities, When-Issued
and Delayed Delivery Securities and Derivatives, including but not limited to
Forwards, Futures, Options and Swaps. For additional information about
investments, see "Securities and Investment Techniques" below.

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<PAGE>

The Adviser's approach is to select Common Stocks that are deemed to be
relatively undervalued at the time of purchase based on certain proprietary
measures of value. The Portfolio will typically exhibit a lower price/earnings
value ratio than the S&P MidCap 400 Index. The Portfolio will be structured
taking into account the economic sector weights of the S&P MidCap 400 Index,
with sector weights normally being within 5% of the sector weights of the
Index. For additional information about strategies employed in managing the
Portfolio, see "Value Stock Investing" in "Securities and Investment
Techniques."

U.S. REAL ESTATE PORTFOLIO

The Portfolio seeks above-average current income and long-term capital
appreciation by investing primarily in Equity Securities of companies in the
U.S. real estate industry. Such Equity Securities include Common Stocks, shares
or units of beneficial interest of REITs, limited partnership interests in
master limited partnerships, Rights or Warrants to purchase Common Stocks,
Convertible Securities, and Preferred Stock.

Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in income producing Equity Securities of U.S. and non-U.S.
companies principally engaged in the U.S. real estate industry. For purposes of
the Portfolio's investment policies, a company is "principally engaged" in the
real estate industry if (i) it derives at least 50% of its revenues or profits
from the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
REITs, master limited partnerships that invest in interests in real estate,
real estate operating companies, and companies with substantial real estate
holdings, such as hotel companies, residential builders and land-rich
companies.

The Portfolio may also invest in Fixed Income Securities issued or guaranteed
by real estate companies or secured by real estate assets and rated, at time of
purchase, in one of the four highest rating categories by an NRSRO or
determined by the Adviser to be of comparable quality at the time of purchase,
high-quality Money Market Instruments, such as notes, certificates of deposit
or bankers' acceptances issued by domestic or foreign issuers, or high-grade
debt securities, consisting of corporate debt securities and U.S. Governments
and Agencies. Securities rated in the lowest category of Investment Grade
Securities have speculative characteristics. Investment Grade Securities are
securities that are rated in one of the four highest rating categories by an
NRSRO. The Portfolio may also invest in certain securities or obligations,
including Non-Publicly Traded Securities, Private Placements, Restricted
Securities, Repurchase Agreements, When-Issued and Delayed Delivery Securities,
Temporary Investments and Derivatives, including but not limited to Options and
Futures and may lend its portfolio securities. For additional information about
the Portfolio's investments, see "Securities and Investment Techniques" and
"Non-Diversified Status" below.

The Adviser's approach is to invest in Equity Securities of companies that it
believes will provide a dividend yield that exceeds the composite dividend
yield of securities comprising the S&P 500. A substantial portion of the
Portfolio's total assets will be invested in Equity Securities of REITs. REITs
pool investors' funds for investment primarily in income producing real estate
or real estate related loans or interests, with certain tax advantages if
regulatory requirements are met. Generally, REITs can be classified as Equity
REITs, Mortgage REITs or Hybrid REITs. Equity REITs invest the majority of
their assets directly in real property and derive their income primarily from
rents and capital gains from appreciation realized through property sales.
Equity REITs are further categorized according to the types of real estate
securities they own, e.g., apartment properties, retail shopping centers,
office and industrial properties, hotels, health-care facilities, manufactured
housing and mixed-property types. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity and Mortgage
REITs. The Portfolio will invest primarily in Equity REITs. A shareholder in
the Portfolio investing in REITs indirectly through the Portfolio will bear not
only his or her proportionate share of the expenses of the Portfolio, but also
indirectly, the management expenses of underlying REITs.

GLOBAL PORTFOLIOS

INTERNATIONAL FIXED INCOME PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in investment grade Foreign Bonds and other
Fixed Income Securities of foreign issuers. Under normal circumstances, at
least 95% of the Fixed Income Securities in which the Portfolio will invest
will be Investment Grade Securities. The Portfolio's average weighted maturity
ordinarily will exceed five years and will usually be between three and fifteen
years. Under normal circumstances, the Portfolio will invest at least 80% of
its total assets in Fixed Income Securities of issuers in at least three
countries other than the United States, including Emerging Market Country
Securities and Eastern European Securities. For these purposes, Derivatives may
be used to represent country investments.

The Portfolio may also invest in U.S. Fixed Income Securities, Foreign
Currency, Investment Funds, Investment Company Securities, Loan Participations
and Assignments, Preferred Stock, When-Issued and Delayed Delivery Securities
and Derivatives, including but not limited to, Structured Notes, Forwards,
Futures, Options and Swaps. For additional information about investments, see
"Securities and Investment Techniques" below.

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<PAGE>

The Adviser's approach is to manage the duration, country, and currency
exposure of the Portfolio by combining fundamental research on relative values
with analyses of economic, interest-rate, and exchange-rate trends. The Adviser
will invest in MBSs and Corporate Bonds when it believes they offer the most
value, although most Foreign Currency denominated investments are in Fixed
Income Securities issued by governments or supranational organizations. For
other information about strategies employed in managing the Portfolio, see
"Maturity and Duration Management," "Value Investing," "Foreign Fixed Income
Investing," "Non-Diversified Status," "Emerging Markets Investing," "Mortgage
Investing" and "Foreign Investing" in "Securities and Investment Techniques"
below.

EMERGING MARKETS DEBT PORTFOLIO

The Portfolio seeks high total return by investing primarily in Fixed Income
Securities of issuers in emerging market countries. Under normal circumstances,
the Portfolio will invest at least 65% of its total assets in government Fixed
Income Securities, including Loan Participations and Assignments between
governments and financial institutions, securities issued by government owned,
controlled or sponsored entities and securities of entities organized to
restructure outstanding debt of such issuers.

The Portfolio may also invest in Fixed Income Securities of corporate issuers
located in or organized under the laws of emerging market countries, Fixed
Income Securities customarily referred to as "Brady Bonds" (bonds created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury Nicholas F. Brady), Zero Coupon, Pay-
In-Kind or Deferred Payment Securities, ADRs, Foreign Currency, Investment
Company Securities, Investment Funds, Loan Participations and Assignments,
Money Market Instruments, Repurchase Agreements, Reverse Repurchase Agreements,
Temporary Investments, Non-Publicly Traded Securities, Private Placements,
Restricted Securities, When-Issued or Delayed Delivery Securities, Derivatives,
including but not limited to Forwards, Futures and Options, and may lend its
portfolio securities. The Portfolio may also invest up to 5% of its total
assets in MBSs, CMOs and in other Asset-Backeds issued by non-governmental
entities, such as banks and other financial institutions. Also, the Portfolio
is authorized to borrow up to 33 1/3% of its total assets (including the amount
borrowed), less all liabilities and indebtedness other than the borrowing, for
investment purposes to increase the opportunity for greater return and for
payment of dividends. Such borrowings would constitute leverage, which is a
speculative characteristic. Leveraging will magnify declines as well as
increases in the NAV of the Portfolio's shares and increases in the yield on
the Portfolio's investments. For additional information about investments, see
"Securities and Investment Practices" and "Non-Diversified Status" below.

The Adviser's approach is to invest the Portfolio's assets in Emerging Market
Country Fixed Income Securities that provide a high level of current income,
while at the same time holding the potential for capital appreciation if the
perceived creditworthiness of the issuer improves due to improving economic,
financial, political, social or other conditions in the country in which the
issuer is located. Currently, investing in many emerging market countries is
not feasible or may involve unacceptable political risks. Initially, the
Portfolio expects that its investments in Emerging Market Country Fixed Income
Securities will be made primarily in some or all of the following emerging
market countries:

<TABLE>
<S> <C> <C> <C>
Algeria Argentina Brazil Bulgaria
Chile China Colombia Costa Rica
Czech Republic Dominican Republic Ecuador Egypt
Greece Hungary India Indonesia
Ivory Coast Jamaica Jordan Malaysia
Mexico Morocco Nicaragua Nigeria
Pakistan Panama Paraguay Peru
Philippines Poland Portugal Russia
Slovakia South Africa Thailand Trinidad &
Tunisia Turkey Uruguay Tobago
Venezuela Zaire
</TABLE>

In selecting Emerging Market Country Fixed Income Securities for investment by
the Portfolio, the Adviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications, interest
rate sensitivity, counterparty risks and technical market considerations. As
opportunities to invest in debt securities in other countries develop, the
Portfolio expects to expand and further diversify the universe of emerging
market countries in which it invests. While the Portfolio generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the
Portfolio's assets will be invested in issuers in at least three countries.

Interests in issuers organized and operated for the purpose of restructuring
the investment characteristics of instruments issued by governments, government
agencies or instrumentalities, political subdivisions or government owned,
controlled or sponsored entities involves the deposit with or purchase by an
entity of specific instruments and the issuance by that entity of one or more
classes of securities backed by, or representing interests in, the underlying
instruments. Certain issuers of such structured securities may be deemed to be
"Investment Companies" as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). As a result, the Portfolio's investment in such
securities may be limited by certain investment restrictions contained in the
1940 Act.

The Portfolio's investments in Fixed Income Securities of governments, and
government-related and restructured Fixed

11
<PAGE>

Income Securities are subject to special risks, including the inability or
unwillingness of the issuer to repay principal and interest, requests to
reschedule or restructure outstanding debt and requests to extend additional
loan amounts. The Portfolio may have limited recourse in the event of default
on such Fixed Income Securities. Also, the registration, clearing and
settlement of securities transactions in Russia are subject to significant
risks not normally associated with securities transactions in the United States
and other more developed markets. See "Securities and Investment Techniques --
Russian Securities."

The portion of the Portfolio's assets invested in securities denominated in
currencies other than the U.S. dollar is not restricted and will vary depending
on market conditions. Although the Portfolio is permitted to engage in
investment practices to hedge against currency exchange rate risks with respect
to such assets, the Portfolio may be limited in its ability to hedge against
these risks.

Emerging Market Country Fixed Income Securities in which the Portfolio may
invest will be subject to high risk and will not be required to meet a minimum
rating standard and may not be rated for creditworthiness by any
internationally recognized credit rating organization. These types of Fixed
Income Securities are predominantly speculative and generally involve a greater
risk of default and of volatility in price than securities in higher rating
categories. Ratings of Fixed Income Securities of foreign issuers, to the
extent that those ratings are undertaken, are related to evaluations of the
country in which the issuer of the instrument is located and generally take
into account the currency in which the Fixed Income Securities of a foreign
issuer is denominated.

GLOBAL EQUITY PORTFOLIO

The Global Equity Portfolio seeks long-term capital appreciation by investing
primarily in Common and Preferred Stocks, Convertible Securities, and Rights
and Warrants to purchase Common Stocks, Depositary Receipts and other Equity
Securities of issuers throughout the world, including issuers in the United
States and emerging market countries. Under normal circumstances, at least 65%
of the total assets of the Portfolio will be invested in Equity Securities. In
addition, under normal circumstances, at least 20% of the Portfolio's total
assets will be invested in the Common Stocks of U.S. issuers and the remaining
equity position will be invested in at least three countries other than the
United States. Although the Portfolio intends to invest primarily in securities
listed on stock exchanges, it will also invest in Equity Securities that are
traded over the counter or that are not admitted to listing on a stock exchange
or dealt in on a regulated market. As a result of the absence of a public
trading market, such securities may pose liquidity risks.

The Portfolio may also invest in Forwards, Money Market Instruments, Repurchase
Agreements and When-Issued or Delayed Delivery Securities, and may lend its
portfolio securities. For additional information about investments, see
"Securities and Investment Techniques" below.

The Adviser's approach is oriented to individual stock selection and is value
driven. In selecting stocks for the Portfolio, the Adviser initially identifies
those stocks that it believes to be undervalued in relation to the issuer's
assets, cash flow, earnings and revenues, and then evaluates the future value
of such stocks by running the results of an in-depth study of the issuer
through a dividend discount model. In selecting investments, the Adviser
utilizes the research of a number of sources, including Morgan Stanley Capital
International, an affiliate of the Adviser located in Geneva, Switzerland.
Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's value criteria.
Equity Securities that no longer conform to such investment criteria will be
sold.

Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held. Investing in foreign countries and emerging
market countries is subject to additional risk, see "Securities and Investment
Techniques" below.

INTERNATIONAL MAGNUM PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights or Warrants to
purchase Common Stocks and other Equity Securities of non-U.S. issuers in
accordance with the EAFE country (defined below) weightings determined by the
Adviser. The production of any current income is incidental to this objective.
The Equity Securities in which the Portfolio may invest may be denominated in
any currency.

The countries in which the Portfolio will invest are those comprising the
Morgan Stanley Capital International EAFE Index (the "Index"), which includes
Australia, Japan, New Zealand, most nations located in Western Europe and
certain developed countries in Asia, such as Hong Kong and Singapore (each an
"EAFE country," and collectively the "EAFE countries"). Under normal
circumstances, at least 65% of the total assets of the Portfolio will be
invested in Equity Securities of issuers in at least three different EAFE
countries.

Although the Portfolio intends to invest primarily in Equity Securities listed
on a stock exchange in an EAFE country, the Portfolio may invest without limit
in Equity Securities that are traded over the counter or that are not admitted
to listing on a stock exchange or dealt in on a regulated market. As a result
of the absence of a public trading market, such securities may pose liquidity
risks.

The Portfolio may also invest in Private Placements or initial public offerings
in the form of oversubscriptions, certain shortterm (less than twelve months to
maturity) and medium-
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<PAGE>

term (not greater than five years to maturity) debt securities, Foreign
Currency, Investment Company Securities, Temporary Investments, Money Market
Instruments, Non-Publicly Traded Securities, Private Placements, Restricted
Securities, Repurchase Agreements, Cash or Cash Equivalents, When-Issued or
Delayed Delivery Securities, and Derivatives, including but not limited to
Forwards, Futures (including stock index futures) and Options, and may lend its
Portfolio securities. The Portfolio may also invest up to 10% of its total
assets in (i) Investment Company Securities with investment objectives similar
to that of the Portfolio and (ii) for temporary purposes, money market funds
and pooled investment vehicles. In addition, for temporary defensive purposes
during periods in which the Adviser believes changes in economic, financial or
political conditions make it advisable, the Portfolio may invest up to 100% of
its total assets in such short-term and medium-term Fixed Income Securities or
hold cash. The Portfolio will not invest in Fixed Income Securities that are
not rated at least investment grade by either Moody's or S&P. Although the
Portfolio will not invest for short-term trading purposes, investment
securities may be sold from time to time without regard to the length of time
they have been held. For additional information about investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.

The Adviser's approach is to establish regional allocation strategies. By
analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on comparative interest rates, currencies,
corporate profits and economic growth among the various regions represented in
the Index. These projections will be used to establish regional allocation
strategies. Within these regional allocations, the Adviser then selects Equity
Securities among issuers of a region.

The Adviser's approach in selecting among Equity Securities within a region
comprised of EAFE countries is oriented towards individual stock selection and
is value driven. The Adviser identifies those Equity Securities which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues. In selecting investments, the Adviser utilizes the
research of a number of sources, including Morgan Stanley Capital
International, an affiliate of the Adviser located in Geneva, Switzerland.
Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's investment
criteria. Equity Securities which no longer conform to such investment criteria
will be sold.

EMERGING MARKETS EQUITY PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, sponsored or unsponsored ADRs and other Equity
Securities of emerging market country issuers. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.

The Portfolio may also invest in Fixed Income Securities denominated in the
currency of an emerging market country or issued or guaranteed by an emerging
market country company or the government of an emerging market country, Equity
Securities or Fixed Income Securities of corporate or governmental issuers
located in industrialized countries, Foreign Currency, Investment Funds, Loan
Participations and Assignments, Money Market Instruments, Investment Company
Securities, Repurchase Agreements, Non-Publicly Traded Securities, Private
Placements, Restricted Securities, Temporary Investments, When-Issued and
Delayed Delivery Securities, and Derivatives, including but not limited to
Forwards, Futures and Options and may engage in Loans of Portfolio Securities.
It is likely that many of the Fixed Income Securities in which the Portfolio
will invest will be unrated, and whether or not rated, such securities may have
speculative characteristics.

When deemed appropriate by the Adviser, the Portfolio may also invest up to 10%
of its total assets (measured at the time of the investment) in Fixed Income
Securities that are not Investment Grade Securities (commonly referred to as
High Yield Securities or junk bonds). For temporary defensive purposes, the
Portfolio may invest less than 65% of its total assets in Emerging Market
Country Equity Securities, in which case the Portfolio may invest in other
Equity Securities or may invest in Fixed Income Securities as described in
"Securities and Investment Techniques--Temporary Investments" below. The
Portfolio also has the ability to invest without limitation in high quality
Money Market Instruments or Temporary Investments for temporary defensive
purposes. For additional information about investments, see "Securities and
Investment Techniques" and "Non-Diversified Status" below.

The Adviser's approach is to focus the Portfolio's investments on those
emerging market countries in which it believes the economies are developing
strongly and in which the markets are becoming more sophisticated. There are
currently over 130 countries which, in the opinion of the Adviser, are
generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Currently, investing in many emerging market countries is not
feasible or may involve unacceptable political risks.

The Portfolio intends to invest primarily in some or all of the following
emerging market countries:

<TABLE>
<S> <C> <C> <C>
Argentina Botswana Brazil Chile
China Colombia Greece Hong Kong
Hungary India Indonesia Jamaica
Jordan Kenya Malaysia Mexico
Nigeria Pakistan Peru Philippines
Poland Portugal Russia South Africa
South Korea Sri Lanka Taiwan Thailand
Turkey Venezuela Zimbabwe
</TABLE>

13
<PAGE>

As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging market countries in which it invests. The
Portfolio does not intend to invest in any security in a country where the
currency is not freely convertible to U.S. dollars, unless the Portfolio has
obtained the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantees to protect such
investment against loss of that currency's external value, or the Portfolio has
a reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned guarantees
would be obtained or that the currency in which the security is quoted would be
freely convertible at the time of any proposed sale of the security by the
Portfolio. The Adviser will analyze assets, revenues and earnings of an issuer.
In selecting industries and particular issuers, the Adviser will evaluate costs
of labor and raw materials, access to technology, export of products and
government regulation. Although the Portfolio seeks to invest in larger
companies, it may invest in small- and medium-size companies that, in the
Adviser's view, have potential for growth.

Emerging Market Country Securities pose greater liquidity risks and other risks
than securities of companies located in developed countries and traded in more
established markets. The Portfolio may not be able to hedge Foreign Currency
risk adequately. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Securities and Investment
Techniques." Also, the registration, clearing and settlement of securities
transactions in Russia are subject to significant risks not normally associated
with securities transactions in the United States and other more developed
markets. See "Securities and Investment Techniques--Russian Securities."

ASIAN EQUITY PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, Depositary Receipts and other Equity Securities that
are traded on recognized stock exchanges of the countries in Asia described
below and such Equity Securities of companies organized under the laws of any
such Asian country whose business is conducted principally in Asia. The
production of any current income is incidental to this objective. The Portfolio
does not intend to invest in Asian Equity Securities that are principally
traded in markets in Japan or in companies organized under the laws of Japan.
The Asian countries to be represented in the Portfolio, which include the
following countries, have the more established markets in the region: Hong
Kong, Singapore, Malaysia, Thailand, the Philippines and Indonesia. The
Portfolio may also invest in Common Stocks traded in markets in Taiwan, South
Korea, India, Pakistan, Sri Lanka and other developing markets that are open to
Foreign Investment. Under normal circumstances, the Portfolio will invest at
least 65% of the total assets of the Portfolio in such Asian Equity Securities.

The Portfolio may also invest in Fixed Income Securities, bills and bonds of
governmental entities in Asia and the United States, notes, debentures and
bonds of companies in Asia, U.S. Money Market Instruments, Foreign Currency,
Investment Company Securities and Repurchase Agreements, When-Issued or Delayed
Delivery Securities and Derivatives, including but not limited to Forwards and
Futures, and may lend its portfolio securities. Although the Portfolio will not
invest for short-term trading purposes, portfolio securities may be sold from
time to time without regard to the length of time they have been held. Pending
investment or settlement, and for liquidity purposes, the Portfolio may invest
in domestic, Eurodollar and foreign short-term Money Market Instruments. The
Portfolio may also purchase such instruments to temporarily reduce its equity
holdings for defensive purposes in response to adverse market conditions.
Because of the lack of hedging facilities in the currency markets of Asia, no
active currency hedging strategy is anticipated currently. Instead, each
investment will be considered on a total currency adjusted basis with the U.S.
dollar as a base currency.

The Adviser's approach is oriented to individual stock selection and is value
driven, similar to the approach described for the International Magnum
Portfolio discussed above. There is no requirement that the Fund, at any given
time, invest in any or all of the countries listed above or in any other Asian
countries. The Fund has no set policy for allocating investments among the
various Asian countries. Allocation of investments will depend on the relative
attractiveness of the stocks of issuers in the respective countries. Government
regulation and restrictions in many of the countries of interest may limit the
amount, mode and extent of investment in companies of such countries. The
Adviser will analyze assets, revenues and earnings of an issuer. In selecting
industries and particular issuers, the Adviser will evaluate costs of labor and
raw materials, access to technology, export of products and government
regulation. Although the Portfolio seeks to invest in larger companies, it may
invest in small- and medium-size companies that, in the Adviser's view, have
potential for growth.

The Portfolio's investments will include Emerging Market Country Securities.
These securities pose greater liquidity risks and other risks than securities
of companies located in developed countries and traded in more established
markets. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Securities and Investment
Techniques--Emerging Market Country Securities."

ASSET ALLOCATION PORTFOLIOS

BALANCED PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing in a diversified portfolio of Equity and Fixed Income
Securities. The average

14
<PAGE>

weighted maturity of the Portfolio's Fixed Income Securities ordinarily will
exceed five years and will usually be between three and fifteen years.

When the Adviser judges the relative outlook for the equity and fixed income
markets to be neutral, the portfolio will be invested 60% in Equity Securities
and 40% in Fixed Income Securities. The asset mix may be changed, however, with
Equity Securities ordinarily representing between 45% and 75% of the total
investment.

The Portfolio may invest up to 25% of its total assets in Foreign Bonds and
Foreign Equities, other than ADRs, and an additional 10% of its total assets in
Brady Bonds. The Portfolio will invest at least 25% of its total assets in
senior Fixed Income Securities.

Subject to the foregoing limits, the Portfolio may invest in Foreign Currency,
High Yield Securities, Investment Company Securities, Investment Funds, Eastern
European Securities, Emerging Market Country Securities, Loan Participations
and Assignments, Municipals, When-Issued or Delayed Delivery Securities, and
Derivatives, including but not limited to Structured Notes, Forwards, Futures,
Options and Swaps. For additional information about investments, see
"Securities and Investment Techniques" below.

The Adviser's approach is to determine investment strategies for the equity and
fixed income portions of the Portfolio separately and then determine the mix of
those strategies expected to maximize the return available from both the stock
and bond markets. Strategic judgments on the equity/fixed income asset mix are
based on valuation disciplines and tools for analysis developed by the Adviser
over its twenty-six year history of managing balanced accounts. For other
information about strategies employed in managing the Portfolio, see "Asset
Allocation Management," "Maturity and Duration Management," "Value Investing,"
"Mortgage Investing," "High Yield Investing," "Foreign Fixed Income Investing"
and "Foreign Investing" in "Securities and Investment Techniques" below.

MULTI-ASSET-CLASS PORTFOLIO

The Portfolio seeks above average-total return over a market cycle of three to
five years by investing in a diversified portfolio of Equity Securities and
Fixed Income Securities of domestic and foreign issuers.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in issuers located in at least three countries, including the United
States. The average weighted maturity of the fixed income portion of the
Portfolio ordinarily will exceed five years and will usually be between three
and fifteen years.

The Portfolio may also invest in Municipals, Loan Participations and
Assignments, Investment Funds, Investment Company Securities, Eastern European
Securities, Emerging Market Countries Securities, Foreign Currency, Forwards,
CMOs, Brady Bonds, Zero Coupons, Cash Equivalents, ADRs, When-Issued and
Delayed-Delivery Securities and Derivatives, including but not limited to
Futures and Options, Swaps, and Structured Notes. For additional information
about investments, see "Securities and Investment Techniques" below.

The Adviser's approach is to determine the mix of investments in domestic and
foreign Equity Securities, Fixed Income Securities and High Yield Securities
expected to maximize available total return. Strategic judgments on the asset
mix are based on valuation disciplines and tools for analysis which have been
developed by the Adviser to compare the relative potential returns and risks of
global stock and bond markets. For other information about strategies employed
in managing the Portfolio, see "Asset Allocation Management," "International
Equity Investing," "Maturity and Duration Management," "Value Investing,"
"Emerging Markets Investing," "High Yield Investing," "Foreign Fixed Income
Investing" and "Foreign Investing" in "Securities and Investment Techniques"
below.

SECURITIES AND INVESTMENT TECHNIQUES
- ------------------------------------

The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and strategies each Adviser may
employ in pursuit of a Portfolio's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is
included as well. A complete listing of each Portfolio's policies and
limitations and more detailed information about each Portfolio's investments is
contained in the SAI. Policies and limitations are considered at the time such
investments are purchased; the sale of instruments is not required in the event
of a subsequent change in circumstances, for example, a rating's downgrade.

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.

The Advisers may not buy all of these instruments or use all of these
techniques to the full extent permitted unless they believe that doing so will
help a Portfolio achieve its investment objective. Current holdings and recent
investment strategies are described in the Portfolio's financial reports, which
will be sent to the Portfolios' shareholders twice a year. For a free SAI or
financial report, contact the Fund or your insurance company.

15
<PAGE>

STRATEGIES

ASSET ALLOCATION MANAGEMENT: The Adviser's approach to Asset Allocation
Management is to determine investment strategies for each asset class in a
Portfolio separately, and then determine the mix of those strategies expected
to maximize the return available from each market. Strategic judgments on the
mix among asset classes are based on evaluation disciplines and tools for
analysis which have been developed over the Adviser's twenty-six year history
of managing balanced accounts.

Tactical asset-allocation shifts are based on comparisons of prospective risks,
returns, and the likely risk-reducing benefits derived from combining different
asset classes into a single Portfolio. Experienced teams of equity, fixed
income, and international investment professionals manage the investments of
each asset class.

EMERGING MARKETS INVESTING: The Adviser's approach to Emerging Markets
Investing is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.

As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.

Currently, investing in many emerging market countries is either not feasible
or very costly, or may involve unacceptable political risks. Other special
risks include the possible increased likelihood of expropriation or the return
to power of a political regime which would institute policies to expropriate,
nationalize or otherwise confiscate investments. A Portfolio will focus its
investments on those emerging market countries in which the Adviser believes
the potential for market appreciation outweighs these risks and/or the cost of
investment. Investing in emerging markets also involves an extra degree of
custodial and/or market risk, especially where the securities purchased are not
traded on an official exchange or where ownership records regarding the
securities are maintained by an unregulated entity (or even the issuer itself).

FOREIGN FIXED INCOME INVESTING: The Adviser seeks to invest in Foreign Bonds
and other Fixed Income Securities denominated in Foreign Currencies, where, in
the opinion of the Adviser, the combination of current yield and currency value
offer attractive expected returns. When the total return opportunities in a
foreign bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, Foreign Currency Futures
Contracts and Options, Forwards and Swaps may be used to hedge the currency
risk.

FOREIGN INVESTING: Investing in securities issued by foreign companies or
governments involves certain special considerations which are not typically
associated with investing in U.S. issuers. Since the securities of foreign
issuers may be denominated in Foreign Currencies, and since a Portfolio may
temporarily hold uninvested reserves in bank deposits of Foreign Currencies
prior to reinvestment or conversion to U.S. dollars, a Portfolio may be
affected favorably or unfavorably by changes in currency exchange rates and in
exchange control regulations, and may incur costs in connection with
conversions between various currencies.

Because non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to U.S. companies, there may be less publicly available information
about certain foreign companies than about U.S. companies. Securities of some
non-U.S. companies may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the United
States. With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.

Although a Portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a Portfolio receives from the companies comprising the Portfolio's
investments.

GROWTH STOCK INVESTING: The Adviser seeks to invest in Equity Securities
generally characterized by higher growth rates of revenues and earnings. These
stocks tend to have higher price volatility, higher price/earnings ratios, and
lower yields than the stock market in general as measured by the S&P 500.

16
<PAGE>

HIGH YIELD INVESTING: The Adviser seeks to invest in High Yield Securities
based on the Adviser's analysis of economic and industry trends and individual
security characteristics. The Adviser conducts credit analysis for each
security considered for investment to evaluate its attractiveness relative to
its risk. A high level of diversification is also maintained to limit credit
exposure to individual issuers.

To the extent a Portfolio invests in High Yield Securities it will be exposed
to a substantial degree of credit risk. Lower-rated bonds are considered
speculative by traditional investment standards. High Yield Securities may be
issued as a consequence of corporate restructuring or similar events. Also,
High Yield Securities are often issued by smaller, less creditworthy companies,
or by highly leveraged (indebted) companies, which are generally less able than
more established or less leveraged companies to make scheduled payments of
interest and principal. The risks posed by securities issued under such
circumstances are substantial.

The market for High Yield Securities is still relatively new. Because of this,
a long-term track record for bond default rates does not exist. In addition,
the secondary market for High Yield Securities is generally less liquid than
that for investment grade corporate securities. In periods of reduced market
liquidity, High Yield Security prices may become more volatile, and both the
high yield market and a Portfolio may experience sudden and substantial price
declines. This lower liquidity might have an effect on a Portfolio's ability to
value or dispose of such securities. Also, there may be significant disparities
in the prices quoted for High Yield Securities by various dealers. Under such
conditions, a Portfolio may find it difficult to value its securities
accurately. A Portfolio may also be forced to sell securities at a significant
loss in order to meet shareholder redemptions. These factors add to the risks
associated with investing in High Yield Securities.

High Yield Securities may also present risks based on payment expectations. For
example, High Yield Securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
Portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Conversely, a High Yield
Security's value will decrease in a rising interest rate market.

Certain types of High Yield Securities are non-income paying securities. For
example, Zero Coupons pay interest only at maturity and Pay-In-Kind Securities
pay interest in the form of additional securities. Payment in the form of
additional securities, or interest income recognized through discount
accretion, will, however, be treated as ordinary income which will be
distributed to shareholders even though the Portfolio does not receive periodic
cash flow from these investments.

INTERNATIONAL EQUITY INVESTING: The Adviser's approach to International Equity
Investing is based on its evaluation of both short-term and long-term
international economic trends and the relative attractiveness of non-U.S.
equity markets and individual securities.

The Adviser considers fundamental investment characteristics, the principles of
valuation and diversification, and a relatively long-term investment time
horizon. Since liquidity will also be a consideration, emphasis will likely be
influenced by the relative market capitalizations of different non-U.S. stock
markets and individual securities. Portfolios seek to diversify investments
broadly among both developed and newly industrializing foreign countries. Where
appropriate, a Portfolio may also invest in regulated Investment Companies or
Investment Funds which invest in such countries to the extent allowed by
applicable law.

MATURITY AND DURATION MANAGEMENT: One of two primary components of the
Adviser's fixed income investment strategy is Maturity and Duration Management.
The second primary component of fixed income strategy is Value Investing. See
"Value Investing" below.

The maturity and duration structure of a Portfolio investing in Fixed Income
Securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term, day-to-
day movements in the market, but instead are implemented in anticipation of
longer-term shifts in the levels of interest rates. Adjustments made to shorten
Portfolio maturity and duration are made to limit capital losses during periods
when interest rates are expected to rise. Conversely, adjustments made to
lengthen maturity are intended to produce capital appreciation in periods when
interest rates are expected to fall. The foundation for maturity and duration
strategy lies in analysis of the U.S. and global economies, focusing on levels
of real interest rates, monetary and fiscal policy actions, and cyclical
indicators.

Most Fixed Income Securities provide interest (coupon) payments in addition to
a final (par) payment at maturity. Some securities also have call provisions.
Depending on the relative magnitude of these payments and the nature of the
call provisions, the market values of Fixed Income Securities may respond
differently to changes in the level and structure of interest rates.

Traditionally, a Fixed Income Security's term-to-maturity has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the interest rate risk or volatility of the security). However, term-
to-maturity measures only the time until a Fixed Income Security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity.

Duration is a measure of the expected life of a Fixed Income Security on a
present value basis that was developed as a more precise alternative to the
concept of term-to-maturity. Duration incorporates a Fixed Income Security's
yield, coupon interest payments, final maturity and call features into

17
<PAGE>

one measure. Duration is one of the fundamental tools used by the Adviser in
the selection of Fixed Income Securities.

Duration takes the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled or, in the case
of a callable bond, expected to be received, and weights them by the present
values of the cash to be received at each future point in time. For any Fixed
Income Security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a Fixed
Income Security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a Fixed Income Security, the
shorter the duration of the security.

There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
Floaters often have final maturities of ten or more years; however, their
interest rate exposure corresponds to the frequency of the coupon reset.
Another example where the interest rate exposure is not properly captured by
duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser's analysis of interest rate
exposure incorporates the economic life of a security.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of a fixed
income Portfolio's assets may be invested in MBSs. These include securities
which represent pools of mortgage loans made by lenders such as commercial
banks, savings and loan associations, mortgage bankers and others. The pools
are assembled by various Governmental, Government-related and private
organizations. A Portfolio will invest in securities issued by the Government
National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), other Government
agencies, and private issuers. It is expected that the Portfolio's primary
emphasis will be in MBSs issued by the various Government-related
organizations. However, a Portfolio may invest, without limit, in MBSs issued
by private issuers when the Adviser deems that the quality of the investment,
the quality of the issuer, and market conditions warrant such investments.
Securities issued by private issuers will be rated investment grade by Moody's
or S&P or be deemed by the Adviser to be of comparable investment quality.

VALUE INVESTING: One of two primary components of the Adviser's fixed income
strategy is Value Investing, whereby the Adviser seeks to identify undervalued
sectors and securities through analysis of credit quality, Option
characteristics and liquidity. Quantitative models are used in conjunction with
judgement and experience to evaluate and select securities with embedded put or
call Options which are attractive on a risk- and option-adjusted basis.
Successful Value Investing will permit a Portfolio to benefit from the price
appreciation of individual securities during periods when interest rates are
unchanged. See "Maturity and Duration Management" for a description of the
other key component of the Adviser's fixed income investment strategy.

VALUE STOCK INVESTING: Emphasizes Common Stocks that are deemed by the Adviser
to be undervalued relative to the stock market in general as measured by the
appropriate market index, based on value measures such as price/earnings ratios
and price/book ratios. Value stocks are generally dividend-paying Common
Stocks. However, non-dividend- paying stocks may also be selected for their
value characteristics.

INSTRUMENTS AND INVESTMENTS

AGENCIES. Agencies are securities which are not guaranteed by, or backed by the
full faith and credit of, the U.S. Government, but which are issued, sponsored
or guaranteed by a federal agency or federally sponsored agency such as the
Student Loan Marketing Association, Resolution Funding Corporation, or any of
several other agencies. For further information on these securities, see
"Description of U.S. Government Securities" in the SAI.

ASSET-BACKEDS. Asset-backed securities ("Asset-Backeds") are securities
collateralized by shorter-term loans such as automobile loans, home equity
loans, computer leases or credit card receivables. The payments from the
collateral are passed through to the security holder. The collateral behind
Asset-Backeds tends to have prepayment rates that usually do not vary with
interest rates. In addition the short-term nature of the loans reduces the
impact of any change in prepayment level. Due to amortization, the average life
for Asset-Backeds is also the conventional proxy for maturity.

Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on Asset-Backeds, it is not possible to
determine in advance the actual final maturity date or average life. Faster
prepayment will shorten the average life and slower prepayment will lengthen
it. However, it is possible to determine what the range of that movement could
be and to calculate the effect that it will have on the price of the security.
In selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

18
<PAGE>

history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are actively traded
in the over-the-counter secondary market. For further information on these
securities, see the SAI. A Portfolio will invest in Brady Bonds only if they
are consistent with quality specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).

A Portfolio may invest in obligations of U.S. banks, obligations of foreign
branches of U.S. banks ("Eurodollars") and obligations of U.S. branches of
foreign banks ("Yankee dollars"). Investments in Eurodollars and Yankee dollars
involve some of the same risks of investing in international securities that
are discussed in "Foreign Investment" below.

A Portfolio will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation ("FDIC"), (ii) in
the case of a U.S. bank, it is a member of the FDIC, and (iii) in the case of a
foreign branch of a U.S. bank, the security is deemed by the Adviser to be of
an investment quality comparable with other Fixed Income Securities which may
be purchased by the Portfolio.

(2) Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).

(3) Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

(4) U.S. Governments and Agencies.

(5) Repurchase Agreements collateralized by securities listed above.

CMOS. Collateralized Mortgage Obligations ("CMOs") are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a "tranche"
is essentially a separate security) in a predetermined, specified order. Each
tranche has a stated maturity--the latest date by which the tranche can be
completely repaid, assuming no prepayments--and has an average life--the
average of the time to receipt of a principal payment weighted by the size of
the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time), rather
than paid off entirely at maturity, as would be the case in a straight debt
instrument.

Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

Prepayment risk has two important effects. First, like bonds in general,
mortgage-backed securities will generally decline in price when interest rates
rise. However, when interest rates fall, mortgage-backed securities may not
enjoy as large a gain in market value due to prepayment risk. Second, when
interest rates fall, additional mortgage prepayments must be reinvested at
lower interest rates. In part to compensate for these risks, mortgage-backed
securities will generally offer higher yields than comparable bonds. See "MBSs"
below.

COMMON STOCKS. Common Stocks are Equity Securities which represent an ownership
interest in a corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.

CONVERTIBLE SECURITIES. Convertible Securities are securities, such as
convertible Corporate Bonds, convertible Preferred Stocks. Warrants or other
securities which may be exchanged under certain circumstances for a fixed
number of shares of Common Stock.

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CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.

DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include ADRs, Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"). ADRs are dollar-denominated
Depositary Receipts typically issued by a U.S. financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. financial institutions, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States.

Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of a Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities except as noted.

DERIVATIVES. Derivatives are financial products or instruments that derive
their value from the value of an underlying asset, reference rate or index.
Derivatives include, but are not limited to, the following: CMOs, SMBSs (i.e.,
Stripped Mortgage-Backed Securities), Convertible Securities, Warrants,
Forwards, Futures, Options, Structured Notes and Swaps.

The Adviser will use Derivatives only in circumstances where they offer the
most economic means of improving the risk/reward profile of a Portfolio. The
Adviser will not use Derivatives to increase Portfolio risk above the level
that could be achieved in the Portfolio using only traditional investment
securities. In addition, the Adviser will not use Derivatives to acquire
exposure to changes in the value of assets or indexes of assets that are not
allowable investments for the Portfolio. A Portfolio may enter into over-the-
counter derivative transactions (Swaps, Caps, Floors, etc., but excluding CMOs,
Forwards, Futures, Options, and SMBSs) with counterparties approved by the
Adviser in accordance with guidelines established by the Fund's Board of
Directors. These guidelines provide for a minimum credit rating for each
counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA.

See elsewhere in this "Securities and Investment Techniques" section for
descriptions of these various Derivatives, and see the SAI for more information
regarding any investment policies or limitations applicable to their use.

EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that a Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.

EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.

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resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.

Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud.

With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value
of a Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.

EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

FIXED INCOME SECURITIES. Fixed Income Securities commonly include, but are not
limited to, debentures, U.S. Governments, Zero Coupons, Agencies, Corporate
Bonds, High Yield Securities, MBSs, SMBSs, CMOs, Asset-Backeds, Convertible
Securities, Brady Bonds, Floaters, Inverse Floaters, Cash Equivalents,
Municipals, Repurchase Agreements, Preferred Stocks and Foreign Bonds.
Preferred Stock is contained in both the definition of Equity Securities and
Fixed Income Securities since it exhibits characteristics commonly associated
with each type of security. See the "The Portfolios' Investments" section
applicable to a particular Portfolio to determine in which of the above a
Portfolio may invest.

The short-term and medium-term Fixed Income Securities in which the
International Magnum Portfolio may invest consist of (a) obligations of
governments, agencies or instrumentalities of any member state of the
Organization for Economic Cooperation and Development ("OECD"), including the
United States; (b) bank deposits and bank obligations (including certificates
of deposit, time deposits and bankers' acceptances) of banks organized under
the laws of any member state of the OECD, including the United States,
denominated in any currency; and (c) finance company and corporate commercial
paper and other short-term corporate debt obligations of corporations organized
under the laws of any member state of the OECD, including the United States,
meeting the Portfolio's credit quality standards, provided that no more than
20% of the Portfolio's assets are invested in any one of such issuers. The
short-term and medium-term securities in which the Portfolio may invest will be
rated investment grade by an NRSRO (e.g., rated A or higher by Moody's or S&P),
or if unrated, will be determined to be of comparable quality by the Adviser.

FLOATERS. Floaters are Fixed Income Securities with a floating or variable rate
of interest, i.e. the rate of interest varies with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. Certain
Floaters may carry a demand feature that permits the holder to tender them back
to the issuer of the underlying instrument, or to a third party, at par value
prior to maturity. When the demand feature of certain Floaters represents an
obligation of a foreign entity, the demand feature will be subject to certain
risks discussed under "Foreign Investment".

FOREIGN BONDS. Foreign Bonds are Fixed Income Securities denominated in Foreign
Currency and issued and traded primarily outside the United States, including:
(1) obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) Fixed Income
Securities issued, guaranteed or sponsored by supranational organizations
established or supported by several national governments, including the World
Bank, the European Community, the Asian Development Bank and others; (3) non-
government foreign corporate debt securities; (4) foreign MBSs and various
other MBSs and Asset-Backeds denominated in Foreign Currency; and (5) Brady
Bonds. Investing in foreign companies involves certain special considerations
that are not typically associated with investing in U.S. companies. See
"Foreign Investment" below.

FOREIGN CURRENCY. Portfolios investing in foreign securities will regularly
transact security purchases and sales in Foreign Currencies. These Portfolios
may hold Foreign Currency or purchase or sell Foreign Currency on a forward
basis (see "Forwards").

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FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS. As another means of reducing
the risks associated with investing in securities denominated in Foreign
Currencies, a Portfolio may enter into contracts for the future acquisition or
delivery of Foreign Currencies and may purchase Foreign Currency Options
("Forex Options"). These investment techniques are designed primarily to hedge
against anticipated future changes in currency prices that otherwise might
adversely affect the value of the Portfolio's investments.

Foreign Currency Futures Contracts ("Forex Futures") are standardized contracts
for the future delivery of a specified amount of a Foreign Currency at a future
date at a price set at the time of the contract. Forex Futures traded in the
United States are traded on regulated futures exchanges. A Portfolio will incur
brokerage fees when it purchases or sells Forex Futures, and it will be
required to maintain margin deposits. Parties to a Forex Future must make
initial margin deposits to secure performance of the contract, which generally
range from 2% to 5% of the contract price. There also are requirements to make
"variation" margin deposits as the value of the Futures contract fluctuates.

At the maturity of a Forex Future, a Portfolio may either accept or make
delivery of the currency specified in the contract or, prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to Forex
Futures are effected on a regulated futures exchange. A Portfolio will only
enter into such a Forex Future if it is expected that there will be a liquid
market in which to close out such contract. There can, however, be no assurance
that such a liquid market will exist in which to close a Forward or Futures
contract, in which case the Portfolio may suffer a loss.

A Portfolio may also purchase put or call Forex Options on exchanges. A put
Option gives the Portfolio the right to sell a currency at the exercise price
until the expiration of the Option. A call Option gives the Portfolio the right
to purchase a currency at the exercise price until the expiration of the
Option.

Purposes for which such Forex Futures and Forex Options may be used include
protecting against a decline in a Foreign Currency against the U.S. dollar
between the trade date and settlement date when the Portfolio purchases or
sells securities, locking in the U.S. dollar value of dividends declared on
securities held by the Portfolio and generally protecting the U.S. dollar value
of securities held by the Portfolio against exchange rate fluctuations. Such
contracts will be used only as a protective measure against the effects of
fluctuating rates of currency exchange and exchange control regulations. While
Forex Futures and Forex Options may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

The primary risks associated with the use of Forex Futures and Forex Options
are (i) failure to predict accurately the direction of currency movements and
(ii) market risks (e.g., lack of liquidity or lack of correlation between the
change in value of underlying currencies and the change in the value of the
Portfolio's Forex Futures or Forex Options contracts). The risk that a
Portfolio will be unable to close out a Forex Futures position or Forex Options
contract will be minimized by the Portfolio entering into such transactions
only when there appears to be a liquid secondary market. For more detailed
information about Futures transactions, see "Securities and Investment
Techniques" in the SAI.

FOREIGN EQUITIES. Foreign Equity Securities ("Foreign Equities") include, but
are not limited to, Common Stock, Preferred Stock, Depositary Receipts, Rights,
Warrants and Convertible Securities of foreign issuers. Investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Foreign Investment" below.

FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than
U.S. national securities exchanges, and securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.

subject to limitation in other emerging countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging countries to prevent, among other concerns, violation of Foreign
Investment limitations.

Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
emerging countries. A Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.

Investments in securities of foreign issuers are frequently denominated in
Foreign Currencies. Because a Portfolio may temporarily hold uninvested
reserves in bank deposits in Foreign Currencies, the value of the Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably
by changes in currency exchange rates and in exchange control regulations and a
Portfolio may incur costs in connection with conversions between various
currencies.

FORWARDS. Forward Foreign Currency exchange contracts ("Forwards" or "forward
contracts") are obligations to purchase or sell an amount of a specified
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. Forwards are traded in the interbank market conducted directly
between currency traders (usually large commercial banks).

A Portfolio may use currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities (transaction hedge) or to lock in the dollar value of portfolio
positions (position hedge). In addition a Portfolio may cross-hedge currencies
by entering into a transaction to purchase or sell one or more currencies that
are expected to decline in value relative to other currencies to which a
Portfolio has or expects to have portfolio exposure. A Portfolio may also
engage in proxy hedging which is defined as entering into positions in one
currency to hedge investments denominated in another currency, where the two
currencies are economically linked. Forwards will be used only as a protective
measure against the effects of fluctuating rates of currency exchange and
exchange control regulations. While such contracts may limit losses to the
Portfolio as a result of exchange rate fluctuation, they will also limit any
gains that may otherwise have been realized.

A Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a Foreign Bond, a Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, a Portfolio may be
able to lock in the Foreign Currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S. dollar-
denominated security.

There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S. dollars or other Foreign Currency
is not exactly matched with a Portfolio's obligation under the forward
contract. On the date of maturity, a Portfolio may be exposed to some risk of
loss from fluctuations in that currency. Although the Adviser will attempt to
hold such mismatching to a minimum, there can be no assurance that the Adviser
will be able to do so. When a Portfolio enters into a forward contract for
purposes of creating a synthetic security, it will generally be required to
hold liquid assets in a segregated account with a daily value at least equal to
its obligation under the forward contract.

Except in circumstances where segregated accounts are not required by the 1940
Act and the rules adopted thereunder, a Portfolio's entry into Forwards, as
well as any use of cross or proxy hedging techniques, will generally require
the Portfolio's custodian to place liquid assets into a segregated account of
the Portfolio in an amount equal to the value of the Portfolio's total assets
committed to the consummation of forward contracts. If the value of the
securities placed in the segregated account declines, additional liquid assets
will be placed in the account on a daily basis so that the value of the account
will be at least equal to the amount of the Portfolio's commitments with
respect to such contracts. See "Investment Objectives and Policies--Forward
Foreign Currency Exchange Contracts" in the SAI.

At the maturity of a forward contract, a Portfolio may either accept or make
delivery of the currency specified in the contract or, prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to Forwards are
usually effected with the currency trader who is a party to the original
forward contract. A Portfolio will only enter into such a forward contract if
it is expected that there will be a liquid market in which to close out such
contract. There can, however, be no assurance that such a liquid market will
exist in which to close a forward contract, in which case the Portfolio may
suffer a loss.

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price at any time during the term of the Option (a long position if the Option
is a call and a short position if the Option is a put). Upon exercise of the
Option, the holder is entitled to delivery of the accumulated balance in the
writer's Futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of
the Option on the futures contract.

The Money Market, Growth, U.S. Real Estate, Emerging Markets Debt, Global
Equity, International Magnum, Emerging Markets Equity and Asian Equity
Portfolios may enter into futures contracts to the extent that their
outstanding obligations under such contracts do not exceed 20% of their
respective total assets. The Fixed Income, High Yield, Core Equity, Value, Mid
Cap Growth, Mid Cap Value, International Fixed Income, Balanced and Multi-
Asset-Class Portfolios may enter into futures contracts to the extent that
their outstanding obligations under futures contracts and option transactions
do not exceed 50% of their respective total assets. A Portfolio engaging in
"bona fide hedging" futures transactions is not limited with respect to the
percentage of its assets dedicated to futures contracts, however, if a
Portfolio engages in "non-bona fide hedging" transactions, then such Portfolio
is limited to initial margin deposits equal to or less than 5% of total assets.

Futures are derivative securities, in which a Portfolio may invest for hedging
purposes, as well as to remain fully invested and to reduce transaction costs.
Investing for the latter two purposes may be considered speculative. The
primary risks associated with the use of Futures are (i) imperfect correlation
between the change in market value of the stocks held by the Portfolio and the
prices of Futures and Options relating to the stocks purchased or sold by the
Portfolio and (ii) possible lack of a liquid secondary market for an Option or
a futures contract and the resulting inability to close a Futures position
which could have an adverse impact on the Portfolio's ability to hedge.
Additional risks associated with Options transactions are (i) the risk that an
Option will expire worthless; (ii) the risk that the issuer of an over-the-
counter Option will be unable to fulfill its obligation to the Portfolio due to
bankruptcy or related circumstances; (iii) the risk that Options may exhibit
greater short-term price volatility than the underlying security; and (iv) the
risk that a Portfolio may be forced to forego participation in the appreciation
of the value of underlying securities, futures contracts or currency due to the
writing of a call Option.

HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated Ba
through C by Moody's or BB through D by S&P, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by S&P are classified as non-Investment Grade Securities and are commonly
referred to as
junk bonds or High Yield Securities. Such securities carry a high degree of
risk and are considered speculative by the major credit rating agencies. The
following are excerpts from the Moody's and S&P definitions for speculative-
grade debt obligations:

Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered assured," and protection of principal and interest
is "moderate" and "not well safeguarded during both good and bad times in
the future." B-rated bonds "lack characteristics of a desirable
investment" and the assurance of interest or principal payments "may be
small." Caa-rated bonds are "of poor standing," and "may be in default"
or may have "elements of danger with respect to principal or interest."
Ca-rated bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings. C-rated bonds are the "lowest rated" class of bonds, and
issues so rated can be regarded as having "extremely poor prospects" of
ever attaining any real investment standing.

S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face major ongoing uncertainties . . .
which may lead to inadequate capacity" to pay interest or principal. B-
rated bonds have a "greater vulnerability to default than BB-rated bonds
and the ability to pay interest or principal will likely be impaired by
adverse business conditions." CCC-rated bonds have a currently
identifiable "vulnerability to default" and, without favorable business
conditions, will be "unable to repay interest and principal." The rating
C is reserved for income bonds on which "no interest is being paid." Debt
rated D is "in default," and "payment of interest and/or repayment of
principal is in arrears."

While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. High Yield
Securities may be issued as a consequence of corporate restructuring or similar
events. Also, High Yield Securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) companies, which are
generally less able than more established or less leveraged companies to make
scheduled payments of interest and principal. The price movement of these
securities is influenced less by changes in interest rates and more by the
financial and business position of the issuing corporation when compared to
Investment Grade Securities.

The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a
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designated floating rate, such as LIBOR (London Inter-Bank Offered Rate). Any
rise in the reference rate of an Inverse Floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an Inverse Floater causes an increase in the coupon rate.
Inverse Floaters may exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and Inverse Floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some Inverse
Floater CMOs exhibit extreme sensitivity to changes in prepayments. As a
result, the yield to maturity of an Inverse Floater CMO is sensitive not only
to changes in interest rates, but also to changes in prepayment rates on the
related underlying mortgage assets.

INVESTMENT COMPANY SECURITIES. Investments in investment companies are
securities of other open-end or closed-end investment companies. The 1940 Act
generally prohibits a Portfolio from acquiring more than 3% of the outstanding
voting shares of an investment company and limits such investments to no more
than 5% of the Portfolio's total assets in any one investment company and no
more than 10% in any combination of investment companies. The 1940 Act also
prohibits a Portfolio from acquiring in the aggregate more than 10% of the
outstanding voting shares of any registered close-end investment company.

To the extent a Portfolio invests a portion of its assets in Investment Company
Securities, those assets will be subject to the expenses of the purchased
investment company as well as to the expenses of the Portfolio itself. A
Portfolio may not purchase shares of any affiliated investment company except
as permitted by a rule or order of the Securities and Exchange Commission
("SEC").

INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded
on the stock exchanges in these countries is permitted by certain emerging
market countries through Investment Funds that have been specifically
authorized. A Portfolio may invest in these Investment Funds subject to the
provisions of the 1940 Act, as applicable, and other applicable laws as
discussed in "Investment Limitations" in the SAI. The Portfolios will invest in
such Investment Funds only where appropriate given that the Portfolios'
shareholders will bear not only their proportionate share of the expenses of
the Portfolio (including operating expenses and the fees of the Adviser), but
also will indirectly bear similar expenses of the underlying Investment Funds.

Certain Investment Funds are advised by an Adviser. The Portfolios may, to the
extent permitted under the 1940 Act and other applicable law, invest in these
Investment Funds. If a Portfolio does elect to make an investment in such an
Investment Fund, it will only purchase the securities of such Investment Fund
in the secondary market.

INVESTMENT GRADE SECURITIES. Investment Grade Securities are those rated by one
or more NRSROs in one of the four highest rating categories at the time of
purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or Baa by
Moody's). Securities rated BBB or Baa represent the lowest of four levels of
Investment Grade Securities and are regarded as borderline between definitely
sound obligations and those in which the speculative element begins to
predominate. MBSs, including mortgage pass-throughs and CMOs, deemed investment
grade by the Adviser, will either carry a guarantee from an agency of the U.S.
Government or a private issuer of the timely payment of principal and interest
(such guarantees do not extend to the market value of such securities or the
net asset value per share of the Portfolio) or, in the case of unrated
securities, be sufficiently seasoned and considered by the Adviser to be of
comparable quality. The Adviser may retain a security if its rating falls below
investment grade if it deems retention of the security to be in the best
interests of the Portfolio. Any Portfolio permitted to hold Investment Grade
Securities may hold unrated securities if the Adviser considers the risks
involved in owning that security to be equivalent to the risks involved in
holding an Investment Grade Security.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Loan Participations are loans or other
direct debt instruments which are interests in amounts owed by a corporate,
governmental or other borrower to another party. They may represent amounts
owed to lenders or lending syndicates, to suppliers of goods or services (trade
claims or other receivables), or to other parties. A Portfolio may invest in
fixed rate and floating rate loans ("Loans") arranged through private
negotiations between an issuer of sovereign debt obligations and one or more
financial institutions ("Lenders"). A Portfolio's investments in Loans are
expected in most instances to be in the form of participation in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. A Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of the insolvency of the Lender selling a
Participation, a Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. A Portfolio
will acquire Participations only if the Lender interpositioned between a
Portfolio and the borrower is determined by the Adviser to be creditworthy.

When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan.

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However, because Assignments are arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations
acquired by a Portfolio as the purchaser of an Assignment may differ from, and
be more limited than, those held by the assigning Lender. Because there is no
liquid market for such securities, a Portfolio anticipates that such securities
could be sold only to a limited number of institutional investors. The lack of
a liquid secondary market may have an adverse impact on the value of such
securities and a Portfolio's ability to dispose of particular Assignments or
Participations when necessary to meet a Portfolio's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for a Portfolio
to assign a value to these securities for purposes of valuing a Portfolio's
securities and calculating its NAV.

Direct debt instruments involve the risk of loss in case of default or
insolvency of the borrower. Direct debt instruments may offer less legal
protection to a Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the investing Portfolio to supply additional cash to
the borrower on demand. Participations involving emerging market country
issuers may relate to Loans as to which there has been or currently exists an
event of default or other failure to make payment when due, and may represent
amounts owed to financial institutions that are themselves subject to political
and economic risks, including the risk of currency devaluation, expropriation,
or failure. Such Participations present additional risks of default or loss.

LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions
for the purpose of increasing its net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of its total assets. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

MONEY MARKET INSTRUMENTS. Each Portfolio may invest in Money Market
Instruments, although the Portfolios intend to stay invested in securities
satisfying their primary investment objective to the extent practical. Each
Portfolio may invest in Money Market Instruments pending other investment or
settlement for liquidity, or in adverse market conditions. The Money Market
Instruments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; obligations of the International Bank for Reconstruction and
Development; other debt securities; commercial paper, including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit); and Repurchase Agreements. For more detailed information about these
Money Market Instruments, see "Description of Certain Securities and Ratings"
in the SAI.

MBSS. Mortgage-Backed Securities ("MBSs") are instruments that entitle the
holder to a share of all interest and principal payments from pools of
residential and commercial mortgage loans underlying the instruments, and may
take the form of pass-through securities or CMOs. Generally, these securities
are designed to provide monthly payments of interest and principal to the
investor.

Pass-Through Securities. The mortgagee's monthly payments to his or her lending
institution are passed through to investors such as the Portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer or pooler. The pools are assembled by various governmental, Government-
related and private organizations. A Portfolio may invest in securities issued
or guaranteed by GNMA, FHLMC, FNMA, private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. MBSs issued by non-agency issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If
there is no guarantee provided by the issuer, MBSs purchased by a Portfolio
will be those which at the time of purchase are rated investment grade by one
or more NRSRO, or, if unrated, are deemed by the Advisers to be of comparable
quality.

Due to the possibility that prepayments on home mortgages will alter cash flow
on MBSs, it is not possible to determine in advance the actual final maturity
date or average life. Like Fixed Income Securities in general, MBSs will
generally decline in price when interest rates rise. Due to prepayment risk,
rising interest rates also tend to discourage refinancings of home mortgages,
with the result that the average life of MBSs held by a Portfolio may be
lengthened. This extension of average life causes the market price of the MBSs
to decrease further than if their average lives were fixed. However, when
interest rates fall, mortgages may not enjoy as large a gain in market value
due to prepayment risk because additional mortgage prepayments must be
reinvested at lower interest rates. Faster prepayment will shorten the average
life and slower prepayments will lengthen it. However, it is possible to
determine what the range of that movement could be and to calculate the effect
that it will

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have on the price of the MBS. In selecting these MBSs, the Adviser will look
for those that offer a higher yield to compensate for any variation in average
maturity.

There are two methods of trading MBSs. A specified pool transaction is a trade
in which the pool number of the security to be delivered on the settlement date
is known at the time the trade is made. This is in contrast with the typical
MBS transaction, called a TBA (to be announced) transaction, in which the type
of MBS to be delivered is specified at the time of trade but the actual pool
numbers of the securities that will be delivered are not known at the time of
the trade. The pool numbers of the pools to be delivered at settlement will be
announced shortly before settlement takes place. The terms of the TBA trade may
be made more specific if desired. Generally, agency pass-through MBSs are
traded on a TBA basis.

CMOs. CMOs are debt securities that are issued by a thrift or other financial
institution and are collateralized as follows. The bondholder has a first
priority perfected security interest in collateral, usually consisting of
agency mortgage pass-through securities, although other assets, including U.S.
Treasuries (including Zero Coupons), Agencies, Cash Equivalents, whole loans
and Corporate Bonds, may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type. See
"CMOs" above.

MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those securities with maturities of less than five years). Municipal bonds are
issued for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation, streets,
water and sewer works; to obtain funds for operating expenses; to refund
outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
taxes. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not the
public issuer.

NON-DIVERSIFIED STATUS. The International Fixed Income, International Magnum,
U.S. Real Estate, Emerging Markets Equity and Emerging Markets Debt Portfolios
are non-diversified portfolios under the 1940 Act, which means that the
Portfolios are not limited by the 1940 Act in the proportion of their assets
that may be invested in the obligations of a single issuer. Thus, the
Portfolios may invest a greater proportion of their assets in the securities of
a small number of issuers and as a result will be subject to greater risk with
respect to their portfolio securities. However, the Portfolios intend to comply
with diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as regulated investment companies.
See "Investment Limitations" and "Taxes" in the SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Growth, U.S. Real Estate, International Magnum, Emerging
Markets Equity, Fixed Income, High Yield, Core Equity, Value, Mid Cap Growth,
Mid Cap Value, International Fixed Income, Balanced and Multi-Asset-Class
Portfolios may invest in securities that are neither listed on a stock exchange
nor traded over-the-counter, including privately placed securities. Such
unlisted Equity Securities may involve a higher degree of business and
financial risk that can result in substantial losses. As a result of the
absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by the Portfolio or less than what may
be considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.

As a general matter, a Portfolio may not invest more than 15% of its net assets
in illiquid securities, including securities for which there is no readily
available secondary market and securities that are restricted from sale to the
public without registration ("Restricted Securities") under the Securities Act
of 1933, as amended (the "1933 Act") and are deemed to be illiquid. Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("Rule 144A Securities") may be deemed to be
liquid under guidelines adopted by the Fund's Board of Directors. The U.S. Real
Estate Portfolio may invest up to 15% of its total assets, the Emerging Markets
Debt, International Magnum and Emerging Markets Equity Portfolios may each
invest up to 25% of their total assets, and the Growth Portfolio may invest up
to 35% of its total assets, in Rule 144A Securities that are deemed to be
liquid.

The Fund's Board of Directors has adopted guidelines and delegated to each
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A Securities.
Rule 144A Securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities. Investors should note that
investment of 5% of a Portfolio's total assets

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in Restricted Securities may be considered a speculative activity and may
involve greater risk and expense to that Portfolio.

OPTIONS. Options are legal contracts that give the holder the right to buy or
sell a specified amount of the underlying security or futures contract at a
fixed or determinable price upon the exercise of the Option. A call Option
conveys the right to buy and a put Option conveys the right to sell a specified
quantity of the underlying security.

A Portfolio may write (i.e., sell) covered call Options on portfolio securities
which give the purchaser the right to buy the underlying security covered by
the Option from the Portfolio at the stated exercise price. A "covered" call
Option means that so long as a Portfolio is obligated as the writer of the
Option, it will own (i) the underlying securities subject to the Option, or
(ii) securities convertible or exchangeable without the payment of any
consideration into the securities subject to the Option. By selling a covered
call Option, a Portfolio would become obligated during the term of the Option
to deliver the securities underlying the Option should the Option holder choose
to exercise the Option before the Option's termination date. In return for the
call Option it has written, a Portfolio will receive from the purchaser (or
Option holder) a premium which is the price of the Option, less a commission
charged by a broker. A Portfolio will keep the premium regardless of whether
the Option is exercised. When a Portfolio writes covered call Options, it
augments its income by the premiums received and is thereby hedged to the
extent of that amount against a decline in the price of the underlying
securities. The premiums received will offset a portion of the potential loss
incurred by a Portfolio if the securities underlying the Options are ultimately
sold by the Portfolio at a loss. However, during the Option period, a Portfolio
has, in return for the premium on the Option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the
price of the underlying security decline.

A Portfolio may also write (i.e., sell) covered put Options. Generally, a put
Option is "covered" if a Portfolio maintains cash, U.S. Governments or other
high grade debt obligations equal to the exercise price of the Option or if a
Portfolio holds a put Option on the same underlying security with the same or
higher exercise price.

By selling a covered put Option, a Portfolio incurs an obligation to buy the
security underlying the Option from the purchaser of the put Option at the
Option's exercise price at any time during the Option period, at the
purchaser's election (certain Options written by a Portfolio will be
exercisable by the purchaser only on a specific date). A Portfolio may sell put
Options to receive the premiums paid by purchasers and to close out a long put
Option position. In addition, when the Adviser wishes to purchase a security at
a price lower than its current market price, a Portfolio may write a covered
put Option at an exercise price reflecting the lower purchase price sought.

A Portfolio may purchase put or call Options on individual securities or
baskets of securities. When a Portfolio purchases a call Option it acquires the
right to buy a designated security at a designated price ("exercise price"),
and when a Portfolio purchases a put Option it acquires the right to sell a
designated security at the exercise price, in each case on or before a
specified date ("termination date"), usually not more than nine months from the
date the Option is issued. A Portfolio may purchase call Options to close out a
covered call Option position or to protect against an increase in the price of
a security it anticipates purchasing. A Portfolio may purchase put Options on
securities which it holds in its portfolio to protect itself against a decline
in the value of the security. If the value of the underlying security were to
fall below the exercise price of the put Option purchased in an amount greater
than the premium paid for the Option, a Portfolio would incur no additional
loss. A Portfolio may also purchase put Options to close out written put Option
positions in a manner similar to call Option closing purchase transactions.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

REPURCHASE AGREEMENTS. Repurchase Agreements are transactions in which a
Portfolio purchases a security and simultaneously commits to resell that
security to the seller (a bank, broker or dealer) at a mutually agreed upon
date and price. The term of these agreements is usually from overnight to one
week, and never exceeds one year. Repurchase Agreements may be viewed as a
fully collateralized loan of money by the Portfolio to the seller. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or date of maturity of the purchased
security.

In these transactions, the securities received by a Portfolio have a market
value at least equal to the purchase price (including accrued interest) of the
Repurchase Agreement as collateral, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's Custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit a Portfolio to keep all its assets invested while
retaining overnight flexibility in pursuit of investments of a longer-term
nature. If the seller defaults and the collateral value declines, the Portfolio
might incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.

Pursuant to an order expected to be issued by the SEC, the Portfolios may pool
their daily uninvested cash balances in order to invest in Repurchase
Agreements on a joint basis. By entering into Repurchase Agreements on a joint
basis, it
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is expected that the Portfolios will incur lower transaction costs and
potentially obtain higher rates of interest on such Repurchase Agreements. Each
Portfolio's participation in the income from jointly purchased Repurchase
Agreements will be based on that Portfolio's percentage share in the total
Repurchase Agreement. The Portfolios' ability to invest in Repurchase
Agreements on a joint basis will be contingent upon issuance of the order by
the SEC described above.

REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a segregated portfolio
of liquid assets in an amount at least equal to its purchase obligations under
these agreements. If interest rates rise during a Reverse Repurchase Agreement,
it may adversely affect the Portfolio's ability to maintain a stable NAV.

RIGHTS. Rights represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance, before the stock is
offered to the general public, allowing the stockholder to retain the same
ownership percentage after the new stock offering.

RUSSIAN SECURITIES. The registration, clearing and settlement of securities
transactions involving Russian issuers are subject to significant risks not
normally associated with securities transactions in the United States and other
more developed markets. Ownership of Equity Securities in Russian companies is
evidenced by entries in a company's share register (except where shares are
held through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and a Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In
addition, while registrars are liable under law for losses resulting from their
errors, it may be difficult for a Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by Russian law to employ an independent company to maintain share
registers, in practice, such companies have not always followed this law.
Because of this lack of independence of registrars, management of a Russian
company may be able to exert considerable influence over who can purchase and
sell the company's shares by illegally instructing the registrar to refuse to
record transactions on the share register. Furthermore, these practices may
prevent a Portfolio from investing in the securities of certain Russian
companies deemed suitable by the Adviser and could cause a delay in the sale of
Russian Securities by the Portfolio if the company deems a purchaser
unsuitable, which may expose the Portfolio to potential loss on its investment.

In light of the risks described above, the Board of Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that a Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that a Portfolio would otherwise make.

SMBSS. Stripped Mortgage-Backed Securities ("SMBSs") are Derivatives in the
form of multi-class mortgage securities. SMBSs may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.

SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("interest-only" or "IO class"),
while the other class will receive all of the principal ("principal-only" or
"PO class"). The yield to maturity on IO classes and PO classes is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal repayments
may have a material adverse effect on the portfolio yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as
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brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet developed and, accordingly, certain of
these securities may be deemed illiquid and subject to a Portfolio's
limitations on investment in illiquid securities.

STRUCTURED NOTES. Structured Notes are Derivatives on which the amount of
principal repayment and/or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500. In some cases, the impact of the movements
of these factors may increase or decrease through the use of multipliers or
deflators. The use of Structured Notes allows a Portfolio to tailor its
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.

SWAPS. Swap contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index for
the return generated by a second fixed income index. The currency Swaps in
which a Portfolio may enter will generally involve an agreement to pay interest
streams in one currency based on a specified index in exchange for receiving
interest streams denominated in another currency. Such Swaps may involve
initial and final exchanges that correspond to the agreed upon notional amount.

A Portfolio will usually enter into Swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two returns. A Portfolio's obligations under
a Swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a Swap counterparty
will be covered by the maintenance of a segregated account consisting of cash
or liquid securities. A Portfolio will not enter into any Swap agreement unless
the counterparty meets the rating requirements set forth in guidelines
established by the Fund's Board of Directors.

Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return Swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency Swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized Swap documentation. As a result, the Swap market has
become relatively liquid. Swaps that include caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" Swaps.

The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if this
investment technique was not used.

TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in
economic, financial or political conditions make it advisable, each Portfolio
may reduce its holdings for temporary defensive purposes and may invest in
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or may hold cash. The
short-term and medium-term debt obligations in which a Portfolio may invest
consist of (a) obligations of the U.S. or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or foreign banks denominated in any currency; (c) Floaters and other
instruments denominated in any currency issued by international development
agencies; (d) finance company and corporate commercial paper and other short-
term corporate debt obligations of U.S. and foreign corporations meeting a
Portfolio's credit quality standards; and (e) Repurchase Agreements with banks
and broker-dealers with respect to such securities. For temporary defensive
purposes, the Portfolios intend to invest only in short-term and medium-term
debt obligations that the Adviser believes to be of high quality, i.e., subject
to relatively low risk of loss of interest or principal (there is currently no
rating system for foreign debt obligations).

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<PAGE>

and U.S. Government sponsored instrumentalities. For further information on
these securities, see "Description of U.S. Government Securities" in the SAI.

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. The Portfolio will maintain with
the Custodian a separate account with a segregated portfolio of liquid
securities or cash in an amount at least equal to these commitments. The Money
Market, Growth, U.S. Real Estate, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios will
not enter into When-Issued or Delayed Delivery Securities commitments
exceeding, in the aggregate, 15% of the Portfolio's total assets other than the
obligations created by these commitments.

ZERO COUPONS, PAY-IN-KIND SECURITIES OR DEFERRED PAYMENT SECURITIES. Zero
Coupons are Fixed Income Securities that do not make regular interest payments.
Instead, Zero Coupons are sold at substantial discounts from their face value.
The difference between a Zero Coupon's issue or purchase price and its face
value represents the imputed interest an investor will earn if the obligation
is held until maturity. Zero Coupons may offer investors the opportunity to
earn higher yields than those available on ordinary interest-paying obligations
of similar credit quality and maturity. However, Zero Coupon prices may also
exhibit greater price volatility than ordinary Fixed Income Securities because
of the manner in which their principal and interest are returned to the
investor. Pay-In-Kind Securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred Payment Securities
are securities that remain Zero Coupons until a predetermined date, at which
time the stated coupon rate becomes effective and interest becomes payable at
regular intervals. Zero Coupon, Pay-In-Kind and Deferred Payment Securities may
be subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparably rated securities paying cash interest
at regular interest payment periods.

FUNDAMENTAL INVESTMENT LIMITS
- -----------------------------

The investment objective of each Portfolio discussed on the preceding pages is
a fundamental policy, that is, a policy subject to change only by shareholder
approval. The policy for each Portfolio in the following paragraph is also
fundamental. All policies stated throughout this Prospectus, other than those
identified as fundamental, can be changed without shareholder approval. For
additional fundamental and non-fundamental investment limits, see "Investment
Limitations" in the SAI.

EACH PORTFOLIO (excluding the International Fixed Income, International Magnum,
U.S. Real Estate, Emerging Markets Equity and Emerging Markets Debt Portfolios)
is a diversified investment company and is therefore subject to the following
fundamental limitations: as to 75% of its total assets, a Portfolio may not (a)
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
or (b) own more than 10% of the outstanding voting securities of any one
issuer.

INTERNAL REVENUE SERVICE ("IRS") LIMITATIONS. In addition to the above, each
Portfolio also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of variable
annuity contracts and variable life insurance policies. More specific
information may be contained in the insurance company's separate account
prospectus.

MANAGEMENT OF THE FUND
- ----------------------

The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The boards of directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Adviser, have agreed or will agree to be responsible for reporting any
potential or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of the Fund will be required to report any potential or

31
<PAGE>

existing conflicts to the Directors of the Fund, and if a material
irreconcilable conflict exists, to remedy such conflict, up to and including
redeeming shares of the Portfolios held by the qualified plans. The majority of
the Fund's Directors are not affiliated with MSAM, MAS, any of their
affiliates, any of the other companies that provide services to the Fund or any
of their affiliates. The officers of the Fund conduct and supervise its daily
business operations.

THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolios will vote shares held in its separate account as
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.

INVESTMENT MANAGEMENT

INVESTMENT ADVISERS. The Adviser assigned to a Portfolio provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM serves as the Adviser for the Money Market, Emerging Markets
Debt, Growth, U.S. Real Estate, Global Equity, International Magnum, Emerging
Markets Equity and Asian Equity Portfolios. MAS serves as the adviser for the
Fixed Income, High Yield, International Fixed Income, Balanced, Multi-Asset-
Class, Value, Core Equity, Mid Cap Growth and Mid Cap Value Portfolios. MSAM,
with principal offices at 1221 Avenue of the Americas, New York, New York
10020, conducts a worldwide investment management business, providing a broad
range of portfolio management services to customers in the United States and
abroad. MSAM is a wholly-owned subsidiary of Morgan Stanley Group Inc.
("MSGI"), which is a publicly owned financial services corporation listed on
the New York, London and Pacific stock exchanges. MSAM, a registered Investment
Adviser under the Investment Advisers Act of 1940, as amended, serves as
investment adviser to numerous open-end and closed-end investment companies.
MAS is a Pennsylvania limited liability partnership founded in 1969 with
principal offices at One Tower Bridge, West Conshohocken, Pennsylvania 19428.
As of January 1996, MAS is also indirectly wholly-owned by MSGI. MAS provides
investment advisory services to employee benefit plans, endowment funds,
foundations and other institutional investors and has served as investment
adviser to several open-end investment companies since 1984. As of November 30,
1996, MSAM and its investment advisory affiliates (exclusive of MAS and Van
Kampen) managed assets of approximately $70 billion, MAS managed assets of
approximately $40 billion, and MSAM and MAS and all of their affiliated asset
management companies managed assets totaling approximately $170 billion. See
"Management of the Fund" in the SAI.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.

MONEY MARKET PORTFOLIO -- Abigail Jones Feder and Kenneth R. Holley. Abigail
Feder is a Principal in MSAM's Fixed Income Group. She is responsible for
managing short-term taxable and tax-exempt portfolios. Ms. Feder holds a B.A.
from Vassar College. Kenneth R. Holley joined MSAM as a short-term fixed income
portfolio manager in July, 1993. Prior thereto, he worked for 2 1/2 years as a
Finance Officer for the African Development Bank ("ADB") implementing trading
strategies for the bank's $1 billion short to intermediate U.S. dollar
portfolio. Mr. Holley holds a B.S. degree in Engineering from University of
Pennsylvania and an M.B.A. from the Wharton School. Ms. Feder and Mr. Holley
have shared primary responsibility for managing the Portfolio's assets since
inception.

FIXED INCOME PORTFOLIO -- Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley. Thomas L. Bennett, a Managing Director of Morgan Stanley & Co.
Incorporated ("Morgan Stanley"), joined MAS in 1984. He assumed responsibility
for the MAS Funds Fixed Income Portfolio in 1984, the MAS Funds Domestic Fixed
Income Portfolio 1987, the MAS Funds High Yield Portfolio in 1985, the MAS
Funds Fixed Income Portfolio II in 1990, the MAS Funds Special Purpose Fixed
Income and Balanced Portfolios in 1992 and the MAS Funds Multi-Asset-Class
Portfolio in 1994. Mr Bennett is Chairman of the Board of Trustees of MAS
Funds, a member of the Executive Committee of MAS and a Director of MAS Fund
Distributors, Inc. Mr. Bennett holds a B.S. in Chemistry and an M.B.A. from
University of Cincinnati. Kenneth B. Dunn, a Managing Director of Morgan
Stanley, joined MAS in 1987. He assumed responsibility for the MAS Funds Fixed
Income and Domestic Fixed Income Portfolios in 1987, the MAS Funds Fixed Income
II Portfolio in 1990, the MAS Funds Mortgage-Backed Securities and Special
Purpose Fixed Income Portfolios in 1992, and the MAS Funds Municipal and PA
Municipal Portfolios in 1994. Mr. Dunn received a B.S. and an M.B.A. from The
Ohio State University and a Ph.D. from Purdue University. Richard B. Worley, a
Managing Director of Morgan Stanley, joined MAS in 1978. He assumed
responsibility for the MAS Funds Fixed Income Portfolio in 1984, the MAS Funds
Domestic Fixed Income Portfolio in 1987, the MAS Funds Fixed Income Portfolio
II in 1990, the MAS Funds Balanced and Special Purpose Fixed Income Portfolios
in 1992, the MAS Funds Global Fixed Income and International Fixed Income
Portfolios in 1993
32
<PAGE>

and the MAS Funds Multi-Asset-Class Portfolio in 1994. Mr. Worley received a
B.A. in Economics from University of Tennessee and attended the Graduate School
of Economics at University of Texas. Messrs. Bennett, Dunn, and Worley have
shared primary responsibility for managing the Portfolio's assets since
inception.

HIGH YIELD PORTFOLIO -- Robert E. Angevine, Thomas L. Bennett, and Stephen F.
Esser. Robert Angevine is a Principal of Morgan Stanley and the Portfolio
Manager for high yield investments. Mr. Angevine received an M.B.A. from
Fairleigh Dickinson University and a B.A. in Economics from Lafayette College.
Information about Thomas L. Bennett is included under Fixed Income Portfolio
above. Stephen F. Esser, a Managing Director of Morgan Stanley, joined MAS in
1988. He assumed responsibility for the MAS Funds High Yield Portfolio in 1989.
Mr. Esser holds a B.S. from University of Delaware. Messrs. Bennett, Angevine
and Esser have shared primary responsibility for managing the Portfolio's
assets since inception.

CORE EQUITY PORTFOLIO -- Arden C. Armstrong, Kurt Feuerman, Nicholas J. Kovich,
Robert J. Marcin and Gary G. Schlarbaum. Arden C. Armstrong, a Managing
Director of Morgan Stanley, joined MAS in 1986. She assumed responsibility for
the MAS Funds Mid Cap Growth Portfolio in 1990, the MAS Funds Growth Portfolio
in 1993 and the MAS Funds Equity Portfolio in 1994. Ms. Armstrong received a
B.A. (Magna Cum Laude) in Economics from Brown University, an M.B.A. from the
Wharton School at University of Pennsylvania and is a Chartered Financial
Analyst. Kurt Feuerman is a Managing Director of MSAM and heads MSAM's Equity
Group. He joined MSAM in July 1993 after spending three years as a Managing
Director of Morgan Stanley's Research Department, where he was responsible for
emerging growth stocks, gaming and restaurants. Mr. Feuerman earned an M.B.A.
from Columbia University, an M.A. from Syracuse University, and a B.A. from
McGill University. Nicholas J. Kovich, a Managing Director of Morgan Stanley,
joined MAS in 1988. He assumed responsibility for the MAS Funds Equity
Portfolio in 1994. Mr. Kovich received a B.S. in Chemical Engineering and an
M.B.A. from University of Kansas. Robert J. Marcin, a Managing Director of
Morgan Stanley, joined MAS in 1988. He assumed responsibility for the MAS Funds
Value Portfolio in 1990 and the MAS Funds Equity Portfolio in 1994. Mr. Marcin
holds a B.A. (Cum Laude) from Dartmouth College and is a Chartered Financial
Analyst. Gary G. Schlarbaum, a Managing Director of Morgan Stanley, joined MAS
in 1987. He assumed responsibility for the MAS Funds Equity and Small Cap Value
Portfolios in 1987, the MAS Funds Balanced Portfolio in 1992 and the MAS Funds
Multi-Asset-Class and Mid Cap Value Portfolios in 1994. Mr. Schlarbaum holds a
B.A. from Coe College and a Ph.D. from University of Pennsylvania. Ms.
Armstrong, Mr. Kovich, Mr. Marcin and Mr. Schlarbaum have shared primary
responsibility for managing the Portfolio's assets since inception.

GROWTH PORTFOLIO -- Kurt Feuerman, Margaret K. Johnson, and Daniel Lascano.
Information about Kurt Feuerman is included under Core Equity Portfolio above.
Margaret Johnson is a Principal of MSAM and a Portfolio Manager in the
Institutional Equity Group. She joined MSAM in 1984. She holds a B.A. degree
from Yale College and is a Chartered Financial Analyst. Daniel Lascano is a
Vice President of MSAM. He joined MSAM in 1993. Mr. Lascano graduated from the
University of California at Berkeley, with a B.A. in Economics and Statistics.
Mr. Feuerman, Ms. Johnson and Mr. Lascano have shared primary responsibility
for managing the Portfolio's assets since inception.

VALUE PORTFOLIO -- Richard M. Behler and Robert J. Marcin. Richard M. Behler, a
Principal of Morgan Stanley, joined MAS in 1995. He served as a Portfolio
Manager from 1992 through 1995 for Moore Capital Management and as Senior Vice
President for Merrill Lynch Economics from 1987 through 1992. He assumed
responsibility for the MAS Fund's Value Portfolio in 1996. Mr. Behler received
a B.A. (Cum Laude) in Economics from Villanova University and an M.A. and a
Ph.D. in Economics from University of Notre Dame. Information about Robert J.
Marcin is included under Core Equity Portfolio above. Mr. Behler and Mr.
Marcin have shared primary responsibility for managing the Portfolio's assets
since inception.

MID CAP GROWTH PORTFOLIO -- Arden C. Armstrong and Abhi Y. Kanitkar.
Information about Arden C. Armstrong is included under Core Equity Portfolio
above. Abhi Y. Kanitkar, a Vice-President of Morgan Stanley, joined MAS in
1994. He served as an Investment Analyst from 1993 through 1994 for Newbold's
Asset Management and as Director & Investment Analyst from 1990 through 1993
for Kanitkar Investment Services, Inc. He assumed responsibility for the MAS
Fund's Mid Cap Growth Portfolio in 1996. Mr. Kanitkar received a B.S. (Magna
Cum Laude, Tau Beta Pi) in Electrical Engineering from University of Michigan
and an M.B.A. from the Wharton School at University of Pennsylvania. Ms.
Armstrong and Mr. Kanitkar have shared primary responsibility for managing the
Portfolio's assets since inception.

MID CAP VALUE PORTFOLIO -- William B. Gerlach and Gary G. Schlarbaum. William
B. Gerlach, a Vice President of Morgan Stanley, joined MAS in 1991. He served
as a Programmer in Applications Software Development at Alphametrics
Corporation from 1987 through 1991 and as a Data Analyst and Inflation
Economist at Wharton Econometric Forecasting Associates from 1984 through 1987.
He holds a B.A. in Economics from Haverford College. Information about Gary G.
Schlarbaum is included under Core Equity Portfolio above. Mr. Gerlach and Mr.
Schlarbaum have had primary responsibility for managing the Portfolio's assets
since inception.

U.S. REAL ESTATE PORTFOLIO -- Theodore R. Bigman and Russell Platt. Mr. Bigman,
a Principal of Morgan Stanley,

33
<PAGE>

joined MSAM in 1995. Together with Russell Platt, he is responsible for MSAM's
real estate securities research. Prior to joining MSAM, he was a Director at CS
First Boston, where he worked for eight years in the Real Estate Group. Mr.
Bigman graduated from Brandeis University with a B.A. in Economics and received
an M.B.A. from Harvard University. Russell Platt joined MSAM in 1994.
Mr. Platt, a Managing Director of Morgan Stanley, previously served as a
Director of the General Partner of The Morgan Stanley Real Estate Fund I, where
he was involved in capital raising, acquisitions, oversight of investments and
investor relations. From 1991 to 1993, Mr. Platt was head of Morgan Stanley
Realty's Transaction Development Group. As such, he was actively involved in
Morgan Stanley's worldwide real estate business. Mr. Platt graduated from
Williams College with a B.A. in Economics and received an M.B.A. from Harvard
Business School. Mr. Bigman and Mr. Platt have had primary responsibility for
managing the Portfolio's assets since inception.

INTERNATIONAL FIXED INCOME PORTFOLIO -- J. David Germany, Michael Kushma, Paul
F. O'Brien and Richard B. Worley. J. David Germany, a Managing Director of
Morgan Stanley, joined MAS in 1991. He assumed responsibility for the MAS Funds
Global Fixed Income and International Fixed Income Portfolios in 1993 and the
MAS Funds Multi-Asset-Class Portfolio in 1994. Mr. Germany holds an A.B. from
Princeton University and a Ph.D. in Economics from Massachusetts Institute of
Technology. Michael Kushma joined Morgan Stanley in 1988. He assumed
responsibility for the Morgan Stanley Institutional Fund, Inc. ("MSIF") Global
Fixed Income and MSIF International Fixed Income Portfolio in 1996. Mr. Kushma
holds an A.B. from Princeton University, an M.S. from London School of
Economics and an M.A. in Philosophy from Columbia University. Paul F. O'Brien,
a Principal of Morgan Stanley, joined MAS in 1996. He served as Head of
European Economics from 1993 through 1995 for JP Morgan and as Principal
Administrator from 1991 through 1992 for the Organization for Economic
Cooperation and Development. He assumed responsibility for the Global Fixed
Income and International Fixed Income Portfolios in 1996. Mr. O'Brien attended
the United States Naval Academy, holds a B.S. from Massachusetts Institute of
Technology and a Ph.D. in Economics from University of Minnesota. Information
about Richard B. Worley is included under Fixed Income Portfolio above. Messrs.
Germany, Kushma, O'Brien and Worley have shared primary responsibility for
managing the Portfolio's assets since inception.

EMERGING MARKETS DEBT PORTFOLIO -- Paul Ghaffari. Paul Ghaffari is a Managing
Director of Morgan Stanley. He joined MSAM in June 1993 as a Vice President and
Portfolio Manager for the Morgan Stanley Emerging Markets Debt Fund Inc. (a
closed-end investment company). Prior to joining MSAM, Mr. Ghaffari was a Vice
President in the Fixed Income Division of the Emerging Markets Sales and
Trading Department at Morgan Stanley. He holds a B.A. in International
Relations from Pamona College and an M.S. in Foreign Service from Georgetown
University. Mr. Ghaffari has had primary responsibility for managing the
Portfolio's assets since inception.

GLOBAL EQUITY PORTFOLIO -- Frances Campion. Frances Campion, a Principal of
Morgan Stanley, joined MSAM in January 1990 as a Global Equity Fund Manager.
Her responsibilities include day-to-day management of the Global Equity
product. Prior to joining MSAM, Ms. Campion was a U.S. equity analyst with
Lombard Odler Limited where she had responsibility for the management of global
portfolios. She is a graduate of University of College, Dublin. Ms. Campion has
had primary responsibility for managing the Portfolio's assets since inception.

INTERNATIONAL MAGNUM PORTFOLIO -- Francine J. Bovich. Francine Bovich joined
Morgan Stanley as a Principal in 1993. She is responsible for product
development, portfolio management and communication of MSAM's asset allocation
strategy to institutional investor clients. Previously, Ms. Bovich was a
Principal and Executive Vice President of Westwood Management Corp. She holds a
B.A. in Economics from Connecticut College and an M.B.A. in Finance from New
York University. Ms. Bovich has had primary responsibility for managing the
Portfolio's assets since inception.

EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar and Marianne L. Hay. Madhav
Dhar is a Managing Director of MSAM and Morgan Stanley. He joined MSAM in 1984
to focus on global asset allocation and investment strategy and now is a co-
head of MSAM's emerging markets group. He holds a B.S. (honors) from St.
Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Marianne L. Hay, a Managing Director of Morgan Stanley, is a co-
head of the Adviser's emerging markets group. She joined the Adviser in June
1993 to work with the Adviser's senior management covering all emerging markets
assets allocation, product development and client services. Ms. Hay has 17
years of investment experience. Prior to joining the Adviser, she was a
director of Martin Currie Investment Management, Ltd. where her
responsibilities included geographic asset allocation and portfolio management
for global and emerging markets funds, as well as being director in charge of
the company's North American clients. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland. Mr.
Dhar and Ms. Hay have shared primary responsibility for managing the
Portfolio's assets since its inception.

34
<PAGE>

Singapore Investment Corporation, where she was a portfolio manager of one of
the largest portfolios in Asia. Ms. Chin was an ASEAN scholar educated at the
University of Singapore. Seah Kiat Seng joined the Adviser's Singapore office
in 1990 as a portfolio manager/analyst specializing in the Southeast Asian
markets. He is currently a Vice President, responsible for investments in
Thailand. He has had primary management responsibility for the Investment Fund
since its inception. Kiat Seng is a Chartered Financial Analyst and a qualified
real estate valuer who has worked for the Singapore Ministry of Finance. He was
a Colombo Plan Scholar educated in New Zealand. Ms. Chin and Mr. Seng have
shared primary responsibility for managing the Portfolio's assets since
inception.

BALANCED PORTFOLIO -- Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley. Information about Thomas L. Bennett
and Richard B. Worley is included under Fixed Income Portfolio above.
Information about John D. Connolly and Gary G. Schlarbaum is included under
Core Equity Portfolio above and information about Horacio A. Valeiras is
included under Multi-Asset-Class Portfolio below. Messrs. Bennett, Connolly,
Schlarbaum, Valeiras and Worley have shared primary responsibility for managing
the Portfolio's assets since inception.

MULTI-ASSET-CLASS PORTFOLIO -- Thomas L. Bennett, John D. Connolly, J. David
Germany, Gary G. Schlarbaum, Horacio A. Valeiras and Richard B. Worley.
Information about Thomas L. Bennett and Richard B. Worley is included under
Fixed Income Portfolio above. Information about John D. Connolly and Gary G.
Schlarbaum is included under Core Equity Portfolio above. Information about J.
David Germany is included under International Fixed Income Portfolio above.
Horacio A. Valeiras, a Principal of Morgan Stanley, joined MAS in 1992. He
served as an International Strategist from 1989 through 1992 for Credit Suisse
First Boston and as Director-Equity Research in 1992. He assumed responsibility
for the International Equity Portfolio in 1992, the MAS Funds Emerging Markets
Portfolio in 1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994 and the
Balanced Portfolio in 1996. Mr. Valeiras received a B.S. in Chemical
Engineering from Virginia Tech, an M.S. and Engineer's Degree from
Massachusetts Institute of Technology and an M.B.A. from University of
California, Berkeley. Messrs. Bennett, Connolly, Germany, Schlarbaum, Valeiras
and Worley have shared primary responsibility for managing the Portfolio's
assets since inception.

OTHER SERVICES

DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley
serves as the exclusive Distributor of the Fund and sells shares of each
Portfolio upon the terms and at the current offering price described in this
Prospectus. Morgan Stanley is not obligated to sell any certain number of
shares of any Portfolio. Morgan Stanley, as principal underwriter, or the
insurance companies whose variable products are funded by the Fund, will bear
all of the Fund's marketing expenses. This includes the cost of reproducing
prospectuses, statements of additional information or any other Fund documents
(such as semiannual reports) used as sales materials.

ADMINISTRATION. MSAM and MAS also provide the respective Portfolios of the Fund
which they manage with administrative services pursuant to Administration
Agreements. The services provided under the respective Administration
Agreements are subject to the supervision of the officers and the Board of
Directors of the Fund, and include day-to-day administration of matters related
to the corporate existence of the Fund, maintenance of its records, preparation
of reports, supervision of the Fund's arrangements with its Custodian, and
assistance in the preparation of the Fund's registration statements under
federal and state laws. The Administration Agreements also provide that the
Administrators through their agents will provide the Fund with dividend
disbursing and transfer agent services. For their services under the
Administration Agreements, the Fund pays MSAM and MAS a monthly fee which on an
annual basis equals 0.25% of the average daily net assets of each Portfolio
that they administer.

MSAM and MAS have each entered into a Sub-Administration Agreement with Chase
Global Funds Services Company ("Chase Global"), a subsidiary of The Chase
Manhattan Bank ("Chase"), pursuant to which Chase Global has agreed to provide
certain administrative services to the Fund. MSAM and MAS supervise and monitor
such administrative services provided by Chase Global. The services provided
under the Administration Agreements and the Sub-Administration Agreements are
also subject to the supervision of the Board of Directors of the Fund. The
Board of Directors of the Fund has approved the provision of services described
above pursuant to the Administration Agreements and the Sub-Administration
Agreements as being in the best interests of the Fund. Chase Global's business
address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional
information regarding the Administration Agreements or the Sub-Administration
Agreements, see "Management of the Fund" in the SAI.

Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.

CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolios. Chase is not an affiliate of either of the Advisers or the
Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an
affiliate of MSAM, MAS and the Distributor, acts as the Fund's Custodian for
foreign assets held outside the United States (including, through sub-
custodians, securities held in Russia) and employs sub-custodians approved by
the Board of Directors of the Fund in accordance with regulations of the SEC
for the purpose of providing custodial services for
35
<PAGE>

such assets. MSTC may also hold certain domestic assets for the Fund. For more
information on the Custodians, see "General Information -- Custody
Arrangements" in the SAI.

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and will audit the annual financial statements of each Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM and MAS pay fees to affiliates who
provide assistance with these services. Each Portfolio also pays other
expenses, which are explained below. The Advisers may, from time to time,
reduce their fees or reimburse the Portfolios for expenses above a specified
limit. These fee reductions or expense reimbursements, which may be terminated
at any time without notice, can decrease a Portfolio's expenses and boost its
performance.

MANAGEMENT FEE

The Adviser assigned to a Portfolio is entitled to receive from such Portfolio
a management fee, payable quarterly, at an annual rate as a percentage of
average daily net assets as set forth in the tables below.

36
<PAGE>

U.S. FIXED INCOME PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Assets Money Market Fixed Income High Yield
- -----------------------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.30% 0.40% 0.50%
- -----------------------------------------------------------------------
From $500 million to $1 billion 0.25% 0.35% 0.45%
- -----------------------------------------------------------------------
More than $1 billion 0.20% 0.30% 0.40%
</TABLE>

U.S. EQUITY PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Mid Cap Mid Cap U.S. Real
Assets Core Equity Growth Value Growth Value Estate
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $500 million 0.55% 0.55% 0.55% 0.75% 0.75% 0.80%
- -----------------------------------------------------------------------------
From $500 million to $1
billion 0.50% 0.50% 0.50% 0.70% 0.70% 0.75%
- -----------------------------------------------------------------------------
More than $1 billion 0.45% 0.45% 0.45% 0.65% 0.65% 0.70%
</TABLE>

GLOBAL PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
International Emerging
Fixed Emerging Global International Markets Asian
Assets Income Markets Debt Equity Magnum Equity Equity
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $500 million 0.50% 0.75% 0.80% 0.80% 1.25% 0.80%
- ------------------------------------------------------------------------------------------
From $500 million to $1
billion 0.45% 0.70% 0.75% 0.75% 1.20% 0.75%
- ------------------------------------------------------------------------------------------
More than $1 billion 0.40% 0.65% 0.70% 0.70% 1.15% 0.70%
</TABLE>

ASSET ALLOCATION PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Assets Balanced Multi-Asset-Class
- -------------------------------------------------------------
<S> <C> <C>
First $500 million 0.50% 0.65%
- -------------------------------------------------------------
From $500 million to $1 billion 0.45% 0.60%
- -------------------------------------------------------------
More than $1 billion 0.40% 0.55%
</TABLE>

37
<PAGE>

However, the Advisers, with respect to certain of the Portfolios, have
voluntarily waived receipt of their management fees and agreed to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed the respective percentage of average daily
net assets set forth in the table below.

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Portfolio Fee Waivers
- --------- ------------------------
<S> <C>
Money Market........................................... 0.55%
Fixed Income........................................... 0.70%
High Yield............................................. 0.80%
International Fixed Income............................. 0.80%
Balanced............................................... 0.80%
Growth................................................. 0.85%
Value.................................................. 0.85%
Core Equity............................................ 0.85%
Multi-Asset-Class...................................... 0.95%
Mid Cap Growth......................................... 1.05%
Mid Cap Value.......................................... 1.05%
U.S. Real Estate....................................... 1.10%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Asian Equity........................................... 1.20%
Emerging Markets Debt.................................. 1.25%
Emerging Markets Equity................................ 1.75%
</TABLE>

OTHER EXPENSES

In addition to investment advisory and certain administrative expenses charged
by the administrators, each Portfolio pays all expenses not assumed by MSAM or
MAS. Such expenses include or could include investment-related expenses, such
as brokers' commissions, transfer taxes and fees related to the purchase, sale,
or loan of securities; fees and expenses for Directors not affiliated with MSAM
or MAS; fees and expenses of its independent accountants and legal counsel;
costs of Directors and shareholder meetings; SEC fees; expenses of preparing
and filing registration statements; the cost of providing proxy statements,
prospectuses and statements of additional information to existing variable
annuity contract and variable life insurance policy owners; expenses of
preparing and printing the annual and semiannual shareholder reports to
variable annuity contract and variable life insurance policy owners; bank
transaction charges and certain custodians' fees and expenses; federal, state
or local income or other taxes; costs of maintaining the Portfolio's corporate
existence; membership fees for the Investment Company Institute and similar
organizations; fidelity bond and Directors' liability insurance premiums; and
any extraordinary expenses such as indemnification payments or damages awarded
in litigation or settlements made. All these expenses that are incurred by the
Portfolio will be passed on to the shareholders through a daily charge made to
the assets held in the Portfolios, which will be reflected in share prices.

PORTFOLIO TURNOVER

Under certain market conditions, a Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by a Portfolio in anticipation of a rise or decline in
interest rates or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. As a result
of their investment strategies, the Fixed Income, Mid Cap Value, U.S. Real
Estate and Emerging Markets Debt Portfolios' annual portfolio turnover rates
are expected to be as high as 200%. The High Yield, Mid Cap Growth and
International Fixed Income Portfolios' rates are expected to be as high as
150%. The International Fixed Income Portfolio and the fixed income portion of
the Balanced Portfolio will ordinarily exceed annual portfolio turnover rates
of 100%. Higher portfolio turnover rates for the Portfolios can result in
corresponding increases in expenses such as brokerage commissions and
transaction costs. Although none of the Portfolios other than the Money Market
Portfolio will invest for short-term trading purposes, investment securities
may be sold from time to time without regard to the length of time they have
been held and the Portfolios will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objectives and policies. The tables that will be set forth in "Financial
Highlights" will present the Portfolios' historical turnover rates.

PERFORMANCE OF PORTFOLIOS

Each Portfolio's total return and yield may be quoted in advertising if
accompanied by performance of your insurance company's separate account.
Performance is based on historical results and is not intended to indicate
future performance. For additional performance information, contact your
insurance company for a free annual report.

TOTAL RETURN. Total return is the change in value of an investment in a
Portfolio over a given period, assuming reinvestment of any dividends and
capital gains. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period. Average
annual total returns smooth out variations in performance; they are not the
same as actual year-by-year results.

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

YIELD. Yield refers to the income generated by an investment in a Portfolio
over a given period of time, expressed as an annual percentage rate. When a
yield assumes that income is reinvested, it is called an effective yield.

38
<PAGE>

Seven-day yield illustrates the income earned by an investment in the Money
Market Portfolio over a recent seven-day period. Since the Money Market
Portfolio attempts to maintain a stable $1.00 share price, current seven-day
yields are the most common illustration of the Money Market Portfolio
performance.

Total returns and yields quoted for the Portfolios include each Portfolio's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since shares of the Portfolios may be purchased
only through variable annuity contracts and variable life insurance policies
and by tax qualified investors, such as qualified pension and retirement plans,
you should carefully review the prospectus of the insurance product you have
chosen for information on relevant charges and expenses. Excluding these
charges from quotations of each Portfolio's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing a Portfolio's performance to that of other mutual funds.

PERFORMANCE OF INVESTMENT ADVISERS

The Advisers manage portfolios of Morgan Stanley Institutional Fund, Inc.
("MSIF") and MAS Funds, which served as the models for the Portfolios of the
Fund. The portfolios of MSIF and MAS Funds have substantially the same
investment objectives, policies and strategies as the Portfolios of the Fund.
In addition, the Advisers intend the Portfolios of the Fund and the
corresponding portfolios of MSIF and MAS Funds to be managed by the same
personnel and to continue to have closely similar investment strategies,
techniques and characteristics. The following table sets forth the name of each
Portfolio of the Fund and the name of the corresponding portfolio of MSIF or
MAS Funds from which the Portfolio is cloned.

<TABLE>
<CAPTION>
Corresponding MSIF Corresponding MAS Funds
Fund Portfolio portfolio portfolio
-------------- --------------------- --------------------------
<S> <C> <C>
Money Market Money Market
Fixed Income Fixed Income
High Yield High Yield
Core Equity Equity
Growth Equity Growth
Value Value
Mid Cap Growth Mid Cap Growth
Mid Cap Value Mid Cap Value
U.S. Real Estate U.S. Real Estate
International Fixed
Income International Fixed Income
Emerging Markets Debt Emerging Markets Debt
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
Asian Equity Asian Equity
Balanced Balanced
Multi-Asset-Class Multi-Asset-Class
</TABLE>

39
<PAGE>

Past investment performance of the portfolios of MSIF and MAS Funds, as shown
in the table below, may be relevant to your consideration of the Portfolios.
The investment performance of the portfolios of MSIF and MAS Funds is not
necessarily indicative of future performance of the Portfolios of the Fund.
Also, the operating expenses of each of the Portfolios of the Fund will be
different from, and may be higher than, the operating expenses of the
corresponding portfolio of MSIF or MAS Funds. The investment performance of the
portfolios of MSIF and MAS Funds is provided merely to indicate the experience
of the Advisers in managing similar portfolios.
<TABLE>
<CAPTION>
Average Average
One Year Five Years Ten Years Annual Annual Average
Cumulative Cumulative Cumulative Total Return Total Return Annual
Total Return Total Return Total Return Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth........... 4/2/91 31.14% 119.49% NA 17.03% NA 17.11%
U.S. Real Estate........ 2/24/95 39.56% NA NA NA NA 32.74%
Emerging Markets Debt... 2/1/94 50.52% NA NA NA NA 18.96%
Global Equity........... 7/15/92 22.83% NA NA NA NA 19.21%
International Magnum.... 3/15/96 8.25%* NA NA NA NA NA
Emerging Markets
Equity................. 9/25/92 12.49% NA NA NA NA 13.00%
Asian Equity............ 7/1/91 3.49% 142.14% NA 19.35% NA 18.28%
MAS Funds:
Fixed Income............ 11/14/84 7.36% 49.18% 143.25% 8.33% 9.30% 11.03%
High Yield.............. 2/28/89 15.29% 96.04% NA 14.41% NA 11.66%
Equity.................. 11/14/84 20.59% 85.31% 289.52% 13.13% 14.57% 16.38%
Value................... 11/5/84 27.63% 140.12% 333.56% 19.15% 15.80% 17.57%
Mid Cap Growth.......... 3/30/90 18.79% 86.31% NA 13.25% NA 19.11%
Mid Cap Value........... 12/30/94 40.77% NA NA NA NA 36.62%
International Fixed
Income................. 4/29/94 6.20% NA NA NA NA 9.87%
Balanced................ 12/31/92 15.37% NA NA NA NA 12.30%
Multi Asset............. 7/29/94 15.93% NA NA NA NA 15.71%
</TABLE>
- -------
*Cumulative (unannualized) total return since inception.

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

The Fund intends each of its Portfolios to qualify as a separate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and to qualify as a
"regulated investment company" under Subchapter M of the Code. As a regulated
investment company under the Code, net income and net realized gains of each
Portfolio will be distributed to shareholders at least once a year (except
distributions from the Money Market Portfolio which will be made monthly).

As stated on the cover of this prospectus, shares of the Portfolios will be
purchased by life insurance companies for their separate accounts under
variable annuity contracts and variable life insurance policies and by other
entities under qualified pension and retirement plans. Under the provisions of
the Code currently in effect, net income and realized capital gains are not
currently taxable when left to accumulate within a variable annuity contract or
variable life insurance policy or under a qualified pension or retirement plan.

For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of variable annuity contracts or variable life insurance
policies, refer to the life insurance company's variable annuity contract or
variable life insurance policy prospectus.

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each of the Core Equity, Growth, Value, Mid Growth, Mid Cap
Value, U.S. Real Estate, Emerging Markets Debt, Global Equity, International
Magnum, Emerging Markets Equity and Asian Equity Portfolio's NAV is determined
as of the close of business of the NYSE (normally 4:00 p.m. Eastern time) on
each day that the NYSE is open for business. The NYSE is currently scheduled to
be closed on New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when any of these holidays falls on a
Saturday or Sunday, respectively.

Each of the Fixed Income, High Yield and International Fixed Income Portfolio's
NAV is determined as of one hour after the close of the bond markets (normally
4:00 p.m. Eastern time) on each day that the Portfolios are open for business.

40
<PAGE>

Each of the Balanced and Multi-Asset-Class Portfolio's NAV is determined as of
the later of the close of the NYSE or one hour after the close of the bond
markets on each day the Portfolios are open for business.

Each Portfolio's NAV is the value of a single share. The NAV is computed by
adding the value of the Portfolio's investments, cash and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.

Except for the Money Market Portfolio, each Portfolio's assets are valued
primarily on the basis of market quotations. The Money Market Portfolio values
its assets by the amortized cost method, as described in the SAI, which
approximates market value. Foreign securities are valued on the basis of
quotations from the primary market in which they are traded, and are translated
from the local currency into U.S. dollars using current exchange rates. If
quotations are not readily available or if the values have been materially
affected by events occurring after the closing of a foreign market, assets are
valued by a method that the Fund's Board of Directors believes accurately
reflects fair value.

Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.

Each Portfolio reserves the right to suspend the offering of shares for a
period of time. Each Portfolio also reserves the right to reject any specific
order. Purchase orders may be refused if, in the Adviser's opinion, they would
disrupt management of a Portfolio.

INVESTMENTS AND REDEMPTIONS. Investments and redemptions may be made only by
separate accounts established and maintained by insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies and by tax qualified investors, such as qualified pension and
retirement plans. Please refer to the prospectus of your insurance company's
separate account or the qualified plan documents for information on how to
invest in and redeem shares of each Portfolio.

Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of one or more
Portfolios the morning of the next business day. These orders are normally
executed at the NAV that was computed at the close of the previous business day
in order to provide a match between the variable contract and policy owners'
orders to the insurance companies and the insurance companies' orders to a
Portfolio. In some cases, an insurance company's orders for Portfolio shares
may be executed at the NAV next computed after the order is actually
transmitted to a Portfolio.

Redemption proceeds will normally be wired to the insurance company on the next
business day after receipt of the redemption instructions by a Portfolio but in
no event later than seven days following receipt of instructions. Each
Portfolio may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.

41
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY MILLER
ASSET MANAGEMENT ANDERSON &
INC. SHERRERD, LLP

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THIS PROSPECTUS
DESCRIBES FIVE PORTFOLIOS MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM"). THE FUND ALSO OFFERS TWELVE OTHER PORTFOLIOS MANAGED BY MSAM OR
MILLER ANDERSON & SHERRERD, LLP. THE FUND MAKES AVAILABLE IN A SINGLE PRODUCT
THE COMBINED STRENGTH OF THESE LEADING INVESTMENT MANAGEMENT FIRMS.

A STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 1, 1996, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR A FREE
COPY, CONTACT THE FUND OR YOUR INSURANCE COMPANY.

<TABLE>
<CAPTION>
THE PORTFOLIOS:
<S> <C>
U.S. Real Estate Emerging Markets Equity
Global Equity Asian Equity
International Magnum
</TABLE>

AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES.

THE EMERGING MARKETS EQUITY PORTFOLIO MAY INVEST IN EQUITY SECURITIES OF
RUSSIAN COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY INVOLVES
CERTAIN RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN
OTHER SECURITIES MARKETS. SEE "SECURITIES AND INVESTMENT TECHNIQUES--RUSSIAN
SECURITIES."

Prospectus dated January 31, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC.
P.O. Box 2798, Boston, MA 02208-2798
<PAGE>

THE FUND

The Fund is an open-end management investment company, or mutual fund. Each of
the five separate investment portfolios (each, a "Portfolio") described in this
Prospectus has a distinct investment objective. The following pages describe
the types of securities and investment techniques each Portfolio uses to seek
its objective, as well as the risks inherent in those types of securities and
investment techniques.

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the
Portfolios.

<TABLE>
<S> <C>
U.S. Real Estate Emerging Markets
Global Equity Equity
International Magnum Asian Equity
</TABLE>

MSAM conducts a world wide investment advisory business. As of November 30,
1996, MSAM and its investment advisory affiliates (exclusive of Miller Anderson
& Sherrerd, LLP ("MAS") and Van Kampen American Capital, Inc. ("Van Kampen"))
managed assets of approximately $70 billion. MAS and Van Kampen became
affiliates of MSAM in January, 1996 and October, 1996, respectively. Also as of
November 30, 1996, MSAM and all of its affiliated asset management companies
managed assets totaling approximately $170 billion.

OFFERING OF SHARES

PORTFOLIO SUMMARIES 3

For each Portfolio, the investment objective and a summary of strategy,
potential investors, and investment characteristics and risks.

THE PORTFOLIOS' INVESTMENTS 4

A more detailed review of how each Portfolio invests and investment
characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 8

More information about the types of investment strategies that may be used
by some or all of the Portfolios and information about investment risks and
limitations.

FUNDAMENTAL INVESTMENT LIMITS 21

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 22

General information about the organization and operations of the Fund,
including details about MSAM and the individual portfolio managers, as well as
fees, expenses and performance calculations.

ACCOUNT POLICIES 27

Information on net asset value calculation, income and gain distributions,
taxes and share purchases and redemptions.
</TABLE>

2
<PAGE>

PORTFOLIO SUMMARIES

Certain investment terms used below have initial capital letters ("Common
Stocks," for example). These terms are further described under "Securities and
Investment Techniques" below.

U.S. REAL ESTATE PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, the Portfolio's investments may be subject to the risks
associated with the direct ownership of real estate and direct investments of
REITs.

GLOBAL EQUITY PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by Foreign Currency
values, the political and regulatory environment, greater volatility of
securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.

INTERNATIONAL MAGNUM PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by Foreign Currency
values, the political and regulatory environment, greater volatility of
securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

ASIAN EQUITY PORTFOLIO

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets of Asian countries other than Japan.

3
<PAGE>

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

Each Portfolio spreads investment risk by limiting its holdings in any one
company or industry. Nevertheless, each Portfolio will experience price
volatility the extent of which will be affected by the types of securities and
techniques the particular Portfolio uses. In the short term, stock prices can
fluctuate dramatically in response to these factors. Over time, however, stocks
have shown greater growth potential than other types of securities. The prices
of bonds also fluctuate and generally move in the opposite direction from
interest rates.

Investments in foreign securities may involve risks in addition to those of
U.S. investments. The performance of the Portfolios investing in foreign
securities will be affected by Foreign Currency values, the political and
regulatory environment, and overall economic factors in the countries in which
investments are made.

Because the U.S. Real Estate, International Magnum and Emerging Markets Equity
Portfolios are non-diversified Portfolios and are permitted greater flexibility
to invest their assets in the obligations of a single issuer, they are exposed
to increased risk of loss if such an investment underperforms expectations. See
"Non-Diversified Status" in this Prospectus and "Investment Limitations" in the
Statement of Additional Information ("SAI").

Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. The Adviser may use various investment techniques
to hedge risks, including the use of Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.

U.S. REAL ESTATE PORTFOLIO

The Portfolio may also invest in Fixed Income Securities issued or guaranteed
by real estate companies or secured by real estate assets and rated, at time of
purchase, in one of the four highest rating categories by a nationally
recognized statistical rating organization (each an "NRSRO") or determined by
the Adviser to be of comparable quality at the time of purchase, high-quality
Money Market Instruments, such as notes, certificates of deposit or bankers'
acceptances issued by domestic or foreign issuers, or high-grade debt
securities, consisting of corporate debt securities and U.S. Governments and
Agencies. Securities rated in the lowest category of Investment Grade
Securities have speculative characteristics. Investment Grade Securities are
securities that are rated in one of the four highest rating categories by an
NRSRO. The Portfolio may also invest in certain securities or obligations,
including Non-Publicly Traded Securities, Private Placements, Restricted
Securities, Repurchase Agreements, When-Issued and Delayed Delivery Securities,
Temporary Investments and Derivatives, including but not limited to Options and
Futures and may lend its portfolio securities. For additional information about
the Portfolio's investments, see "Securities and Investment Techniques" and
"Non-Diversified Status" below.

4
<PAGE>

The Adviser's approach is to invest in Equity Securities of companies that it
believes will provide a dividend yield that exceeds the composite dividend
yield of securities comprising the Standard & Poor's Ratings Group ("S&P") 500
Index. A substantial portion of the Portfolio's total assets will be invested
in Equity Securities of REITs. REITs pool investors' funds for investment
primarily in income producing real estate or real estate related loans or
interests, with certain tax advantages if regulatory requirements are met.
Generally, REITs can be classified as Equity REITs, Mortgage REITs or Hybrid
REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial
properties, hotels, health-care facilities, manufactured housing and mixed-
property types. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. The
Portfolio will invest primarily in Equity REITs. A shareholder in the Portfolio
investing in REITs indirectly through the Portfolio will bear not only his or
her proportionate share of the expenses of the Portfolio, but also indirectly,
the management expenses of underlying REITs.

GLOBAL EQUITY PORTFOLIO

INTERNATIONAL MAGNUM PORTFOLIO

The Portfolio may also invest in Private Placements or initial public offerings
in the form of oversubscriptions, certain short-term (less than twelve months
to maturity) and medium-term (not greater than five years to maturity) debt
securities, Foreign Currency, Investment Company Securities, Temporary
Investments, Money Market Instruments, Non-Publicly Traded Securities, Private
Placements, Restricted Securities, Repurchase Agreements, Cash or Cash

5
<PAGE>

Equivalents, When-Issued or Delayed Delivery Securities, and Derivatives,
including but not limited to Forwards, Futures (including stock index futures)
and Options, and may lend its Portfolio securities. The Portfolio may also
invest up to 10% of its total assets in (i) Investment Company Securities with
investment objectives similar to that of the Portfolio and (ii) for temporary
purposes, money market funds and pooled investment vehicles. In addition, for
temporary defensive purposes during periods in which the Adviser believes
changes in economic, financial or political conditions make it advisable, the
Portfolio may invest up to 100% of its total assets in such short-term and
medium-term Fixed Income Securities or hold cash. The Portfolio will not invest
in Fixed Income Securities that are not rated at least investment grade by
either Moody's Investors Service, Inc. ("Moody's") or S&P. Although the
Portfolio will not invest for short-term trading purposes, investment
securities may be sold from time to time without regard to the length of time
they have been held. For additional information about investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.

EMERGING MARKETS EQUITY PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, sponsored or unsponsored ADRs and other Equity
Securities of emerging market country issuers. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.

The Portfolio intends to invest primarily in some or all of the following
emerging market countries:

Argentina Botswana Brazil Chile
China Colombia Greece Hong Kong
Hungary India Indonesia Jamaica
Jordan Kenya Malaysia Mexico
Nigeria Pakistan Peru Philippines
Poland Portugal Russia South Africa
South Korea Sri Lanka Taiwan Thailand
Turkey Venezuela Zimbabwe

6
<PAGE>

ASIAN EQUITY PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, Depositary Receipts and other Equity Securities that
are traded on recognized stock exchanges of the countries in Asia described
below and such Equity Securities of companies organized under the laws of any
such Asian country whose business is conducted principally in Asia. The
production of any current income is incidental to this objective. The Portfolio
does not intend to invest in Asian Equity Securities that are principally
traded in markets in Japan or in companies organized under the laws of Japan.
The Asian countries to be represented in the Portfolio, which include the
following countries, have the more established markets in the region: Hong
Kong, Singapore, Malaysia, Thailand, the Philippines and Indonesia. The
Portfolio may also invest in Common Stocks traded in markets in Taiwan, South
Korea, India, Pakistan, Sri Lanka and other developing markets that are open to
Foreign Investment. Under normal circumstances, the Portfolio will invest at
least 65% of the total assets of the Portfolio in such Asian Equity Securities.

may invest in small- and medium-size companies that, in the Adviser's view,
have potential for growth.

SECURITIES AND INVESTMENT TECHNIQUES
- ------------------------------------

The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and strategies the Adviser may
employ in pursuit of a Portfolio's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is

7
<PAGE>

included as well. A complete listing of each Portfolio's policies and
limitations and more detailed information about each Portfolio's investments is
contained in the SAI. Policies and limitations are considered at the time such
investments are purchased; the sale of instruments is not required in the event
of a subsequent change in circumstances, for example, a rating's downgrade.

The Adviser may not buy all of these instruments or use all of these techniques
to the full extent permitted unless it believes that doing so will help a
Portfolio achieve its investment objective. Current holdings and recent
investment strategies are described in the Portfolio's financial reports, which
will be sent to the Portfolios' shareholders twice a year. For a free SAI or
financial report, contact the Fund or your insurance company.

STRATEGIES
- ----------

U.S. companies. There is generally less government supervision and regulation
of stock exchanges, brokers and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.

8
<PAGE>

INSTRUMENTS AND INVESTMENTS

BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury. Brady Bonds
have been issued only in relatively recent years, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market. For further
information on these securities, see the SAI. A Portfolio will invest in Brady
Bonds only if they are consistent with quality specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

(1)Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).

international securities that are discussed in "Foreign Investment" below.

9
<PAGE>

(2)Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).

(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

(4)U.S. Governments and Agencies.

(5)Repurchase Agreements collateralized by securities listed above.

CONVERTIBLE SECURITIES. Convertible Securities are securities, such as
convertible Corporate Bonds, convertible Preferred Stocks, Warrants or other
securities which may be exchanged under certain circumstances for a fixed
number of shares of Common Stock.

10
<PAGE>

Stripped Mortgage-Backed Securities), Convertible Securities, Warrants,
Forwards, Futures, Options, Structured Notes and Swaps.

The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.

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<PAGE>

Economic Cooperation and Development ("OECD"), including the United States; (b)
bank deposits and bank obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks organized under the laws of any
member state of the OECD, including the United States, denominated in any
currency; and (c) finance company and corporate commercial paper and other
short-term corporate debt obligations of corporations organized under the laws
of any member state of the OECD, including the United States, meeting the
Portfolio's credit quality standards, provided that no more than 20% of the
Portfolio's assets are invested in any one of such issuers. The short-term and
medium-term securities in which the Portfolio may invest will be rated
investment grade by an NRSRO (e.g., rated A or higher by Moody's or S&P), or if
unrated, will be determined to be of comparable quality by the Adviser.

Foreign Currency Futures Contracts ("Forex Futures") are standardized contracts
for the future delivery of a specified amount of a Foreign Currency at a future
date at a price set at the time of the contract. Forex Futures traded in the
United States are traded on regulated futures exchanges. A Portfolio will incur
brokerage fees when it purchases or sells Forex Futures and it will be required
to maintain margin deposits. Parties to a Forex Future must make initial margin
deposits to secure performance of the contract, which generally range from 2%
to 5% of the contract price. There also are requirements to make "variation"
margin deposits as the value of the Futures contract fluctuates.

12
<PAGE>

Futures position or Forex Options contract will be minimized by the Portfolio
entering into such transactions only when there appears to be a liquid
secondary market. For more detailed information about Futures transactions, see
"Securities and Investment Techniques" in the SAI.

Prior governmental approval for Foreign Investments may be required under
certain circumstances in some emerging countries, and the extent of Foreign
Investment in certain Fixed Income Securities and domestic companies may be
subject to limitation in other emerging countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging countries to prevent, among other concerns, violation of Foreign
Investment limitations.

A Portfolio may use currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities (transaction hedge) or to lock in the dollar value of portfolio
positions (position hedge). In addition a Portfolio may cross-hedge currencies
by entering into a transaction to purchase or sell one or more currencies that
are expected to decline in value relative to other currencies to which a
Portfolio has or
expects to have portfolio exposure. A Portfolio may also engage in proxy
hedging which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where the two currencies are
economically linked. Forwards will be used only as a protective measure against
the effects of fluctuating rates of currency exchange and exchange control
regulations. While such contracts may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

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<PAGE>

date of maturity, a Portfolio may be exposed to some risk of loss from
fluctuations in that currency. Although the Adviser will attempt to hold such
mismatching to a minimum, there can be no assurance that the Adviser will be
able to do so. When a Portfolio enters into a forward contract for purposes of
creating a synthetic security, it will generally be required to hold liquid
assets in a segregated account with a daily value at least equal to its
obligation under the forward contract.

Except in circumstances where segregated accounts are not required by the
Investment Company Act of 1940 (the "1940 Act") and the rules adopted
thereunder, a Portfolio's entry into Forwards, as well as any use of cross or
proxy hedging techniques, will generally require the Portfolio's custodian to
place liquid assets into a segregated account of the Portfolio in an amount
equal to the value of the Portfolio's total assets committed to the
consummation of forward contracts. If the value of the securities placed in the
segregated account declines, additional liquid assets will be placed in the
account on a daily basis so that the value of the account will be at least
equal to the amount of the Portfolio's commitments with respect to such
contracts. See "Investment Objectives and Policies--Forward Foreign Currency
Exchange Contracts" in the SAI.

FUTURES. The term "Futures" includes futures contracts and Options on futures
contracts. Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of a specific security, at a specified
future time and price. An Option on a futures contract gives the purchaser the
right (in return for the premium paid) to assume a position in a futures
contract at a specified exercise price at any time during the term of the
Option (a long position if the Option is a call and a short position if the
Option is a put). Upon exercise of the Option, the holder is entitled to
delivery of the accumulated balance in the writer's Futures margin account,
which represents the amount by which the market price of the futures contract
at the time of exercise exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the Option on the futures contract.

The Portfolios may enter into futures contracts to the extent that their
outstanding obligations under such contracts do not exceed 20% of their
respective total assets. A Portfolio engaging in "bona fide hedging" futures
transactions is not limited with respect to the percentage of its assets
dedicated to futures contracts, however, if a Portfolio engages in "non-bona
fide hedging" transactions, then such Portfolio is limited to initial margin
deposits equal to or less than 5% of total assets.

HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated Ba
through C by Moody's or BB through D by S&P, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by S&P are classified as non-Investment Grade Securities and are commonly
referred to as junk bonds or High Yield Securities. Such securities carry a
high degree of risk and are considered speculative by the major credit rating
agencies. The following are excerpts from the Moody's and S&P definitions for
speculative-grade debt obligations:

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<PAGE>

S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face major ongoing uncertainties . . .
which may lead to inadequate capacity to pay interest or principal. B-
rated bonds have a "greater vulnerability to default than BB-rated bonds
and the ability to pay interest or principal will likely be impaired by
adverse business conditions." CCC-rated bonds have a currently
identifiable "vulnerability to default" and, without favorable business
conditions, will be "unable to repay interest and principal." The rating
C is reserved for income bonds on which "no interest is being paid." Debt
rated D is "in default," and "payment of interest and/or repayment of
principal is in arrears."

The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates, but also to changes in
prepayment rates on the related underlying mortgage assets.

Certain Investment Funds are advised by the Adviser. The Portfolios may, to the
extent permitted under the 1940 Act and other applicable law, invest in these
Investment Funds. If a Portfolio does elect to make an investment in such an
Investment Fund, it will only purchase the securities of such Investment Fund
in the secondary market.

15
<PAGE>

unrated securities if the Adviser considers the risks involved in owning that
security to be equivalent to the risks involved in holding an Investment Grade
Security.

When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by a Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, a
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and a Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet a Portfolio's liquidity needs or in response to a specific economic
event such as a deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for Assignments and Participations also may make
it more difficult for a Portfolio to assign a value to these securities for
purposes of valuing a Portfolio's securities and calculating its NAV.

MONEY MARKET INSTRUMENTS. Each Portfolio may invest in Money Market
Instruments, although the Portfolios intend to stay invested in securities
satisfying their primary investment objective to the extent practical. Each
Portfolio may invest in Money Market Instruments pending other investment or
settlement for liquidity, or in adverse market conditions. The Money Market
Instruments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; obligations of the International Bank for Reconstruction and
Development; other debt securities; commercial paper, including bank
obligations; certificates of deposit, including Eurodollar certificates of
deposit; and Repurchase Agreements. For more detailed information about these
Money Market Instruments, see "Description of Certain Securities and Ratings"
in the SAI.

16
<PAGE>

mortgagor actually makes the payment. The guarantees made by issuers or poolers
are supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer or pooler. The pools are assembled by various governmental, Government-
related and private organizations. A Portfolio may invest in securities issued
or guaranteed by the GNMA, FHLMC, FNMA, private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. MBSs issued by non-agency issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If
there is no guarantee provided by the issuer, MBSs purchased by a Portfolio
will be those which at the time of purchase are rated investment grade by one
or more NRSRO, or, if unrated, are deemed by the Adviser to be of comparable
quality.

NON-DIVERSIFIED STATUS. The U.S. Real Estate, International Magnum and Emerging
Markets Equity Portfolios are non-diversified portfolios under the 1940 Act,
which means that the Portfolios are not limited by the 1940 Act in the
proportion of their assets that may be invested in the obligations of a single
issuer. Thus, the Portfolios may invest a greater proportion of their assets in
the securities of a small number of issuers and, as a result, will be subject
to greater risk with respect to their portfolio securities. However, the
Portfolios intend to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
regulated investment companies. See "Investment Limitations" and "Taxes" in the
SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The U.S. Real Estate, International Magnum and Emerging Markets
Equity Portfolios may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities.
Such unlisted Equity Securities may involve a higher degree of business and
financial risk that can result in substantial losses. As a result of the
absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by the Portfolio or less than what may
be considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not

17
<PAGE>

be subject to the disclosure and other investor protection requirements which
might be applicable if their securities were publicly traded. If such
securities are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Portfolio may be required to bear
the expenses of registration.

As a general matter, a Portfolio may not invest more than 15% of its net assets
in illiquid securities, including securities for which there is no readily
available secondary market and securities that are restricted from sale to the
public without registration ("Restricted Securities") under the Securities Act
of 1933, as amended (the "1933 Act") and are deemed to be illiquid. Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("Rule 144A Securities") may be deemed to be
liquid under guidelines adopted by the Fund's Board of Directors. The U.S. Real
Estate Portfolio may invest up to 15% of its total assets and the International
Magnum and Emerging Markets Equity Portfolios may each invest up to 25% of
their total assets in Rule 144A Securities that are deemed to be liquid.

A Portfolio may write (i.e., sell) covered call Options on portfolio securities
which give the purchaser the right to buy the underlying security covered by
the Option from the Portfolio at the stated exercise price. A "covered" call
Option means that so long as a Portfolio is obligated as the writer of the
Option, it will own (i) the underlying securities subject to the Option, or
(ii) securities convertible or exchangeable without the payment of any
consideration into the securities subject to the Option. By selling a covered
call Option, a Portfolio would become obligated during the term of the Option
to deliver the securities underlying the Option should the Option holder choose
to exercise the Option before the Option's termination date. In return for the
call Option it has written, a Portfolio will receive from the purchaser (or
Option holder) a premium which is the price of the Option, less a commission
charged by a broker. A Portfolio will keep the premium regardless of whether
the Option is exercised. When a Portfolio writes covered call
Options, it augments its income by the premiums received and is thereby hedged
to the extent of that amount against a decline in the price of the underlying
securities. The premiums received will offset a portion of the potential loss
incurred by a Portfolio if the securities underlying the Options are ultimately
sold by the Portfolio at a loss. However, during the Option period, a Portfolio
has, in return for the premium on the Option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the
price of the underlying security decline.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

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<PAGE>

In these transactions, the securities received by a Portfolio have a market
value at least equal to the purchase price (including accrued interest) of the
Repurchase Agreement as collateral, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's Custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit a Portfolio to keep all its assets invested while
retaining overnight flexibility in pursuit of investments of a longer- term
nature. If the seller defaults and the collateral value declines, the Portfolio
might incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.

Pursuant to an order expected to be issued by the SEC, the Portfolios,
including the twelve portfolios of the Fund not described in this Prospectus,
may pool their daily uninvested cash balances in order to invest in Repurchase
Agreements on a joint basis. By entering into Repurchase Agreements on a joint
basis, it is expected that the Portfolios will incur lower transaction costs
and potentially obtain higher rates of interest on such Repurchase Agreements.
Each Portfolio's participation in the income from jointly purchased Repurchase
Agreements will be based on that Portfolio's percentage share in the total
Repurchase Agreement. The Portfolios' ability to invest in Repurchase
Agreements on a joint basis will be contingent upon issuance of the order by
the SEC described above.

REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a
segregated portfolio of liquid assets in an amount at least equal to its
purchase obligations under these agreements. If
interest rates rise during a Reverse Repurchase Agreement, it may adversely
affect the Portfolio's ability to maintain a stable NAV.

19
<PAGE>

requirement will likely have the effect of precluding investments in certain
Russian companies that a Portfolio would otherwise make.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to a Portfolio's limitations on investment in illiquid
securities.

SWAPS. Swap contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity
indices (as well as amounts derived from arithmetic operations on these
indices). For example, a Portfolio may agree to swap the return generated by a
fixed income index for the return generated by a second fixed income index. The
currency Swaps in which a Portfolio may enter will generally involve an
agreement to pay interest streams in one currency based on a specified index in
exchange for receiving interest streams denominated in another currency. Such
Swaps may involve initial and final exchanges that correspond to the agreed
upon notional amount.

20
<PAGE>

interest rates, and currency exchange rates, the investment performance of a
Portfolio would be less favorable than it would have been if this investment
technique was not used.

U.S. GOVERNMENTS. U.S. Governments are Fixed Income Securities that are backed
by the full faith and credit of the U.S. Government as to the payment of both
principal and interest. U.S. Governments may include securities issued by the
U.S. Treasury and securities issued by federal agencies and U.S. Government
sponsored instrumentalities. For further information on these securities, see
"Description of U.S. Government Securities" in the SAI.

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. The Portfolio will maintain with
the Custodian a separate account with a segregated portfolio of liquid
securities or cash in an amount at least equal to these commitments. The
Portfolios will not enter into When-Issued or Delayed Delivery Securities
commitments exceeding, in the aggregate, 15% of the Portfolio's total assets
other than the obligations created by these commitments.

FUNDAMENTAL INVESTMENT LIMITS
- -----------------------------

Each Portfolio (excluding the U.S. Real Estate, International Magnum and
Emerging Markets Equity Portfolios) is a diversified investment company and is
therefore subject to the following fundamental limitations: as to 75% of its
total assets, a Portfolio may not (a) invest more than 5% of its total assets
in the securities of any one issuer, except obligations of the U.S. Government,
its agencies and instrumentalities, or (b) own more than 10% of the outstanding
voting securities of any one issuer.

INTERNAL REVENUE SERVICE ("IRS") LIMITATIONS. In addition to the above, each
Portfolio also follows certain limitations imposed by the IRS on separate
accounts of

21
<PAGE>

insurance companies relating to the tax-deferred status of variable annuity
contracts and variable life insurance policies. More specific information may
be contained in the insurance company's separate account prospectus.

MANAGEMENT OF THE FUND
- ----------------------

INVESTMENT MANAGEMENT

INVESTMENT ADVISER. The Adviser assigned to a Portfolio provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM serves as the Adviser for the Portfolios. MSAM, with
principal offices at 1221 Avenue of the Americas, New York, New York 10020,
conducts a worldwide investment management business, providing a broad range of
portfolio management services to customers in the United States and abroad.
MSAM is a wholly-owned subsidiary of Morgan Stanley Group Inc. ("MSGI"), which
is a publicly owned financial services corporation listed on the New York,
London and Pacific stock exchanges. MSAM, a registered Investment Adviser under
the Investment Adviser Act of 1940, as amended, serves as investment adviser to
numerous open-end and closed-end investment companies. As of November 30, 1996,
MSAM and its investment advisory affiliates (exclusive of MAS and Van Kampen)
managed assets of approximately $70 billion. Also as of November 30, 1996, MSAM
and all of its affiliated asset management companies managed assets totaling
$170 billion. See "Management of the Fund" in the SAI.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.

U.S. REAL ESTATE PORTFOLIO -- Theodore R. Bigman and Russell Platt. Mr. Bigman,
a Principal of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), joined
MSAM in 1995. Together with Russell Platt, he is responsible for MSAM's real
estate securities research. Prior to joining MSAM, he was a Director at CS
First Boston, where he worked for eight years in the Real Estate Group. Mr.
Bigman graduated from Brandeis University with a B.A. in Economics and received
an M.B.A. from Harvard University. Russell Platt joined MSAM in 1994.
Mr. Platt, a Managing Director of Morgan Stanley, previously served as a
Director of the General Partner of The Morgan Stanley Real Estate Fund I, where
he was involved in capital raising, acquisitions, oversight of investments and
investor relations. From 1991 to 1993, Mr. Platt was head of Morgan Stanley
Realty's Transaction Development Group. As such, he was actively involved in
Morgan Stanley's worldwide real estate business. Mr. Platt graduated from
Williams College with a B.A. in Economics and received an M.B.A. from Harvard
Business School. Mr. Bigman and Mr. Platt have had primary responsibility for
managing the Portfolio's assets since inception.

GLOBAL EQUITY PORTFOLIO -- Frances Campion. Frances Campion, a Principal of
Morgan Stanley, joined MSAM in January 1990 as a Global Equity Fund Manager.
Her

22
<PAGE>

responsibilities include day-to-day management of the Global
Equity product. She is a graduate of University of College, Dublin. Ms. Campion
has had primary responsibility for managing the Portfolio's assets since
inception.

EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar and Marianne L. Hay. Madhav
Dhar is a Managing Director of MSAM and Morgan Stanley. He joined MSAM in 1984
to focus on global asset allocation and investment strategy and now is a co-
head of MSAM's emerging markets group. He holds a B.S. (honors) from St.
Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Marianne L. Hay, a Managing Director of Morgan Stanley, is a co-
head of the Adviser's emerging markets group. She joined the Adviser in June,
1993 to work with the Adviser's senior management covering all emerging markets
assets allocation, product development and client services. Ms. Hay has 17
years of investment experience. Prior to joining the Adviser, she was a
director of Martin Currie Investment Management, Ltd. where her
responsibilities included geographic asset allocation and portfolio management
for global and emerging markets funds, as well as being director in charge of
the company's North American clients. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland. Mr.
Dhar and Ms. Hay have shared primary responsibility for managing the
Portfolio's assets since its inception.

ASIAN EQUITY PORTFOLIO -- Ean Wah Chin and Seah Kiat Seng. Ean Wah Chin is a
Managing Director of Morgan Stanley, and is responsible for MSAM's regional
Asia ex-Japan operations based in Singapore. Prior to joining Morgan Stanley in
1986, Ms. Chin spent eight years with the Monetary Authority of Singapore and
the Government of Singapore Investment Corporation, where she was a portfolio
manager of one of the largest portfolios in Asia. Ms. Chin was an ASEAN scholar
educated at the University of Singapore. Seah Kiat Seng joined the Adviser's
Singapore office in 1990 as a portfolio manager/analyst specializing in the
Southeast Asian markets. He is currently a Vice President, responsible for
investments in Thailand. He has had primary management responsibility for the
Investment Fund since its inception. Kiat Seng is a Chartered Financial Analyst
and a qualified real estate valuer who has worked for the Singapore Ministry of
Finance. He was a Colombo Plan Scholar educated in New Zealand. Ms. Chin and
Mr. Seng have shared primary responsibility for managing the Portfolio's assets
since inception.

OTHER SERVICES

ADMINISTRATION. MSAM also provides the Portfolios of the Fund with
administrative services pursuant to an Administration Agreement. The services
provided under the Administration Agreement are subject to the supervision of
the officers and the Board of Directors of the Fund, and include day-to-day
administration of matters related to the corporate existence of the Fund,
maintenance of its records, preparation of reports, supervision of the Fund's
arrangements with its Custodian, and assistance in the preparation of the
Fund's registration statements under federal and state laws. The Administration
Agreement also provides that the Administrator through its agents will provide
the Fund with dividend disbursing and transfer agent services. For its services
under the Administration Agreement, the Fund pays MSAM a monthly fee which on
an annual basis equals 0.25% of the average daily net assets of each Portfolio.

MSAM has entered into a Sub-Administration Agreement with Chase Global Funds
Services Company ("Chase Global"), a subsidiary of The Chase Manhattan Bank
("Chase"), pursuant to which Chase Global has agreed to provide certain
administrative services to the Fund. MSAM supervises and monitors such
administrative services provided by Chase Global. The services provided under
the Administration Agreement and the Sub-Administration Agreement are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the Sub-Administration Agreement
as being in the best interests of the Fund. Chase Global's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information
regarding the Administration Agreement or the Sub-Administration Agreement, see
"Management of the Fund" in the SAI.

Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.

23
<PAGE>

CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolios. Chase is not an affiliate of the Adviser or the Distributor.
Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of MSAM
and the Distributor, acts as the Fund's Custodian for foreign assets held
outside the United States (including, through sub-custodians, securities held
in Russia) and employs sub-custodians approved by the Board of Directors of the
Fund in accordance with regulations of the SEC for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the Custodians, see "General
Information--Custody Arrangements" in the SAI.

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and will audit the annual financial statements of each Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM pays fees to affiliates who provide
assistance with these services. Each Portfolio also pays other expenses, which
are explained below. The Adviser may, from time to time, reduce its fees or
reimburse the Portfolios for expenses above a specified limit. These fee
reductions or expense reimbursements, which may be terminated at any time
without notice, can decrease a Portfolio's expenses and boost its performance.

MANAGEMENT FEE

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
===============================================================
U.S. Emerging
Real Global International Markets Asian
Assets Estate Equity Magnum Equity Equity
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First $500
million 0.80% 0.80% 0.80% 1.25% 0.80%
- ---------------------------------------------------------------
From $500
million to
$1 billion 0.75% 0.75% 0.75% 1.20% 0.75%
- ---------------------------------------------------------------
More than
$1 billion 0.70% 0.70% 0.70% 1.15% 0.70%
===============================================================
</TABLE>

However, the Adviser, with respect to certain of the Portfolios, has
voluntarily waived receipt of its management fees and agreed to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed the respective percentage of average daily
net assets set forth in the table below.

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Portfolio Fee Waivers
- --------- ------------------------
<S> <C>
U.S. Real Estate....................................... 1.10%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Asian Equity........................................... 1.20%
Emerging Markets Equity................................ 1.75%
</TABLE>

OTHER EXPENSES

In addition to investment advisory and certain administrative expenses charged
by the Administrator, each Portfolio pays all expenses not assumed by MSAM.
Such expenses include or could include investment-related expenses, such as
brokers' commissions, transfer taxes and fees related to the purchase, sale, or
loan of securities; fees and expenses for Directors not affiliated with MSAM;
fees and expenses of its independent accountants and legal counsel; costs of
Directors and shareholder meetings; SEC fees; expenses of preparing and filing
registration statements; the cost of providing proxy statements, prospectuses
and statements of additional information to existing variable annuity contract
and variable life insurance policy owners; expenses of preparing and printing
the annual and semiannual shareholder reports to variable annuity contract and
variable life insurance policy owners; bank transaction charges and certain
custodians' fees and expenses; federal, state or local income or other taxes;
costs of maintaining the Portfolio's corporate existence; membership fees for
the Investment Company Institute and similar organizations; fidelity bond and
Directors' liability insurance premiums; and any extraordinary expenses such as
indemnification payments or damages awarded in litigation or settlements made.
All these expenses that are incurred by the Portfolio will be passed on to the
shareholders through a daily charge made to the assets held in the Portfolios,
which will be reflected in share prices.

PORTFOLIO TURNOVER

24
<PAGE>

Although none of the Portfolios will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held and the Portfolios will not consider
portfolio turnover rate a limiting factor in making investment decisions
consistent with their respective objectives and policies. The tables that will
be set forth in "Financial Highlights" will present the Portfolios' historical
turnover rates.

PERFORMANCE OF PORTFOLIOS
- -------------------------

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

25
<PAGE>

PERFORMANCE OF INVESTMENT ADVISER

The Adviser manages portfolios of Morgan Stanley Institutional Fund, Inc.
("MSIF"), which served as the models for the Portfolios of the Fund. The
portfolios of MSIF have substantially the same investment objectives, policies
and strategies as the Portfolios of the Fund. In addition, the Adviser intends
the Portfolios of the Fund and the corresponding portfolios of MSIF to be
managed by the same personnel and to continue to have closely similar
investment strategies, techniques and characteristics. The following table sets
forth the name of each Portfolio of the Fund and the name of the corresponding
portfolio of MSIF from which the Portfolio is cloned.

<TABLE>
<CAPTION>
Corresponding
MSIF
Fund Portfolio portfolio
-------------- -------------
<S> <C>
U.S. Real Estate U.S. Real Estate
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
Asian Equity Asian Equity
</TABLE>

Past investment performance of the portfolios of MSIF, as shown in the table
below, may be relevant to your consideration of the Portfolios. The investment
performance of the portfolios of MSIF is not necessarily indicative of future
performance of the Portfolios of the Fund. Also, the operating expenses of each
of the Portfolios of the Fund will be different from, and may be higher than,
the operating expenses of the corresponding portfolio of MSIF. The investment
performance of the portfolios of MSIF is provided merely to indicate the
experience of the Adviser in managing similar portfolios.

<TABLE>
<CAPTION>
Average
One Year Five Years Annual Average
Cumulative Cumulative Total Return Annual
Total Return Total Return Five Years Total Return
Inception Ended Ended Ended Since
MSIF Fund Name Date 12/31/96 12/31/96 12/31/96 Inception
- -------------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S. Real Estate........ 2/24/95 39.56% NA NA 32.74%
Global Equity........... 7/15/92 22.83% NA NA 19.21%
International Magnum.... 3/15/96 8.25%* NA NA NA
Emerging Markets
Equity................. 9/25/92 12.49% NA NA 13.00%
Asian Equity............ 7/1/91 3.49% 142.14% 19.35% 18.28%
</TABLE>
- -------
* Cumulative (unannualized) total return since inception.

26
<PAGE>

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each of the U.S. Real Estate, Global Equity, International
Magnum, Emerging Markets Equity and Asian Equity Portfolio's NAV is determined
as of the close of business of the NYSE (normally 4:00 p.m. Eastern time) on
each day that the NYSE is open for business. The NYSE is currently scheduled to
be closed on New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when any of these holidays falls on a
Saturday or Sunday, respectively.

Each Portfolio's assets are valued primarily on the basis of market quotations.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded, and are translated from the local currency
into U.S. dollars using current exchange rates. If quotations are not readily
available or if the values have been materially affected by events occurring
after the closing of a foreign market, assets are valued by a method that the
Fund's Board of Directors believes accurately reflects fair value.

Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.