MORGAN STANLEY UNIVERSAL FUNDS INC, 497, 1999-11-30

MORGAN STANLEY UNIVERSAL FUNDS INC
497, 1999-11-30

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<PAGE>

PROSPECTUS December 1, 1999

[MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS LOGO APPEARS HERE]
A Portfolio of MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.

TECHNOLOGY PORTFOLIO
Long-term capital appreciation by investing primarily in equity securities of
companies that the investment adviser expects to benefit from their
involvement in technology and technology-related industries.

Investment Adviser

Morgan Stanley Dean Witter Investment Management Inc.

Distributor

Morgan Stanley & Co. Incorporated

Morgan Stanley Dean Witter Universal Funds, Inc. (the "Fund") is a mutual
fund that provides investment vehicles for variable annuity contracts and
variable life insurance policies and for certain tax-qualified investors. The
Technology Portfolio (the "Portfolio") is one portfolio of the Fund managed
by Morgan Stanley Dean Witter Investment Management Inc. ("MSDW Investment
Management" or the "Adviser").

The Securities and Exchange Commission (the "Commission") has not approved or
disapproved these securities or passed upon the adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>

TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY

Technology Portfolio 1

Additional Risk Factors and Information 2

INVESTMENT ADVISER 4

MANAGEMENT FEE 4

PORTFOLIO MANAGERS 5

SHAREHOLDER INFORMATION 6
</TABLE>
<PAGE>

INVESTMENT SUMMARY

TECHNOLOGY PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
equity securities of companies that the investment adviser expects to benefit
from their involvement in technology and technology-related industries.

Approach

The Adviser seeks to maximize long-term capital appreciation by identifying
significant long-term technology trends and by investing primarily in
companies the Adviser believes are positioned to benefit materially from these
trends.

Process

The Adviser extensively researches technology trends in order to identify
industry sectors and issuers with strong prospects and leading market share.
The Portfolio invests in a broad range of technology-related industries,
including: computers; software and peripheral products; electronics;
communications equipment and services; entertainment; multimedia; and
information services. The Portfolio seeks to overweight investment in the
best-positioned sectors, while underweighting the sectors exposed to the
greatest risk in comparison to potential return. The Adviser looks to invest
in issuers with strong management teams, reasonable valuation relative to
growth prospects and whose competitors face sustainable barriers to market
entry. The Portfolio may participate in the global technology market by
investing up to 35% of its total assets in the equity or fixed income
securities of foreign issuers, including those located in emerging markets.

Risk

Investing in the Portfolio may be appropriate for you if you are willing to
accept the risks and uncertainties of investing in equity securities of
companies in the technology sector in the hope of earning superior returns and
diversifying your investment portfolio. Because the Portfolio invests primarily
in technology-related issuers, there is an additional risk that economic events
may affect a substantial portion of the Portfolio's investments. Historically,
the price of securities in this sector have tended to be volatile. In general,
prices of equity securities are more volatile than those of fixed income
securities. The prices of equity securities will rise and fall in response to a
number of different factors. In particular, prices of equity securities will
respond to events which affect entire financial markets or industries (changes
in inflation or consumer demand, for example) and to events that affect a
particular issuer (news about the success or failure of a new product, for
example). As a result of this price volatility, there is a risk that you may
lose money by investing in the Portfolio. In addition, at times the Portfolio's
market sector, equity securities of technology-related issuers, may underperform
relative to other sectors.

The Portfolio may invest in the equity securities of both large and small
companies. While the Adviser believes that smaller companies may provide
greater growth potential than larger, more established firms, investing in the
securities of smaller companies also involves greater risk and price
volatility.

The risks of investing in the Portfolio may be intensified because the
Portfolio is non-diversified, which means that it may invest in securities of
a limited number of issuers. As a result, the performance of a particular
investment or a smaller group of investments may affect the Portfolio's
performance more than if the Portfolio were diversified. In addition, the
Portfolio may sell short. In a short sale transaction, the Portfolio sells a
borrowed security in anticipation of a decline in the market value of that
security, hoping to profit from the difference between the amount received
from the sale and the cost of replacing the borrowed security. If the Adviser
incorrectly predicts that the price of the borrowed security will decline, the
Portfolio may lose money because the amount necessary to replace the borrowed
security will be greater than the amount received from the sale.

There is no performance information for the Portfolio since it has not commenced
operations as of the date of this Prospectus.

1
<PAGE>

INVESTMENT SUMMARY

ADDITIONAL RISK FACTORS AND INFORMATION

This section discusses additional risk factors and information relating to the
Portfolio. The Portfolio's investment practices and limitations are described
in more detail in the Statement of Additional Information ("SAI") which is
legally part of this Prospectus. For details on how to obtain a copy of the
SAI and other reports and information, see the back cover of this Prospectus.

Price volatility

The value of your investment in the Portfolio is based on the market prices of
the securities the Portfolio holds. These prices change daily due to economic
and other events that affect markets generally, as well as those that affect
particular regions, countries, industries, and companies. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Portfolio owns and the markets in which the
securities trade. Over time, equity securities have generally shown superior
gains, although they have tended to be more volatile than fixed income
securities in the short term.

Foreign investing

Investing in foreign countries entails the risk that the news and events
unique to a country or region will affect those markets and their issuers.
These same events will not necessarily have an effect on the U.S. economy or
similar issuers located in the United States. In addition, the Portfolio's
investments in foreign countries generally will be denominated in foreign
currencies. As a result, changes in the value of a country's currency compared
to the U.S. dollar may affect the value of the Portfolio's investments. These
changes may occur separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country. These
risks may be intensified for investments in emerging markets countries. The
Adviser may invest in certain instruments, such as derivatives, and may use
certain techniques, such as hedging, to manage these risks. However, the
Adviser cannot guarantee that it will be practical to hedge these risks in
certain markets or under particular conditions or that it will succeed in
doing so. The Adviser may use derivatives for other purposes such as gaining
exposure to foreign markets.

Emerging market risks

Emerging market countries are foreign countries that major international
financial institutions, such as the World Bank, generally consider to be less
economically mature than developed nations, such as the United States or most
nations in Western Europe. Emerging market countries can include every nation
in the world except the United States, Canada, Japan, Australia, New Zealand,
and most nations located in Western Europe. Emerging market countries may be
more likely to experience political turmoil or rapid changes in economic
conditions than more developed countries, and the financial condition of
issuers in emerging market countries may be more precarious than in other
countries. These characteristics result in greater risk of price volatility in
emerging market countries, which may be heightened by currency fluctuations
relative to the U.S. dollar.

The Portfolio may use various instruments that derive their values from those
of specified securities, indices, currencies or other points of reference for
both hedging and non-hedging purposes. Derivatives include futures, options,
forward contracts, swaps, and structured notes. These derivatives, including
those used to manage risk, are themselves subject to risks of the different
markets in which they trade and, therefore, may not serve their intended
purposes.

The primary risks of derivatives are: (i) changes in the market value of
securities held by the Portfolio, and of derivatives relating to those
securities, may not be proportionate, (ii) there may not be a liquid market
for the Portfolio to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. In addition, some derivatives are subject to counterparty risk.
To minimize this risk, the Portfolio may enter into derivatives transactions
with counterparties that meet certain requirements for credit quality and
collateral. Also, the Portfolio may invest in certain derivatives that require
the Portfolio to segregate some or all of its cash or liquid securities to
cover its obligations under those instruments. At certain levels, this can
cause the Portfolio to lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other obligations.
If the Portfolio is in that position, it could be forced to sell other
securities that it wanted to retain.

2
<PAGE>

The Portfolio will limit its use of derivatives, for non-hedging purposes, to
33 1/3% of its total assets measured by the aggregate notional amount of
outstanding derivatives. While the use of derivatives may be advantageous to
the Portfolio, if the Adviser is not successful in employing them, the
Portfolio's performance may be worse than if it did not make such investments.
See the SAI for more about the risks of different types of derivatives.

Year 2000 risks

The management and distribution services provided to the Fund by the Adviser
and Morgan Stanley & Co. Incorporated ("Morgan Stanley") depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the handling of securities trades, pricing and
account services. The Adviser and Morgan Stanley have been actively working on
necessary changes to their own computer systems to deal with the year 2000
problem and expect that their systems will be adapted before that date. There
can be no assurance, however, that they will be successful. In addition, other
unaffiliated service providers may be faced with similar problems. The Adviser
and Morgan Stanley are monitoring their remedial efforts, but, there can be no
assurance that they and the services they provide will not be adversely
affected.

In addition, it is possible that the markets for securities in which the
Portfolio invests may be detrimentally affected by computer failures
throughout the financial services industry beginning January 1, 2000.
Improperly functioning trading systems may result in settlement problems and
liquidity issues. In addition, corporate and governmental data processing
errors may result in production problems for individual companies and overall
economic uncertainties. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in U.S. and foreign financial statements. Accordingly, the Portfolio's
investments may be adversely affected.

Temporary defensive investments

When the Adviser believes that changes in economic, financial or political
conditions warrant, the Portfolio may invest without limit in certain short-
and medium-term fixed income securities for temporary, defensive purposes. If
the Adviser incorrectly predicts the effects of these changes, such defensive
investments may adversely affect the Portfolio's performance and the Portfolio
may not achieve its investment objective.

Portfolio turnover

The Portfolio may engage in frequent trading of securities to achieve its
investment objective. Higher portfolio turnover will cause the Portfolio to
incur additional transaction costs.

3
<PAGE>

INVESTMENT ADVISER

MSDW Investment Management, with principal offices at 1221 Avenue of the
Americas, New York, New York 10020, conducts a worldwide portfolio management
business and provides a broad range of portfolio management services to
customers in the United States and abroad. Morgan Stanley Dean Witter & Co.
("MSDW") is the direct parent of MSDW Investment Management and Morgan
Stanley. MSDW is a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses --
securities, asset management and credit services. As of October 31, 1999, MSDW
Investment Management and its institutional investment advisory affiliates had
approximately $173 billion in assets under management or fiduciary advice.

MANAGEMENT FEE

The Adviser is entitled to receive a management fee at an annual percentage of
the Portfolio's average daily net assets as follows:

<TABLE>
<CAPTION>
ASSETS FEE
----------------------------------------------------------------
<S> <C>
First $500 million 0.80%
----------------------------------------------------------------
From $500 million to $1 billion 0.75%
----------------------------------------------------------------
More than $1 billion 0.70%
</TABLE>

However, the Adviser has voluntarily agreed to reduce its management fee
and/or reimburse the Portfolio, so that total annual operating expenses of the
Portfolio will not exceed 1.15% of its average daily assets. For purposes of
determining the amount of the voluntary management fee waiver and/or
reimbursement, if any, the annual operating expenses of the Portfolio exclude
certain investment related expenses such as foreign country tax expense and
interest expense on amounts borrowed. As a result, the expense ratio,
including these expenses, after fee waivers and/or reimbursements may be
higher than 1.15%. Fee waivers and/or expense reimbursements are voluntary and
the Adviser reserves the right to terminate any waiver and/or reimbursement at
any time without notice.
4
<PAGE>

PORTFOLIO MANAGERS
The following individuals have primary day-to-day portfolio management
responsibility for the Portfolio:

TECHNOLOGY PORTFOLIO
Alexander L. Umansky and Stephen C. Sexauer
Alexander L. Umansky is a Vice President of MSDW Investment Management and
Morgan Stanley and a Portfolio Manager in the Institutional Equity Group. He
joined MSDW Investment Management in 1994 as a Compliance Analyst and in 1996,
he became a research analyst in the Institutional Equity Group focusing
primarily on technology. Prior to joining MSDW Investment Management, Mr.
Umansky was a financial analyst in Morgan Stanley's Global Risk Management
department. He graduated from New York University's Stern School of Business
with a B.S. in Computer Science and Finance. Stephen C. Sexauer is a Principal
of MSDW Investment Management and Morgan Stanley and is a Portfolio Manager in
the Institutional Equity Group of MSDW Investment Management. In addition to
portfolio management, his equity research responsibilities include
telecommunications, technology, finance and utilities. Mr. Sexauer joined MSDW
Investment Management in 1989 after three years as Vice President at Salomon
Brothers. Previously, he was with Merrill Lynch Economics and Wharton
Econometrics. Mr. Sexauer received a B.S. in Economics from the University of
Illinois and an M.B.A. in Economics and Statistics from the University of
Chicago. Messrs. Umansky and Sexauer have had primary responsibility for
managing the Portfolio since its inception.
5
<PAGE>

SHAREHOLDER INFORMATION

Purchasing and selling Fund shares

Shares are offered on each day that the New York Stock Exchange (the "NYSE")
is open for business.

The Portfolio offers its shares only to insurance companies for separate
accounts they establish to fund variable life insurance and variable annuity
contracts and by other entities under qualified pension and retirement plans.
An insurance company purchases or redeems shares of the Portfolio based on,
among other things, the amount of net contract premiums or purchase payments
allocated to a separate account investment division, transfers to or from a
separate account investment division, contract loans and repayments, contract
withdrawals and surrenders, and benefit payments. The contract prospectus
describes how contract owners may allocate, transfer and withdraw amounts to,
and from, separate accounts.

The price per share will be the net asset value (NAV) per share next
determined after the Fund receives the insurance company's purchase order. In
some cases, an insurance company's order may be executed at the NAV that was
computed at the close of the previous business day. NAV for one share is the
value of that share's portion of all of the assets in the Portfolio. The Fund
determines the NAV for the Portfolio as of the close of the NYSE (normally 4:00
p.m. Eastern Time) on each day that the NYSE is open for business.

About net asset value

In calculating NAV, the Portfolio generally values its portfolio securities at
their market price. If market prices are unavailable or the Portfolio thinks
that they are unreliable because of events occurring after the close of
trading, the Portfolio may determine fair value prices using methods approved
by the Board of Directors. The Portfolio may hold portfolio securities that
are listed on foreign exchanges. These securities may trade on weekends or
other days when the Portfolio does not calculate NAV. As a result, the value
of these investments may change on days when you cannot purchase or sell
shares.

Dividends and distributions

The Portfolio distributes its investment income annually as dividends and
makes distributions of capital gains, if any, at least annually.

Taxes

Please consult your tax advisor regarding your specific questions about
federal, state and local income taxes. Below is summarized some important tax
issues that affect the Portfolio and its shareholders. The summary is based on
current tax laws, which may change.

The Portfolio expects that it will not have to pay income taxes if it
distributes all of its income and gains. Net income and realized capital gains
that the Portfolio distributes are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract 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 Portfolio and federal income
taxation of owners of variable annuity or variable life insurance contracts,
refer to the contract prospectus.

6
<PAGE>

WHERE TO FIND ADDITIONAL INFORMATION

Statement of Additional Information
In addition to this Prospectus, the Portfolio has an SAI, dated May 1, 1999 as
supplemented through December 1, 1999, which contains additional, more
detailed information about the Fund and the Portfolio. The SAI is incorporated
by reference into this Prospectus and, therefore, legally forms a part of this
Prospectus.

Shareholder Reports
The Fund publishes annual and semi-annual reports containing financial
statements. These reports contain additional information about the Portfolio's
investments. In the Fund's shareholder reports, you will find a discussion of
the market conditions and the investment strategies that significantly
affected the Portfolio's performance during that period.

For additional Fund information, including information regarding investments
comprising the Portfolio, please call 1-800-281-2715 or contact your insurance
company.

You may obtain the SAI and shareholder reports, when available, without charge
by contacting the Fund at the toll-free number above or your insurance
company.

Information about the Fund, including the SAI, and the annual and semi-annual
reports, may be obtained from the Commission in any of the following ways: (1)
In person: you may review and copy documents in the Commission's Public
Reference Room in Washington, D.C. (for information on the operation of the
Public Reference Room, call 1-202-942-8090); (2) On-line: you may retrieve
information from the EDGAR Database on the Commission's web site at
"http://www.sec.gov"; or (3) By mail; you may request documents, upon payment
of a duplicating fee, by writing to Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549-0102. You may also obtain this
information, upon payment of a duplicating fee, by e-mailing the Commission at
the following address: [email protected]. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-7607
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
[MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. LOGO APPEARS HERE]
P.O. Box 2798
Boston, Massachusetts 02208-2798

For information call 1-800-281-2715
<PAGE>

Morgan Stanley Dean Witter Universal Funds, Inc.

P.O. Box 2798, Boston, MA 02208-2798

STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Dean Witter Universal Funds, Inc. (the "Fund") is a no-load,
open-end management investment company with diversified and non-diversified
series ("Portfolios"). The Fund currently consists of 20 Portfolios offering a
broad range of investment choices. Shares of each Portfolio are offered with no
sales charge or exchange or redemption fee.

Shares of each Portfolio may be purchased only by insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies and by certain tax-qualified investors. The variable annuity contract
and variable life insurance policy holders incur fees and expenses separate
from the fees and expenses charged by the Portfolios. This Statement of
Additional Information addresses information of the Fund applicable to each of
the 20 Portfolios.

The Fund was incorporated under the laws of the State of Maryland on March 26,
1996. The Fund filed a registration statement with the Securities and Exchange
Commission (the "SEC") registering itself as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares under the Securities Act of 1933, as amended (the "1933 Act").

The Portfolios are managed by either Morgan Stanley Dean Witter Investment
Management Inc. ("MSDW Investment Management" or an "Adviser") or Miller
Anderson & Sherrerd, LLP ("MAS" or an "Adviser") thereby making available in a
single product the combined strength of these leading investment management
firms.

This Statement of Additional Information is not a prospectus but should be read
in conjunction with the prospectus for the Fund's Portfolio(s) (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety. To obtain the Prospectus, please
contact the Fund or your insurance company.

<TABLE>
<S> <C>
Table of Contents Page
Investment Policies 2
Investments and Strategies 4
Taxes 27
Purchase of Shares 29
Redemption of Shares 29
Investment Limitations 29
Determining Maturities of Certain Instruments 31
Management of the Fund 32
Net Asset Value for the Money Market Portfolio 41
Portfolio Transactions 41
Performance Information 44
General Performance Information 45
General Information 46
Description of Ratings 47
Financial Statements 48
</TABLE>

Statement of Additional Information dated May 1, 1999 as supplemented through
December 1, 1999, relating to the Fund's Prospectuses:

Dated May 1, 1999 for the Money Market, Fixed Income, High Yield, Core Equity,
Equity Growth, Mid Cap Growth, Mid Cap Value, U.S Real Estate, Value, Asian
Equity, Emerging Markets Debt, Emerging Markets Equity, Global Equity,
International Fixed Income, International Magnum, Latin American, Balanced and
Multi-Asset-Class Portfolios.

Dated September 2, 1999 for the Active International Allocation Portfolio.

Dated December 1, 1999 for the
Technology Portfolio.
<PAGE>

Investment Policies

The following table provides additional information about the Portfolios'
investment policies. Certain terms below have initial capital letters. These
terms are described under "Instruments and Strategies."

Fixed Income Portfolio 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). The Portfolio
may invest up to 50% of its assets in Mortgage-
Backed Securities.

High Yield Portfolio Under normal circumstances, the Portfolio will
invest at least 65% of its total assets in High
Yield Securities.

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 will purchase Equity Securities of
issuers with a market capitalization of generally
greater than $1 billion.

Equity Growth Portfolio Under normal circumstances, the Portfolio will
invest at least 65% of its total assets in Equity
Securities.

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).

Mid Cap Growth Under normal circumstances, the Portfolio will
Portfolio 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).

Mid Cap Value Portfolio
Under normal circumstances, the Portfolio will
invest at least 65% of its total assets in Equity
Securities of mid-cap companies deemed to be under-
valued. The Portfolio may invest up to 5% of its
total assets in Foreign Equities (other than ADRs).

U.S. Real Estate Under normal circumstances, at least 65% of the
Portfolio 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.

International Fixed
Income Portfolio 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.
Derivatives may be used to represent country
investments.

Emerging Markets Debt Under normal circumstances, the Portfolio will
Portfolio 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 Portfoilio may
also invest in Fixed Income Securities of corporate
issuers located in or organized under the laws of
emerging market countries. The Portfolio may also
invest up to 5% of its total assets in Mortgage-
Backed Securities, Collateralized Mortgage
Obligations and in other Asset-Backed Securities
issued by non-governmental entities, such as banks
and other financial institutions.

2
<PAGE>

Global Equity Portfolio
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.

International Magnum Under normal circumstances, at least 65% of the
Portfolio total assets of the Portfolio will be invested in
Equity Securities of issuers in at least three
different EAFE countries. The Portfolio may invest
up to 5% of its total assets in the securities of
issuers domiciled in non-EAFE countries.

Emerging Markets Equity Under normal circumstances, at least 65% of the
Portfolio Portfolio's total assets will be invested in
Emerging Market Country Equity Securities.

Asian Equity Portfolio
Under normal circumstances, the Portfolio will
invest at least 65% of the total assets of the
Portfolio in Equity Securities of Asian issuers
(excluding Japanese issuers).

Latin American The Portfolio expects, under normal circumstances,
Portfolio to have at least 55% of its total assets invested in
listed Equity Securities of issuers in these four
countries: Argentina, Brazil, Chile and Mexico.

Active International
Allocation Portfolio Under normal circumstances, at least 65% of the
total assets of the Portfolio will be invested in
Equity Securities of non-U.S. issuers which, in the
aggregate, replicate broad market indices.

Balanced Portfolio 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 Portfolio will purchase Equity
Securities of issuers with a market capitalization
of generally greater than $1 billion.

Multi-Asset-Class
Portfolio 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 Portfolio will purchase Equity
Securities of issuers with a market capitalization
of generally greater than $1 billion.

Technology Portfolio Under normal circumstances, at least 65% of the
total assets of the Portfolio will be invested in
Equity Securities of companies that MSDW Investment
Management expects to benefit from their involvement
in technology and technology-related industries.

3
<PAGE>

Investments and Strategies

This Statement of Additional Information provides additional information
about the investment policies and operations of the Fund and its investment
portfolios (each a "Portfolio"). MSDW Investment Mangement or MAS act as
investment adviser to each Portfolio. Under the supervision of MSDW Investment
Management, Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors") acts as
investment sub-adviser to the Money Market Portfolio. References to MSDW
Investment Management, when used in connection with its activities as
investment adviser, include MSDW Advisors acting under its supervision.

The following tables summarize the permissible strategies and investments for
each Portfolio. These tables should be used in conjunction with the investment
summaries for each Portfolio in order to provide a complete description of such
Portfolio's investment policies.

U.S. FIXED INCOME PORTFOLIOS

<TABLE>
<CAPTION>
Fixed High Money
Income Yield Market
------ ----- ------
<S> <C> <C> <C>
STRATEGIES:
Emerging Markets Investing................................ x
Foreign Fixed Income Investing............................ x x
Foreign Investing......................................... x x
High Yield Investing...................................... x x
Maturity and Duration Management.......................... x x
Mortgage Investing........................................ x x
Value Investing........................................... x x
EQUITY SECURITIES:..........................................
Common Stocks.............................................
Depositary Receipts.......................................
Investment Company Securities............................. x x x
Limited Partnerships......................................
REITs.....................................................
Rights....................................................
Warrants..................................................
FIXED INCOME SECURITIES:....................................
Agencies.................................................. x x x
Asset-Backed Securities................................... x x x
Cash Equivalents.......................................... x x x
Commercial Paper.......................................... x x x
Corporates................................................ x x x
Floaters.................................................. x x x
High Yield Securities..................................... x x
Inverse Floaters.......................................... x x
Investment Grade Securities............................... x x x
Loan Participations and Assignments....................... x x
Money Market Instruments.................................. x x x
Mortgage Related Securities............................... x x x
--CMOs.................................................... x x
--MBSs.................................................... x x
--SMBSs................................................... x x
Municipals................................................ x x x
Repurchase Agreements..................................... x x x
Temporary Investments..................................... x x x
U.S. Government Securities................................ x x x
Yankee Dollar Obligations................................. x x
Zero Coupons, Pay-In-Kind Securities
or Deferred Payment Securities........................... x x x
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
Fixed High
Income Yield Money Market
------ ----- ------------
<S> <C> <C> <C>
FOREIGN INVESTMENT:..........................
Brady Bonds................................ x x
Emerging Market Country Securities......... x
Foreign Bonds.............................. x x
Foreign Currency Transactions.............. x x
Foreign Equity Securities.................. x
Investment Funds........................... x x
Russian Equity Securities..................
OTHER SECURITIES AND INVESTMENT TECHNIQUES:
Borrowing for Investment Purposes..........
Convertible Securities..................... x x
Loans of Portfolio Securities.............. x x x
Non-Publicly Traded Securities,
Private Placements and Restricted x x x
Securities................................ (Private Placements)
Preferred Stocks........................... x x
Reverse Repurchase Agreements.............. x x x
Short Sales................................ x x
Structured Investments..................... x x x
Temporary Borrowing........................ x x x
When-Issued and Delayed Delivery
Securities................................ x x
DERIVATIVES:.................................
Foreign Currency Forward Contracts......... x x
Futures and Forward Contracts.............. x x
Options.................................... x x
Swaps, Caps, Collars and Floors............ x x
</TABLE>

U.S. EQUITY PORTFOLIOS

<TABLE>
<CAPTION>
Core Equity Mid Cap Mid Cap U.S.
Equity Growth Growth Value Technology Real Estate Value
------ ------ ------- ------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
STRATEGIES:
Emerging Markets
Investing............ x
Core Equity
Investing............ x x
Foreign Investing..... x x x x x x x
Growth Stock
Investing............ x x
Real Estate
Investing............ x
Value Stock
Investing............ x x
EQUITY SECURITIES:
Common Stocks......... x x x x x x x
Depositary Receipts... x x x x x x x
(ADRs (ADRs (ADRs (ADRs
ONLY) ONLY) ONLY) ONLY)
Investment Company
Securities........... x x x x x x x
Limited Partnerships.. x
Rights................ x x x x x x x
REITS................. x
Specialized Ownership
Vehicles............. x
Warrants.............. x x x x x x x
FIXED INCOME SECURITIES:
Agencies.............. x x x x x x
Asset-Backed
Securities...........
Cash Equivalents...... x x x x x x x
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
Core Equity Mid Cap Mid Cap U.S.
Equity Growth Growth Value Technology Real Estate Value
------ ------ ------- ------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Paper...... x x x x x x x
Corporates............ x x x x x x
Floaters..............
High Yield
Securities........... x
Inverse Floaters......
Investment Grade
Securities........... x x x x x x x
Loan Participations
and Assignments......
Money Market
Instruments.......... x x x x x x x
Mortgage Related
Securities...........
--CMOs................
--MBSs................
--SMBSs...............
Municipals............
Repurchase
Agreements........... x x x x x x x
Temporary
Investments.......... x x x x x x x
U.S. Government
Securities........... x x x x x x x
Yankee Dollar
Obligations.......... x x
Zero Coupons, Pay-In-
Kind Securities or
Deferred Payment
Securities........... x x x x x x x
FOREIGN INVESTMENT:
Brady Bonds...........
Emerging Market
Country Securities... x x
Eurodollar
Obligations.......... x
Foreign Bonds......... x x x x x x
Foreign Currency
Transactions......... x x x x x x x
Foreign Equity
Securities........... x x x x x x x
Investment Funds...... x x x
Russian Equity
Securities...........
OTHER SECURITIES AND
INVESTMENT
TECHNIQUES:
Borrowing for
Investment Purposes.. x
Convertible
Securities........... x x x x x x x
Loans of Portfolio
Securities........... x x x x x x x
Non-Publicly Traded
Securities, Private
Placements and
Restricted
Securities........... x x x x x x x
Preferred Stocks...... x x x x x x x
Reverse Repurchase
Agreements........... x x x x x
Short Sales........... x x x x x
Structured
Investments.......... x x x
Temporary Borrowing... x x x x x x x
When-Issued and
Delayed Delivery
Securities........... x x x x x x x
DERIVATIVES:
Foreign Currency
Forward Contracts.... x x x x x x x
Futures and Forward
Contracts............ x x x x x x x
Options............... x x x x x x x
Swaps, Caps, Collars
and Floors........... x x x x x x x
</TABLE>

6
<PAGE>

GLOBAL PORTFOLIOS

<TABLE>
<CAPTION>
Active Emerging Emerging
International Asian Markets Markets Global International International Latin
Allocation Equity Debt Equity Equity Fixed Income Magnum American
------------- ------ -------- -------- ------ ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STRATEGIES:
Emerging Markets
Investing............ x x x x x x
Foreign Fixed Income
Investing............ x x x x x x x x
Foreign Investing..... x x x x x x x x
High Yield Investing.. x x x x
Maturity and Duration
Management........... x
Mortgage Investing.... x
Value Investing....... x
EQUITY SECURITIES:
Common Stocks......... x x x x x x
Depositary Receipts... x x x x x x x
Investment Company
Securities........... x x x x x x x x
Limited Partnerships..
Rights................ x x x x x x x
Warrants.............. x x x x x x x
FIXED INCOME SECURITIES:
Agencies.............. x x x x * x x x
Asset-Backed
Securities........... x x
Cash Equivalents...... x x x x x x x x
Commercial Paper...... x x x x x x x x
Corporates............ x x x x * x x x
Floaters.............. x x
High Yield
Securities........... x x x x
Inverse Floaters...... x x
Investment Grade
Securities........... x x x x x x x x
Loan Participations
and Assignments...... x x x
Money Market
Instruments.......... x x x x x x x x
Mortgage Related
Securities........... x x
--CMOs................ x x
--MBSs................ x x
--SMBSs............... x x
Municipals............ x x
Repurchase
Agreements........... x x x x x x x x
Temporary
Investments.......... x x x x x x x x
U.S. Government
Securities........... x x x x * x x x
Yankee Dollar
Obligations.......... x x x x
Zero Coupons, Pay-In-
Kind Securities or
Deferred Payment
Securities........... x x x x x x x
FOREIGN INVESTMENT:
Brady Bonds........... x x x x x x x
Emerging Market
Country Securities... x x x x x x x x
Eurodollar
Obligations.......... x x x x x x x x
Foreign Bonds......... x x x x x x x x
Foreign Currency
Transactions......... x x x x x x x x
Foreign Equity
Securities........... x x x x x x x
Investment Funds...... x x x x x x x x
Russian Equity
Securities........... x x
</TABLE>

7
<PAGE>

ASSET ALLOCATION PORTFOLIOS

<TABLE>
<CAPTION>
MULTI-ASSET-
BALANCED CLASS
---------- ------------
<S> <C> <C>
STRATEGIES:
Asset Allocation Management........................... x x
Core Equity Investing................................. x x
Emerging Markets Investing............................ x x
Fixed Income and Asset Allocation..................... x x
Foreign Fixed Income Investing........................ x x
Foreign Investing..................................... x x
High Yield Investing.................................. x x
International Equity Investing........................ x x
Maturity and Duration Management...................... x x
Mortgage Investing.................................... x x
Value Investing....................................... x x
EQUITY SECURITIES:
Common Stocks......................................... x x
Depositary Receipts................................... x x
(ADRs ONLY) (ADRs ONLY)
Investment Company Securities......................... x x
Limited Partnerships..................................
REITs.................................................
Rights................................................ x x
Warrants.............................................. x x
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
MULTI-ASSET-
BALANCED CLASS
-------- ------------
<S> <C> <C>
FIXED INCOME SECURITIES:
Agencies................................................ x x
Asset-Backed Securities................................. x x
Cash Equivalents........................................ x x
Commercial Paper........................................ x x
Corporate Bonds......................................... x x
Floaters................................................ x x
High Yield Securities................................... x x
Inverse Floaters........................................ x x
Investment Grade Securities............................. x x
Loan Participations and Assignments..................... x x
Money Market Instruments................................ x x
Mortgage Related Securities............................. x x
--CMOs.................................................. x x
--MBSs.................................................. x x
--SMBSs................................................. x x
Municipals.............................................. x x
Repurchase Agreements................................... x x
Temporary Investments................................... x x
U.S. Government Securities.............................. x x
Yankee Dollars.......................................... x x
Zero Coupons, Pay-In-Kind Securities
or Deferred Payment Securities......................... x x
FOREIGN INVESTMENT:
Brady Bonds............................................. x x
Emerging Market Country Securities...................... x x
Foreign Bonds........................................... x x
Foreign Currency Transactions........................... x x
Foreign Equity Securities............................... x x
Investment Funds........................................ x x
Russian Equity Securities...............................
OTHER SECURITIES AND INVESTMENT TECHNIQUES:
Borrowing for Investment Purposes.......................
Convertible Securities.................................. x x
Loans of Portfolio Securities........................... x x
Non-Publicly Traded Securities,
Private Placements and Restricted Securities........... x x
Preferred Stocks........................................ x x
Reverse Repurchase Agreements........................... x x
Short Sales............................................. x x
Structured Investments.................................. x x
Temporary Borrowing..................................... x x
DERIVATIVES:
Foreign Currency Forward Contracts...................... x x
Futures and Forward Contracts........................... x x
Options................................................. x x
Swaps................................................... x x
</TABLE>

9
<PAGE>

Investment 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. In its twenty-five year
history of managing balanced accounts, MAS has developed strategic judgments on
the mix among asset classes are based on valuation disciplines and tools for
analysis. 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 in each asset class.

Core Equity Investing: The Adviser's "core" or primary equity strategy
emphasizes common stocks of large companies, with targeted investments in small
company stocks that promise special growth opportunities. Depending on the
Adviser's outlook for the economy and different market sectors, the mix between
value stocks and growth stocks will change.

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.

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. 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 markets 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 communist 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 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).

Fixed Income Management and Asset Allocation: In selecting fixed-income
securities for certain Portfolios, the Adviser considers the value offered by
various segments of the fixed income securities market relative to cash
equivalents and equity securities. The Adviser may find that certain segments
of the fixed income securities market offer more or less attractive relative
value when compared to equity securities than when compared to other fixed
income securities.

For example, in a given interest rate environment, equity securities may be
judged to be fairly valued when compared to intermediate duration fixed-income
securities, but overvalued compared to long duration fixed-income securities.
Consequently, while a Portfolio investing only in fixed-income securities may
not emphasize long duration assets to the same extent, the fixed-income portion
of a balanced investment may invest a percentage of its assets in long duration
bonds on the basis of their valuation relative to equity securities.

Foreign Fixed Income Investing: The Adviser invests 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, currency futures &
options, forwards and swaps may be used to hedge the currency risk.

Foreign Investing: Investors should recognize that investing in Foreign bonds
and foreign equities involves certain special considerations which are not
typically associated with investing in domestic securities.

As 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 securities than about U.S. securities. Foreign bonds and
Foreign equities 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 U.S.
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.

Since foreign bonds and foreign equities 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 rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.

10
<PAGE>

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 focuses on common stocks that generally
have higher growth rates, betas, and price/earnings ratios, and lower yields
than the stock market in general as measured by an appropriate market index.

High Yield Investing: This strategy involves investments 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. See "High Yield Securities," below, for further
discussion of these securities, including risks.

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 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. See Value Investing for a description of the second primary
component of the Adviser's fixed-income strategy.

About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations
also have call provisions. Depending on the relative magnitude of these
payments and the nature of the call provisions, the market values of debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt 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 debt 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 that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed-income securities. Duration is a
measure of the expected life of a fixed-income security on a present value
basis. 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,
floating and variable rate securities 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

11
<PAGE>

situations, the Adviser will use sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
interest rate exposure.

Mortgage Investing: As described in the prospectus, certain Portfolios may
invest greater than 50% of their assets, and other Portfolios also may invest,
in mortgage-related securities. These include mortgage securities representing
interests in 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 organizations, including the Government National Mortgage
Association ("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie
Mae, other government agencies, and private issuers. It is expected that a
Portfolio's primary emphasis will be in mortgage securities issued by the
various government-related organizations. However, a Portfolio may invest,
without limit, in mortgage securities 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 Standard & Poor's or be
deemed by the Adviser to be of comparable investment quality.

Real Estate Investing: Investments in securities of issuers engaged in the real
estate industry, entail special risks and considerations. In particular,
securities of such issuers may be subject to risks associated with the direct
ownership of real estate. These risks include: the cyclical nature of real
estate values, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, demographic trends and variations in rental income, changes
in zoning laws, casualty or condemnation losses, environmental risks,
regulatory limitations on rents, changes in neighborhood values, changes in the
appeal of properties to tenants, increases in interest rates and other real
estate capital market influences. Generally, increases in interest rates will
increase the costs of obtaining financing, which could directly and indirectly
decrease the value of the Portfolios' investments.

Value Investing: One of two primary components of the Adviser's fixed-income
strategy is value investing. 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 judgment 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.

Value Stock Investing: The Adviser emphasizes common stocks that it believes
are undervalued relative to the stock market in general as measured by an
appropriate market index. The Adviser determines value using a variety of
measures, including price/earnings ratios and price/book ratios. Value stocks
generally pay dividends, but the Adviser may select non-dividend paying stocks
for their value characteristics.

Equity Securities

Equity Securities generally represent an ownership interest in an issuer, or
may be convertible into or represent a right to acquire an ownership interest
in an issuer. While there are many types of Equity Securities, prices of all
equity securities will fluctuate. Economic, political and other events may
affect the prices of broad equity markets. For example, changes in inflation or
consumer demand may affect the prices of all Equity Securities in the United
States. Similar events also may affect the prices of particular equity
securities. For example, news about the success or failure of a new product may
affect the price of a particular issuer's Equity Securities.

ADRs. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

Common Stocks. Common Stocks represent an ownership interest in a corporation,
entitling the stockholder to voting rights and receipt of dividends paid based
on proportionate ownership.

Depositary Receipts. Depositary Receipts represent an ownership interest in
securities of foreign companies (an "underlying issuer") that are deposited
with a depositary. Depositary Receipts are not necessarily denominated in the
same currency as the underlying securities. Depositary Receipts include
American Depositary Receipts ("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 an ownership interest 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 unsponsored
Depositary Receipts generally bear all the costs associated with establishing
unsponsored Depositary Receipts. In addition, the issuers of the securities
underlying

12
<PAGE>

unsponsored Depository 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 an investment in the underlying securities,
except that ADRs may be deemed to be issued by a U.S. issuer.

Investment Company Securities. Investment Company Securities are securities of
other open-end or closed-end investment companies. The Investment Company Act
of 1940, as amended (the "1940 Act"), generally prohibits an underlying fund
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. To the extent a Portfolio invests a portion of its assets
in Investment Company Securities, those assets will be subject to the risks of
the purchased investment company's portfolio securities. The Portfolio also
will bear its proportionate share of the expenses of the purchased investment
company in addition to its own expenses.

REITs. Real Estate Investment Trusts ("REITs") pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests. A REIT is not taxed on income distributed to its
shareholders or unitholders if it complies with regulatory requirements
relating to its organization, ownership, assets and income, and with a
regulatory requirement that it distribute to its shareholders or unitholders at
least 95% of its taxable income for each taxable year. 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.

A shareholder in any of the Portfolios, by investing in REITs indirectly
through the Portfolio, will bear not only his proportionate share of the
expenses of the Portfolio, but also, indirectly, the management expenses of
underlying REITs. REITs may be affected by changes in the value of their
underlying properties and by defaults by borrowers or tenants. Mortgage REITs
may be affected by the quality of the credit extended. Furthermore, REITs are
dependent on specialized management skills. Some REITs may have limited
diversification and may be subject to risks inherent in investments in a
limited number of properties, in a narrow geographic area, or in a single
property type. REITs depend generally on their ability to generate cash flow to
make distributions to shareholders or unitholders, and may be subject to
defaults by borrowers and to self-liquidations. In addition, the performance of
a REIT may be affected by its failure to qualify for tax-free pass-through of
income, or its failure to maintain exemption from registration under the 1940
Act.

Rights. Rights represent the right, but not the obligation, for a fixed period
of time to purchase additional shares of an issuer's Common Stock at the time
of a new issuance, usually at a price below the initial offering price of the
Common Stock and before the Common Stock is offered to the general public.
Rights are usually freely transferrable. The risk of investing in a Right is
that the Right may expire prior to the market value of the Common Stock
exceeding the price fixed by the Right.

Specialized Ownership Vehicles. Specialized ownership vehicles pool investors'
funds for investment primarily in income-producing real estate or real estate
related loans or interests. Such specialized ownership vehicles in which the
Portfolios may invest include property unit trusts, REITs and other similar
specialized investment vehicles. Investments in such specialized ownership
vehicles may have favorable or unfavorable legal, regulatoy or tax implications
for a Portfolio and, to the extent such vehicles are structured similarly to
investment funds, may cause the Portfolios' shareholders to indirectly bear
certain certain additional operating expenses.

Warrants. Warrants give holders the right, but not the obligation, to buy
Common Stock of an issuer at a given price, usually higher than the market
price at the time of issuance, during a specified period. Warrants are usually
freely transferrable. The risk of investing in a Warrant is that the Warrant
may expire prior to the market value of the Common Stock exceeding the price
fixed by the Warrant.

Fixed Income Securities

Fixed Income Securities generally represent an issuer's obligation to repay
money that it has borrowed together with interest on the amount borrowed. Fixed
Income Securities come in many varieties and may differ in the way that
interest is calculated, the amount and frequency of payments, the type of
collateral, if any, and some Fixed Income Securities may have other novel
features such as conversion rights. Prices of Fixed Income Securities fluctuate
and, in particular, are subject to credit risk and market risk. Credit risk is
the possibility that an issuer may be unable to meet scheduled interest and
principal payments. Market risk is the possibility that a change in interest
rates or the market's perception of the issuer's prospects may adversely affect
the

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value of a fixed income security. Economic, political and other events also may
affect the prices of broad fixed income markets. Generally, the values of Fixed
Income Securities vary inversely with changes in interest rates. During periods
of falling interest rates, the values of outstanding Fixed Income Securities
generally rise and during periods of rising interest rates, the values of such
securities generally decline. Prepayments also will affect the maturity and
value of Fixed Income Securities. Prepayments generally rise in response to a
decline in interest rates as debtors take advantage of the opportunity to
refinance their obligations. When this happens, a Portfolio may be forced to
reinvest in lower yielding Fixed Income Securities.

The length of time to the final payment, or maturity, of a Fixed Income
Security also affects its price volatility. While securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuation, especially as a result of
changes in interest rates. Traditionally, term to maturity has been used as a
barometer of a Fixed Income Security's sensitivity to interest rate changes.
However, this measure considers only the time until final payment and takes no
account of the pattern of payments prior to maturity. Duration is a more
precise measure of the expected life of a Fixed Income Security that combines
consideration of yield, coupon, interest payments, final maturity and call
features and measures the expected life of a Fixed Income Security on a present
value basis. The duration of a Fixed Income Security ordinarily is shorter than
its maturity.

Agencies. Agencies are Fixed Income 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, or any of several other
agencies.

Asset-Backed Securities. Asset-Backed Securities ("ABSs") are securities
collateralized by shorter-term loans such as automobile loans, home equity
loans, equipment or computer leases or credit card receivables. The payments
from the collateral are passed through to the security holder. The collateral
underlying ABSs 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. However, it is possible that
prepayments (on automobile loans and other collateral) will alter the cash flow
on ABSs and 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. The maturity of ABSs will be based on
the expected average life of the instrument. In selecting these securities, the
Advisers will look for those securities that offer a higher yield to compensate
for any variation in average maturity.

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, of foreign branches of
U.S. banks (Eurodollars) and of U.S. branches of foreign banks (Yankee
dollars). Euro and Yankee dollar investments will involve some of the same
risks of investing in international securities that are discussed in the
foreign investing section of the Prospectus.

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 U.S. banks, it is a member of the FDIC, and (iii) in the case of
foreign branches of U.S. banks, the security is deemed by the Adviser to be of
an investment quality comparable with other fixed income securities which the
Portfolio may purchase.

(2) Commercial paper rated at time of purchase by one or more Nationally
Recognized Statistical Rating Organizations ("NRSRO") in one of their two
highest categories, (e.g., A-l or A-2 by Standard & Poor's or Prime 1 or Prime
2 by Moody's), or, if not rated, issued by a corporation having an outstanding
unsecured debt issue rated high-grade by a NRSRO (e.g., A or better by Moody's,
Standard & Poor's or Fitch).

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

(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;

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(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie
Mae, Federal Financing Bank, the Tennessee Valley Authority, and others;

(6) Repurchase agreements collateralized by securities listed above; and

(7) The Money Market Portfolio's investments are limited by the requirements
of Rule 2a-7 under the 1940 Act.

Commercial paper refers to short-term fixed income securities with maturities
ranging from 2 to 270 days. They are primarily issued by corporations needing
to finance large amounts of receivables, but may be issued by banks and other
borrowers. Commercial paper is issued either directly or through broker-
dealers, and may be discounted or interest-bearing. Commercial paper is
unsecured, but is almost always backed by bank lines of credit. Virtually all
commercial paper is rated by Moody's or Standard & Poor's.

Collateralized Mortgage Obligations. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage-backed securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.

CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity
having the credit status of a governmental agency or instrumentality are
generally structured with one or more types of credit enhancement as described
below. An issuer of CMOs may elect to be treated for federal income tax
purposes as a Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of
CMOs issued after 1991 must elect to be treated as a REMIC or it will be
taxable as a corporation under rules regarding taxable mortgage pools.

The principal and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash
flows on Mortgage Assets to the various classes of a CMO is to create certain
tranches on which the expected cash flows have a higher degree of
predictability than do the underlying Mortgage Assets. As a general matter, the
more predictable the cash flow is on a particular CMO tranche, the lower the
anticipated yield on that tranche at the time of issue will be relative to
prevailing market yields on Mortgage Assets. As part of the process of creating
more predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows on
the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on other mortgage related securities with
similar average lives. Principal prepayments on the underlying Mortgage Assets
may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Because of the uncertainty of
the cash flows on these tranches, the market prices and yields of these
tranches are more volatile. In addition, some inverse floating rate obligation
CMOs exhibit extreme sensitivity to changes in prepayments. As a result, the
yield to maturity of these CMOs is sensitive not only to changes in interest
rates, but also to changes in prepayment rates on the related underlying
Mortgage Assets.

Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments, provided
that, among other things, the actual prepayment experience on the underlying
Mortgage Assets falls within a predefined range. If the actual prepayment
experience on the underlying Mortgage Assets is faster or slower than the
predefined range or if deviations from other assumptions occur, payments on the
PAC Bond may be earlier or later than predicted and the yield may rise or fall.
The magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risk of prepayment than are other types of
mortgage related securities.

Corporates. Corporates are Fixed Income Securities issued by private
businesses. Holders, as creditors, have a prior legal claim over holders of
Equity Securities of the issuer as to both income and assets for the principal
and interest due the holder.

Fannie Mae Certificates. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed
by the full faith and credit of the U.S. Government.

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<PAGE>

Each Fannie Mae certificate represents a pro rata interest in one or more pools
of mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed
by the Department of Veteran Affairs under the Servicemen's Readjustment Act of
1944, as amended ("VA Loans") or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.

Floaters. Floaters are Fixed Income Securities with a rate of interest that
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."

High Yield Securities. High Yield Securities are generally considered to
include Fixed Income Securities rated below the four highest rating categories
at the time of purchase (e.g., Ba through C by Moody's or BB through D by S&P)
and unrated securities considered to be of equivalent quality. High Yield
Securities are not considered investment grade and are commonly referred to as
junk bonds or high yield, high risk securities.

While High Yield Securities offer higher yields, they carry a high degree of
credit risk and are considered speculative by the major credit rating agencies.
High Yield Securities are often issued by smaller, less credit worthy issuers,
or by highly leveraged (indebted) issuers that are generally less able than
more established or less leveraged issuers to make scheduled payments of
interest and principal. In comparison to Investment Grade Securities, the price
movement of these securities is influenced less by changes in interest rates
and more by the financial and business position of the issuer. The values of
High Yield Securities are more volatile and may react with greater sensitivity
to market changes.

Inverse Floaters. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities that 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 other mortgage-related securities.

Investment Grade Securities. Investment Grade Securities are Fixed Income
Securities rated by one or more of the rating agencies in one of the four
highest rating categories at the time of purchase (e.g., AAA, AA, A or BBB by
Standard & Poor's Ratings Group ("S&P") or Fitch IBCA, Inc. ("Fitch"), or Aaa,
Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's")) or determined to
be of equivalent quality by the Adviser. 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. Ratings assigned to Fixed Income
Securities represent only the opinion of the rating agency assigning the rating
and are not dispositive of the credit risk associated with the purchase of a
particular Fixed Income Security. Moreover, market risk also will affect the
prices of even the highest rated Fixed Income Securities so that their prices
may rise or fall even if the issuer's capacity to repay its obligations remains
unchanged.

Loan Participations and Assignments. Loan Participations are interests in loans
or other direct debt instruments ("Loans") relating to amounts owed by a
corporate, governmental or other borrower to another party. Loans may represent
amounts owed to lenders or lending syndicates, to suppliers of goods or
services (trade claims or other receivables), or to other parties ("Lenders")
and may be fixed rate or floating rate. Loans also may be arranged through
private negotiations between an issuer of sovereign debt obligations and
Lenders.

A Portfolio's investments in Loans are expected in most instances to be in the
form of a participation in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. In the case of a
Participation, 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 an 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
a 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.

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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, it is
likely 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.

Loan Participations and Assignments involve a risk of loss in case of default
or insolvency of the borrower. In addition, they may offer less legal
protection to a Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the Lender. Certain Loan Participations and
Assignments 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 Lenders
that are themselves subject to political and economic risks, including the risk
of currency devaluation, expropriation, or failure. Such Loan Participations
and Assignments present additional risk of default or loss.

Money Market Instruments. Money Market Instruments are high quality short-term
Fixed Income Securities. Money Market Instruments may include obligations of
governments, government agencies, banks, corporations and special purpose
entities and Repurchase Agreements relating to these obligations. Certain Money
Market Instruments may be denominated in a foreign currency.

Mortgage-Backed Securities. With mortgage-backed securities ("MBSs"), many
mortgagees' obligations to make monthly payments to their lending institution
are pooled together and passed through to investors. The pools are assembled by
various governmental, Government-related and private organizations. A Portfolio
may invest in securities issued or guaranteed by Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac"), Fannie Mae, private issuers and other government
agencies. MBSs issued by non-agency issuers, whether or not such securities are
subject to guarantees, may entail greater risk, since private issuers may not
be able to meet their obligations under the policies. If there is no guarantee
provided by the issuer, a Portfolio will purchase only MBSs which at the time
of purchase are rated investment grade by one or more NRSROs or, if unrated,
are deemed by the Adviser to be of comparable quality.

MBSs are issued or guaranteed by private sector originators of or investors in
mortgage loans and structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
however, they are generally structured with one or more of the types of credit
enhancement described below. Fannie Mae and FHLMC obligations are not backed by
the full faith and credit of the U.S. Government as GNMA certificates are.
FHLMC securities are supported by its right to borrow from the U.S. Treasury.
Each of GNMA, Fannie Mae and FHLMC guarantees timely distributions of interest
to certificate holders. Each of GNMA and Fannie Mae also guarantees timely
distributions of scheduled principal. Although FHLMC has in the past guaranteed
only the ultimate collection of principal of the underlying mortgage loan,
FHLMC now issues MBSs (FHLMC Gold PCS) which also guarantee timely payment of
monthly principal reductions. Resolution Funding Corporation ("REFCORP")
obligations are backed, as to principal payments, by zero coupon U.S. Treasury
bonds, and as to interest payment, ultimately by the U.S. Treasury.

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 are
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.

Like fixed income securities in general, MBSs will generally decline in price
when interest rates rise. 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. As average life extends, price
volatility generally increases. This extension of average life causes the
market price of the MBSs to decrease further when interest rates rise 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

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and slower prepayments will lengthen it. However, it is possible to determine
what the range of the average life movement could be and to calculate the
effect that it will have on the price of the MBS. In selecting MBSs, the
Advisers look for those that offer a higher yield to compensate for any
variation in average 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. 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. The Portfolios will purchase securities issued by
private issuers which are rated investment grade at the time of purchase by
Moody's or S&P or be deemed by the Advisers to be of comparable investment
quality.

Mortgage Related Securities. Mortgage related securities are securities that,
directly or indirectly, represent a participation in, or are secured by and
payable from, mortgage loans on real property. Mortgage related securities may
include CMOs and ABSs issued or guaranteed by agencies or instrumentalities of
the U.S. Government or by private sector entities.

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 and in certain instances, from state and local
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.

Repurchase Agreements. Repurchase Agreements are transactions in which a
Portfolio purchases a security or basket of securities and simultaneously
commits to resell that security or basket to the seller (a bank, broker or
dealer) at a mutually agreed upon date and price. 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. Repurchase
Agreements may be viewed as a fully collateralized loan of money by the
Portfolio to the seller at a mutually agreed upon rate and price. The term of
these agreements is usually from overnight to one week, and never exceeds one
year. Repurchase Agreements with a term of over seven days are considered
illiquid.

In these transactions, the Portfolio receives as collateral securities that
have a market value at least equal to the purchase price (including accrued
interest) of the Repurchase Agreement, 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 remain fully invested while
retaining overnight flexibility to pursue 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 managed
by an Adviser may pool their daily uninvested cash balances in order to invest
in Repurchase Agreements on a joint basis with other investment companies
advised by that Adviser. By entering into Repurchase Agreements on a joint
basis, the Portfolios expect to 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.

Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed Securities
("SMBSs") are multi-class mortgage securities issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans. SMBSs are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of Mortgage Assets. 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
significant changes in the rate of principal repayments will have a
corresponding effect on the SMBSs' yield to maturity.

Temporary Investments. When the Adviser believes that changes in economic,
financial or political conditions make it advisable, each Portfolio may invest
up to 100% of its assets in cash and certain short- and medium-term Fixed
Income Securities for temporary defensive purposes. These Temporary Investments
may consist of obligations of the

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U.S. or foreign governments, their agencies or instrumentalities; Money Market
Instruments; and instruments issued by international development agencies.

U.S. Government Securities. U.S. Government Securities 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. Government Securities
may include securities issued by the U.S. Treasury and securities issued by
federal agencies and U.S. Government sponsored instrumentalities.

Yankee Dollar Obligations. Yankee dollar bank obligations are dollar-
denominated obligations issued in the U.S. capital markets by foreign banks.
Yankee dollar obligations are subject to the same risks as domestic issues,
notably credit risk, market risk and liquidity risk. To a limited extent, they
are also subject to certain sovereign risks. One such risk is the possibility
that a sovereign country might prevent capital, in the form of dollars, from
flowing across its borders. Other risks include adverse political and economic
developments; the extent and quality of government regulations of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers. The Portfolios may
consider Yankee dollar obligations to be domestic securities for purposes of
their investment policies.

Zero Coupons. Zero Coupons are fixed income securities that do not make regular
interest payments. Instead, Zero Coupons are sold at a discount 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 a higher yield than that available on ordinary interest-
paying obligations of similar credit quality and maturity.

Foreign Investment

Investing in foreign securities involves certain special considerations which
are not typically associated with investing in the Equity Securities or Fixed
Income Securities of U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards and may have
policies that are not comparable to those of domestic issuers. As a result,
there may be less information available about foreign issuers than about
domestic issuers. Securities of some foreign issuers are generally less liquid
and more volatile than securities of comparable domestic issuers. There is
generally less government supervision and regulation of stock exchanges,
brokers and listed issuers than in the United States. In addition, with respect
to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or diplomatic
developments which could affect U.S. investments in those countries. The costs
of investing in foreign countries frequently is higher than the costs of
investing in the United States. Although the Advisers endeavor to achieve the
most favorable execution costs in portfolio transactions, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges.

Investments in securities of foreign issuers generally are denominated in
foreign currencies. Accordingly, the value of a 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. A Portfolio may incur costs
in connection with conversions between various currencies.

Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. The Portfolios may be
able to claim a credit for U.S. tax purposes with respect to any such foreign
taxes.

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. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the over-the-
counter secondary market. The Portfolios will invest in Brady Bonds only if
they are consistent with the Portfolio's quality specifications. However, Brady
Bonds should be viewed as speculative in light of the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds.

Emerging Market Country Securities. An emerging market country security is one
issued by a foreign government or private issuer that has one or more of the
following characteristics: (i) its principal securities trading market is in an
emerging market country, (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, or has a principal office in, an emerging market country.

Emerging market describes any country which is generally considered to be an
emerging or developing country by major organizations in 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. 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.

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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. These economies also
have been, and may continue to be, adversely affected by economic conditions in
the countries with which they trade.

Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging market countries, and the extent of
foreign investment in certain fixed income securities and domestic companies
may be subject to limitation in other emerging market countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in emerging market 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 of 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.

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. Emerging
market countries also pose the risk 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 the United States.

Portfolios that invest in emerging markets may also be exposed to 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).

Eurodollar Obligations. Eurodollar bank obligations are dollar-denominated
certificates of deposit and time deposits issued outside the U.S. capital
markets by foreign branches of U.S. banks and by foreign banks. Eurodollar
obligations are subject to the same risks as domestic issues and are also
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across its borders. Other risks include adverse political and economic
developments; the extent and quality of government regulations of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers.

Foreign Bonds. Foreign Bonds are Fixed Income Securities issued by a foreign
government or a private issuer in a foreign country.

Foreign Currency Transactions. The U.S. dollar value of the assets of the
Portfolios, to the extent they invest in securities denominated in foreign
currencies, may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Portfolios
may incur costs in connection with conversions between various currencies. The
Portfolios may conduct their foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market. The Portfolios also may manage their foreign currency transactions by
entering into foreign currency forward contracts to purchase or sell foreign
currencies or by using other instruments and techniques described under
"Derivatives" below.

Foreign Equity Securities. Foreign Equity Securities are Equity Securities of
an issuer in a foreign country.

Investment Funds. Some emerging market countries have laws and regulations that
currently preclude direct investment or make it undesirable to invest directly
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.

Russian Equity 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

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<PAGE>

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 registrar, 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 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 Equity 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.

Other Securities and Investment Techniques

Borrowing for Investment Purposes. Borrowing for investment purposes creates
leverage which is a speculative characteristic. Portfolios authorized to borrow
will do so only when the Advisers believe that borrowing will benefit the
Portfolio after taking into account considerations such as the costs of
borrowing and the likely investment returns on securities purchased with
borrowed funds. Borrowing by a Portfolio will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. Leverage that results from borrowing will magnify declines as
well as increases in a Portfolio's net asset value per share and net yield.
Each Portfolio that engages in borrowing expects that all of its borrowing will
be made on a secured bases. The Portfolio will either segregate the assets
securing the borrowing for the benefit of the lenders or arrangements will be
made with a suitable sub-custodian. If assets used to secure the borrowing
decrease in value, a Portfolio may be required to pledge additional collateral
to the lender in the form of cash or securities to avoid liquidation of those
assets.

Convertible Securities. Convertible Securities are securities that may be
exchanged under certain circumstances for a fixed number of shares of Common
Stock or other Equity Securities. Convertible Securities generally represent a
feature of some other type of security, such as a Fixed Income Security or
Preferred Stock, so that, for example, a Convertible Fixed Income Security
would be a Fixed Income Security that is convertible into Common Stock.
Convertible Securities may be viewed as an investment in the current security
or the security into which the Convertible Securities may be exchanged and,
therefore, are included in both the definition of Equity Security and Fixed
Income Security.

Loans of Portfolio Securities. Each Portfolio may lend its investment
securities to qualified institutional investors that need to borrow securities
in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities or completing arbitrage operations. By
lending its investment securities, a Portfolio attempts to increase its net
investment income through the receipt of interest of the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term
of the loan would be for the account of the Portfolio. Each Portfolio may lend
its investment securities to qualified brokers, dealers, domestic and foreign
banks or other financial institutions, so long as the terms, structure and the
aggregate amount of such loans are not inconsistent with the 1940 Act or the
Rules and Regulations or interpretations of the SEC thereunder, which currently
require that (i) the borrower pledge and maintain with the Portfolio collateral
consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned; (ii) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to market" on a daily basis); (iii) the loan be made subject to
termination by the Portfolio at any time; and (iv) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. There may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will be made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk.
All relevant facts and circumstances, including the creditworthiness of the
broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Directors.

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<PAGE>

At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.

Non-Publicly Traded Securities, Private Placements and Restricted
Securities. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed and
restricted securities. Such unlisted 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
sold, the Portfolio may be required to bear the expenses of registration.

As a general matter, a Portfolio may not invest more than 15% (10% for the
Money Market Portfolio) of its net assets in illiquid securities, such as
securities for which there is not a readily available secondary market or
securities that are restricted from sale to the public without registration.
However, certain Restricted Securities can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("Rule 144A
Securities") and may be deemed to be liquid under guidelines adopted by the
Fund's Board of Directors. The Portfolios may invest without limit in liquid
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.

Preferred Stocks. Preferred Stocks are securities that evidence ownership in a
corporation and pay a fixed or variable stream of dividends. Preferred Stocks
have a preference over Common Stocks in the event of the liquidation of an
issuer and usually do not carry voting rights. Because Preferred Stocks pay a
fixed or variable stream of dividends they have many of the characteristics of
a Fixed Income Security and are, therefore, included in both the definition of
Equity Security and Fixed Income Security.

Reverse Repurchase Agreements. Under a Reverse Repurchase Agreement, a
Portfolio sells a security and promises to repurchase that security at an
agreed upon future date and price. The price paid to repurchase the security
reflects interest accrued during the term of the agreement. The Portfolio will
earmark cash or liquid assets or establish a segregated account holding cash
and other liquid assets in an amount not less than the purchase obligations of
the agreement. Reverse Repurchase Agreements may be viewed as a speculative
form of borrowing called leveraging. A Portfolio may invest in reverse
repurchase agreements if (i) interest earned from leveraging exceeds the
interest expense of the original reverse repurchase transaction and (ii)
proceeds from the transaction are not invested for longer than the term of the
Reverse Repurchase Agreement.

Short Sales. A short sale is a transaction in which the Portfolio sells
securities it owns or has the right to acquire at no added cost (i.e., "against
the box") or does not own (but has borrowed) in anticipation of a decline in
the market price of the securities. To deliver the securities to the buyer, the
Portfolio arranges through a broker to borrow the securities and, in so doing,
the Portfolio becomes obligated to replace the securities borrowed at their
market price at the time of replacement. When selling short, the Portfolio
intends to replace the securities at a lower price and therefore, profit from
the difference between the cost to replace the securities and the proceeds
received from the sale of the securities. When the Portfolio makes a short
sale, the proceeds it receives from the sale will be held on behalf of a broker
until the Portfolio replaces the borrowed securities. The Portfolio may have to
pay a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.

The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, the Portfolio will
earmark cash or liquid assets or place in a segregated account an amount of
cash or other liquid assets equal to the difference, if any, between (i) the
market value of the securities sold at the time they were sold short, and (ii)
any cash or other liquid securities deposited as collateral with the broker in
connection with the short sale. Short sales by the Portfolio involve certain
risk and special considerations. If the Advisers incorrectly predict that the
price of the borrowed security will decline, the Portfolio will have to replace
the securities with securities with a greater value than the amount received
from the sale. As a result, losses from short sales differ from losses that
could be incurred from a purchase of a security, because losses from short
sales may be unlimited, whereas losses from purchases can equal only the total
amount invested.

Structured Investments. Structured Investments are securities that are
convertible into, or the value of which is based upon the value of, other fixed
income or equity securities or indices upon certain terms and conditions. The
amount a Portfolio receives when it sells a Structured
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<PAGE>

Investment or at maturity of a Structured Investment is not fixed, but is based
on the price of the underlying security or index. Particular Structured
Investments may be designed so that they move in conjunction with or
differently from their underlying security or index in terms of price and
volatility. It is impossible to predict whether the underlying index or price
of the underlying security will rise or fall, but prices of the underlying
indices and securities (and, therefore, the prices of Structured Investments)
will be influenced by the same types of political and economic events that
affect particular issuers of fixed income and equity securities and capital
markets generally. Structured Investments also may trade differently from their
underlying securities. Structured Investments generally trade on the secondary
market, which is fairly developed and liquid. However, the market for such
securities may be shallow compared to the market for the underlying securities
or the underlying index. Accordingly, periods of high market volatility may
affect the liquidity of Structured Investments, making high volume trades
possible only with discounting.

Structured Investments are a relatively new innovation and may be designed to
have various combinations of equity and fixed income characteristics. The
following sections describe four of the more common types of Structured
Investments. The Portfolios may invest in other Structured Investments,
including those that may be developed in the future, to the extent that the
Structured Investments are otherwise consistent with a Portfolio's investment
objective and policies.

Structured Notes. Structured Notes are derivative securities for 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. Structured Notes may be designed to have particular
quality and maturity characteristics and may vary from money market quality to
below investment grade. Depending on the factor used and the use of multipliers
or deflators, however, changes in interest rates and movement of the factor may
cause significant price fluctuations or may cause particular Structured Notes
to become illiquid. The Portfolios will use Structured Notes to tailor their
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.

Temporary Borrowing. Each Portfolio is permitted to borrow from banks (and in
the case of the Technology Portfolio from banks and other entities) for
extraordinary or emergency purposes. For example, the Portfolios may borrow for
temporary defensive purposes or to meet shareholder redemptions when the
Advisers believe that it would not be in the best interests of a Portfolio to
liquidate portfolio holdings. A Portfolio will not purchase additional
securities while temporary borrowings exceed 5% of its total assets.

The Board of Directors of the Fund has approved procedures whereby the
Portfolios together with other investment companies advised by the Advisers or
their affiliates may enter into a joint line of credit arrangement with a bank.
Each Portfolio would be liable only for its own temporary borrowings under the
joint line of credit arrangements.

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. When a Portfolio agrees to
purchase When-Issued or delayed delivery securities, it will earmark or
segregate cash or liquid securities in an amount equal to the Portfolio's
commitment to purchase these securities.

Derivatives

The Portfolios are permitted to utilize various exchange-traded and over-the-
counter derivative instruments and derivative securities, both for hedging and
non-hedging purposes. Permitted derivative products include, but are not
limited to futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other
derivative products yet to be developed, so long as these new products are used
in a manner consistent with the objectives of the Portfolios. These derivative
products may be based on a wide variety of underlying rates, indices,
instruments, securities and other products, such as interest rates, foreign
currencies, foreign and domestic fixed income and equity securities, groups or
"baskets" of securities and securities indices (for each derivative product,
the "underlying"). Each of the Equity Growth, U.S. Real Estate, Emerging
Markets Debt, Global Equity, International Magnum, Emerging Markets Equity,
Asian Equity, Latin American, Active International Allocation and Technology
Portfolios will limit its use of derivatives for non-hedging purposes to 33
1/3% of its total assets measured by the aggregate national amount of
outstanding derivatives. The Fixed Income, High Yield, Core Equity, Value, Mid
Cap Growth, Mid Cap Value, International Fixed Income, Balanced and Multi-
Asset-Class

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<PAGE>

Portfolios will not enter into futures to the extent that each Portfolio's
outstanding obligations to purchase securities under these contracts, in
combination with its outstanding obligations with respect to options, would
exceed 50% of its total assets. The Portfolios' investments in forwards or
other derivatives used for hedging purposes are not subject to the foregoing
limits.

The term hedging, generally, means that a Portfolio is using a derivative
product as a way to reduce or limit risk. For example, a Portfolio may hedge in
order to limit the effects of a change in the value of a particular foreign
currency versus the U.S. dollar or a Portfolio could use a portion of its cash
to buy securities futures in order to hedge the risk of not being fully
invested. The Portfolios also may use certain complex hedging techniques. For
example, a Portfolio may use a type of hedge known as a cross hedge or a proxy
hedge, where the Portfolio hedges the risk associated with one underlying by
purchasing or selling a derivative product with an underlying that is
different. There is no limit on the use of forwards or other derivative
products for hedging purposes.

The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market or currency quickly in
response to changes in the Portfolio's investment strategy, upon the inflow of
investable cash or when the derivative provides greater liquidity than the
underlying market. A Portfolio may use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing
advantage or lower transaction costs. The Portfolios also may purchase
combinations of derivatives in order to gain exposure to an investment in lieu
of actually purchasing such investment. Derivatives may also be used by a
Portfolio for hedging or risk management purposes and in other circumstances
when the Adviser believes it advantageous to do so consistent with the
Portfolio's investment objectives and policies. The Portfolios will not use
derivatives in a manner that creates leverage, except to the extent that the
use of leverage is expressly permitted by a particular Portfolio's investment
policies, and then only in a manner consistent with such policies. Except under
circumstances where a segregated account is not required under the 1940 Act or
the rules adopted thereunder, the Portfolio will earmark cash or liquid assets
or place them in a segregated account in an amount necessary to cover the
Portfolio's obligations under such derivative transactions.

The use of derivative products 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been in
these investment techniques had not been used.

Some of the derivative products in which the Portfolios may invest and some of
the risks related thereto are described in further detail below.

Foreign Currency Forward Contracts. A foreign currency forward contract
involves an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for such trades. The Portfolios may enter into foreign
currency forward contracts in many circumstances. For example, when a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, or when a Portfolio anticipates the receipt in a foreign
currency of dividends or interest payments on a security which it holds, the
Portfolio may desire to "lock-in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may
be. By entering into a forward contract for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Portfolio will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
For example, when any of the Portfolios anticipates that the currency of a
particular foreign country may suffer a decline against the U.S. dollar, it may
enter into a forward contract for a fixed amount of dollars, to sell the amount
of foreign currency approximating the value of some or all of such Portfolio's
securities denominated in such foreign currency. Similarly, when any of the
Portfolios anticipates that the U.S. dollar may suffer a decline against a
foreign currency it may enter into a foreign currency forward contract to buy
that currency for a fixed amount. However, it may not be practicable to hedge
currency in all markets, particularly emerging markets.

The precise matching of the forward contract amounts and the value of the
securities involved generally will not be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date on which the
forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.

Under normal circumstances, consideration of the prospect for changes in the
values of currency will be incorporated into the long-term investment decisions
made with regard to

24
<PAGE>

overall diversification strategies. However, the Advisers believe that it is
important to have the flexibility to enter into such forward contracts when
each determines that it is in the best interests of a Portfolio. Except under
circumstances where a segregated account is not required under the 1940 Act or
the rules adopted thereunder, the Portfolio will earmark cash or liquid assets
or place them into a segregated account in an amount necessary to cover the
Portfolio's obligations under such foreign currency forward contracts.

The Portfolios generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Portfolio may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.

It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for a Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.

If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.

The Portfolios are not required to enter into such transactions with regard to
their foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline
in the value of a currency does not eliminate fluctuation in the underlying
prices of the securities. It simply establishes a rate of exchange which one
can achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.

Futures Contracts (Futures) and Forward Contracts (Forwards). The Portfolios
may purchase and sell futures contracts, including futures on securities
indices, baskets of securities, foreign currencies and interest rates of the
type generally known as financial futures. These are standardized contracts
that are bought and sold on organized exchanges. A futures contract obligates a
party to buy or sell a specific amount of the "underlying," such as a
particular foreign currency, on a specified future date at a specified price or
to settle the value in cash.

The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed under
"Foreign Currency Forward Contracts." These forward contracts are privately
negotiated and are bought and sold in the over-the-counter market. Like a
future, a forward contract obligates a party to buy or sell a specific amount
of the underlying on a specified future date at a specified price. The terms of
the forward contract are customized. Forward contracts, like other over-the-
counter contracts that are negotiated directly with an individual counterparty,
subject the Portfolio to the risk of counterparty default.

In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may use futures contracts, forward contracts and related options are
as follows:

The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or may purchase
securities index futures or options in order to gain market exposure. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging markets. The nature of the strategies
adopted by the Advisers, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolios may also purchase and
sell foreign currency futures to lock in rates or to adjust their exposure to a
particular currency.

The Portfolio may engage in transactions in interest rate futures and related
products. The value of these contracts rises and falls inversely with change in
interest rates. The Portfolios may engage in such transactions to hedge their
holdings of debt instruments against future changes in interest rates or for
other purposes.

Gains and losses on future contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of movement
of securities prices, interest rates and other economic factors. Other risks
associated with the use of these instruments include (i) imperfect correlation
between the changes in market value of

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<PAGE>

investments held by a Portfolio and the prices of derivative products relating
to investments purchased or sold by the Portfolio, and (ii) possible lack of a
liquid secondary market for a derivative product and the resulting inability to
close out a position. A Portfolio will seek to minimize the risk by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
each Portfolio may, without registering with the CFTC as a Commodity Pool
Operator, enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of such Portfolio's total
assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.

Options. The Portfolios may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which such Portfolios may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on exchanges or over-the-counter markets.

Each Portfolio may purchase put and call options. Purchasing a put option gives
a Portfolio the right, but not the obligation, to sell the underlying (such as
a securities index or a particular foreign currency) at the exercise price
either on a specific date or during a specified exercise period. The purchaser
pays a premium to the seller (also known as the writer) of the option.

Each Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. A Portfolio that has written an
option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, a Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, a Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.

By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either
earmark or segregate sufficient liquid assets to cover its obligations under
the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any
consideration into the underlying; or (iii) a call option on the same
underlying with a strike price no higher than the price at which the underlying
was sold pursuant to a short option position. In the case of a put option, the
Portfolio will either earmark or segregate sufficient liquid assets to cover
its obligations under the option or will own another put option on the same
underlying with an equal or higher strike price.

There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Advisers and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.

Swaps, Caps, Collars and Floors. Swaps are privately negotiated over-the-
counter derivative products in which two parties agree to exchange payment
streams calculated in relation to a rate, index, instrument or certain
securities and a particular "notional amount." As with many of the other
derivative products available to the Portfolios, the underlying may include an
interest rate (fixed or floating), a currency exchange rate, a commodity price
index, and a security, securities index or a combination thereof. A great deal
of flexibility is possible in the way the products may be structured, with the
effect being that the parties may have exchanged amounts equal to the return on
one rate, index or group of securities for another. For example, in a simple
fixed-to-floating interest rate swap, one party makes payments equivalent to a
fixed interest rate, and the other make payments equivalent to a specified
interest rate index. A Portfolio may engage in simple or more complex swap
transactions involving a wide variety of underlyings. The currency swaps that
the Portfolios 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.

Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other
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<PAGE>

than foreign currency swaps), the entire notional amount is not exchanged and
thus is not at risk. A collar is a combination product in which the same party,
such as the Portfolio, buys a cap from and sells a floor to the other party. As
with put and call options, the amount at risk is limited for the buyer, but, if
the cap or floor in not hedged or covered, may be unlimited for the seller.
Under current market practice, caps, collars and floors between the same two
parties are generally documented under the same "master agreement." In some
cases, options and forward agreements may also be governed by the same master
agreement. In the event of a default, amounts owed under all transactions
entered into under, or covered by, the same master agreement would be netted
and only a single payment would be made.

Swaps, caps, collars and floors are credit-intensive products. A Portfolio that
enters into a swap transaction bears the risk of default, i.e. nonpayment, by
the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that
meet certain credit rating guidelines. Consistent with current market
practices, a Portfolio will generally enter into swap transactions on a net
basis, and all swap transactions with the same party will be documented under a
single master agreement to provide for net payment upon default. In addition, a
Portfolio's obligations under an agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued, but unpaid, net
amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies under the agreements related to the transaction.

Taxes

The following is only a summary of certain additional federal income tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Portfolios' prospectuses. No attempt is made to
present a detailed explanation of the tax treatment of the Portfolios or their
shareholders, and the discussion here and in the Portfolios' prospectuses is
not intended as a substitute for careful tax planning. Shareholders are urged
to consult their tax advisors with specific reference to their own tax
situations, including their state and local tax liabilities.

Federal Income Tax Treatment of Dividends and Distributions

The following general discussion of certain federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative charges or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.

Each Portfolio within the Fund is generally treated as a separate corporation
for federal income tax purposes, and thus the provisions of the Code generally
will be applied to each Portfolio separately, rather than to the Fund as a
whole.

Qualification as a Regulated Investment Company

The Fund intends that each of its Portfolios qualify and elect to be treated
for each taxable year as a regulated investment company ("RIC") under
Subchapter M of the Code. Accordingly, each Portfolio must, among other things,
(a) derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to security loans, gains from the sale or other
disposition of stock, securities or foreign currencies, and certain other
related income, including generally, certain gains from options, futures and
forward contracts; and (b) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items, U.
S. Government securities, securities or other RICs, and other securities, with
such other securities limited, in respect to any one issuer, to an amount not
greater than 5% of the value of the Portfolio's total assets or 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities (other than U. S.
Government securities or securities of other RICs) of any one issuer or two or
more issuers which the Portfolio controls and which are engaged in the same,
similar, or related trades or business. For purposes of the 90% of gross income
requirement described above, foreign currency gains which are not directly
related to a Portfolio's principal business of investing in stock or securities
(or options or futures with respect to stock or securities) may be excluded
from income that qualifies under the 90% requirement.

In addition to the requirements described above, in order to qualify as a RIC,
each Portfolio must distribute at least 90% of each Portfolio's net investment
income (that generally includes dividends, taxable interest, and the excess of
net

27
<PAGE>

short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.

Some of the Portfolios may make investments in securities (such as STRIPS) that
bear "original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income a Portfolio must distribute to satisfy
the Distribution Requirement. In some cases, a Portfolio may have to borrow
money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.

Although each Portfolio intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, a
Portfolio will be subject to federal income taxation to the extent any such
income or gains are not distributed.

If a Portfolio fails to qualify for any taxable year as a RIC, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent
of such Portfolio's current and accumulated earnings and profits. In this
event, distributions generally will be eligible for the dividends-received
deduction for corporate shareholders.

For certain transactions, each Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains or losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Realized gain or
loss attributable to a foreign currency forward contract is treated as 100%
ordinary income. Furthermore, foreign currency futures contracts which are
intended to hedge against a change in the value of securities held by a
Portfolio may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition.

Short sales engaged in by a Portfolio may reduce the holding period of property
held by a Portfolio which is substantially identical to the property sold
short. This rule may have the effect of converting capital gains recognized by
the Portfolio from long-term to short-term as well as converting capital losses
recognized by the Portfolio from short-term to long-term.

Each Portfolio will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by a Portfolio
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.

Federal Excise Tax

If a Portfolio fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), such Portfolio will be subject to a
nondeductible 4% Federal excise tax on the undistributed amounts. Each
Portfolio intends to make sufficient distributions to avoid imposition of this
tax, or to retain, at most its net capital gains and pay tax thereon.

Foreign Income Taxes

Each Portfolio that invests in foreign securities may be subject to foreign
withholding taxes with respect to its dividend and interest income from foreign
countries, thus reducing the net amount available for distribution to a
Portfolio's shareholders. The United States has entered into tax treaties with
many foreign countries that may entitle a Portfolio to a reduced rate of, or
exemption from, taxes on such income. It is impossible to determine the
effective rate of foreign tax in advance because the amount of a Portfolio's
assets to be invested within various countries is not known.

If more than 50% of the value of a Portfolio's total assets at the close of its
taxable year consists of the stock or securities of foreign corporations, such
Portfolio may elect to "pass through" to its shareholders the amount of foreign
income taxes paid by the Portfolio (the "Foreign Tax Election"). Pursuant to
the Foreign Tax Election, shareholders would be required to (i) include in
gross income, even though not actually received, their respective pro-rata
shares of the foreign income taxes paid by the Portfolio; (ii) either deduct
their pro-rata share of foreign taxes in computing their taxable income, or use
such share (subject to various Code limitations) as a foreign tax credit
against federal income tax (but not both). In determining the source and
character of distributions received from a Portfolio for purposes of the
foreign tax credit limitation rules of the Code, shareholders would, if that
Portfolio makes the Foreign Tax Election, be required to treat their pro-rata
shares of such foreign taxes and allocable portions of Portfolio distributions
as foreign source income.

Purchase of the Shares of the Portfolios

Shares of the Portfolios will be purchased by life insurance companies for
their separate accounts under variable annuity

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<PAGE>

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 of Portfolios of the
Fund 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 the company's variable annuity contracts or variable life
insurance policies, refer to the life insurance company's variable annuity
contract or variable life insurance policy prospectus.

State and Local Tax Considerations

Rules of U.S. state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of these and other U.S. state
and local tax rules regarding an investment in a Portfolio.

Purchase of Shares

The purchase price of each Portfolio of the Fund, except the Money Market
Portfolio, is the net asset value next determined after the order is received.
For each Portfolio of the Fund other than the Money Market Portfolio, an order
received prior to the close of the New York Stock Exchange (the "NYSE")
(normally 4:00 pm Eastern Time) will be executed at the price computed on the
date of receipt; and an order received after the close of the NYSE will be
executed at the price computed on the next day the NYSE is open as long as the
Fund's transfer agent receives payment by check or in Federal Funds prior to
the close of the NYSE on such day. Shares of the Money Market Portfolio may be
purchased at the net asset value per share at the price next determined after
Federal Funds are available to such Portfolio. Shares of each Portfolio may be
purchased on any day the NYSE is open. The NYSE will be closed on the following
days: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day, and typically on the preceding Friday or subsequent Monday when
any of these holidays falls on a Saturday or Sunday, respectively.

The Fund may accept late day orders from participating insurance companies. In
a late day order, all orders received by a participating insurance company on a
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 day.

Each Portfolio reserves the right in its sole discretion to suspend the
offering of its shares and to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Portfolio.

Redemption of Shares

Redemptions. Each Portfolio may suspend redemption privileges or postpone the
date of payment (i) during any period that the NYSE is closed, or trading on
the NYSE is restricted as determined by the SEC, (ii) during any period when an
emergency exists as defined by the rules of the SEC as a result of which it is
not reasonably practicable for a Portfolio to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the SEC may permit.

Distributions In Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the shareholders of a Portfolio to make a
redemption payment wholly in cash, and subject to applicable agreements with
life insurance companies and other qualified investors, the Fund may pay a
portion of a redemption by distribution in kind of portfolio securities in lieu
of cash. Securities issued in a distribution in kind will be readily
marketable, although shareholders receiving distributions in kind may incur
brokerage commissions when subsequently selling shares of those securities.

Investment Limitations

Fundamental Limitations

Each current Portfolio has adopted the following restrictions, which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:

(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling futures contracts or options thereon or
from investing in securities or other instruments backed by physical
commodities);

(2) purchase or sell real estate, although it may purchase and sell securities
of companies that deal in real estate and may purchase and sell securities that
are secured by interests in real estate;

(3) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;

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<PAGE>

(4) except with respect to the International Fixed Income, Emerging Markets
Equity, Emerging Markets Debt, International Magnum, Latin American, U.S. Real
Estate and Technology Portfolios (i) purchase more than 10% of any class of the
outstanding voting securities of any issuer and (ii) purchase securities of an
issuer (except obligations of the U.S. Government and its agencies and
instrumentalities) if as a result, with respect to 75% of its total assets,
more than 5% of the Portfolio's total assets, at market value, would be
invested in the securities of such issuer;

(5) issue senior securities and will not borrow, except from banks (and in the
case of the Technology Portfolio from banks and other entities) in an amount
not in excess of 33 1/3% of its total assets (including the amount borrowed)
less liabilities;

(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act
in the disposition of restricted securities; and

(7) acquire any securities of companies within one industry if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
that (i) there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or (in the
case of the Money Market Portfolio) instruments issued by U.S. banks; (ii)
utility companies will be divided according to their services, for example,
gas, gas transmission, electric and telephone will each be considered a
separate industry; (iii) financial service companies will be classified
according to the end users of their services, for example, automobile finance,
bank finance and diversified finance will each be considered a separate
industry; and (iv) ABSs will be classified according to the underlying assets
securing such securities; and provided further that the U.S. Real Estate
Portfolio may invest more than 25% of its total assets in the U.S. real estate
industry; the Latin American Portfolio may invest more than 25% of its assets
in securities of companies in the telecommunications industry or financial
services industry; and the Technology Portfolio may invest more than 25% of its
assets in securities of companies in the technology or technology related
industries.

In accordance with Fundamental Restriction No. (7), the Latin American
Portfolio will only invest more than 25% of its total assets in companies
involved in the telecommunications industry or financial services industry if
the Board of Directors determines that the Latin American markets are dominated
by securities of issuers in such industries and that, in light of the
anticipated return, investment quality, availability and liquidity of the
issuers in such industries, the Portfolio's ability to achieve its investment
objective would, in light of the investment policies and limitations, be
materially adversely affected if the Portfolio was not able to invest greater
than 25% of its total assets in such industries. The Board of Directors has
made the foregoing determination with respect to the telecommunications
industry and, accordingly, the Latin American Portfolio will invest between 25%
and 40% of its assets in securities of issuers engaged in the
telecommunications industry.

Non-fundamental Limitations

In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below. Such limitations may be changed without
shareholder approval. Each current Portfolio of the Fund will not:

(1) sell short (other than "against the box") unless the Portfolio's
obligation is covered by unencumbered liquid assets in a segregated account and
by collateral held by the lending broker; provided that transactions in futures
contracts and options are not deemed to constitute selling securities short;

(2) invest for the purpose of exercising control over management of any
company;

(3) invest its assets in securities of any investment company except as may be
permitted by the 1940 Act;

(4) invest more than an aggregate or 15% of the net assets of the Portfolio
(10% in the case of the Money Market Portfolio), determined at the time of
investment, in illiquid securities;

(5) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the prospectus) that are publicly distributed, and (ii) by lending
its portfolio securities to banks, brokers, dealers and other financial
institutions and, in the case of the High Yield Portfolio, institutional
investors, so long as such loans are not inconsistent with the 1940 Act or the
Rules and Regulations or interpretations of the SEC thereunder;

(6) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, but it may
make margin deposits in connection with transactions in options, futures, and
options on futures; and

(7) except in the case of the Emerging Markets Debt, Latin American and
Technology Portfolios, borrow money, other than temporarily or for
extraordinary or emergency purposes or purchase additional securities when
borrowings exceed 5% of total (gross) assets.

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<PAGE>

Each of the International Fixed Income, Emerging Markets Debt, Emerging Markets
Equity, International Magnum, Latin American, U.S. Real Estate and Technology
Portfolios will diversify its holdings so that, at the close of each quarter of
its taxable year, (i) at least 50% of the market value of the Portfolio's total
assets is represented by cash (including cash items and receivables), U.S.
Government securities, and other securities, with such other securities
limited, in respect of any one issuer, for purposes of this calculation to an
amount not greater than 5% of the value of the Portfolio's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities).

The percentage limitations contained in these restrictions apply at the time of
purchase of securities. Future Portfolios of the Fund may adopt different
limitations.

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.

In addition, Section 817(h) of the Internal Revenue Code requires that the
assets of each Portfolio be adequately diversified so that insurance companies,
and not variable contract owners, are considered the owners for federal income
tax purposes of the assets held in the separate accounts. To meet the
diversification requirements of regulations issued under Section 817(h), each
Portfolio will meet the following test: no more than 55% of the assets will be
invested in any one investment; no more than 70% of the assets will be invested
in any two investments; no more than 80% of the assets will be invested in any
three investments; and no more than 90% will be invested in any four
investments. Each Portfolio must meet the above diversification requirements
within 30 days of the end of each calendar quarter.

Determining Maturities of Certain Instruments

Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a
government obligation with a variable rate of interest readjusted no less
frequently than annually may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate; (b) an instrument
with a variable rate of interest, the principal amount of which is scheduled on
the face of the instrument to be paid in one year or less, may be deemed to
have a maturity equal to the period remaining until the next readjustment of
the interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand; (d) an instrument with a floating rate of interest that is subject to a
demand feature may be deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand; and (e) a
repurchase agreement may be deemed to have a maturity equal to the period
remaining until the date on which the repurchase of the underlying securities
is scheduled to occur, or where no date is specified, but the agreement is
subject to demand, the notice period applicable to a demand for the repurchase
of the securities. In addition, for securities that are subject to prepayments,
the weighted average life of the security will be used in the weighted average
maturity calculation instead of the stated maturity date on the instrument. The
weighted average life of a security takes into consideration the impact of
prepayments on the length of time the security will be outstanding and
typically indicates an actual maturity that is shorter than the maturity date
stated on the face of the instrument.

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Management of the Fund

Officers and Directors

The Fund's officers, under the supervision of the Board of Directors, manage
the day-to-day operations of the Fund. The Directors set broad policies for the
Fund and choose its officers. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies
managed, administered, advised or distributed by the Advisers or their
affiliates. Two Directors and all of the officers of the Fund are directors,
officers or employees of the Fund's advisers, distributor or administrators.
The other Directors have no affiliation with the Fund's advisers, distributor
or administrators. A list of the Directors and officers of the Fund and a brief
statement of their present positions and principal occupations during the past
five years is set forth below:

<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman, Director and Managing Director of Morgan
Morgan Stanley Dean Witter Stanley Dean Witter Investment Management Inc. and
Investment Management Morgan Stanley Dean Witter Investment Management
1221 Avenue of the Americas Limited; Managing Director of Morgan Stanley & Co.
New York, NY 10020 Incorporated; Member of the Yale Development
11/26/32 Board; Chairman and Director of various U.S.
registered investment companies managed by Morgan
Stanley Dean Witter Investment Management Inc.

Michael F. Klein* Director and President Principal of Morgan Stanley & Co. Incorporated and
Morgan Stanley Dean Witter Morgan Stanley Dean Witter Investment Management
Investment Management Inc.; President and Officer of various U.S.
1221 Avenue of the Americas registered investment companies managed by Morgan
New York, NY 10020 Stanley Dean Witter Investment Management Inc.
12/12/58 Previously practiced law with the New York law
firm of Rogers & Wells.

John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
Barrett Associates Inc. (investment counseling); Director of the Ashforth
521 Fifth Avenue Company (real estate); Director of Morgan Stanley
New York, NY 10135 Dean Witter Institutional Fund, Inc. and Morgan
8/21/35 Stanley Dean Witter Strategic Adviser Fund, Inc.

Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm);
Richards & O'Neil LLP Director of Morgan Stanley Dean Witter
43 Arch Street Institutional Fund, Inc. and Morgan Stanley Dean
Greenwich, CT 06830 Witter Strategic Adviser Fund, Inc.
1/23/37

Andrew McNally IV Director Director of Mercury Finance (consumer finance);
333 North Michigan Avenue Zenith Electronics, Hubbell, Inc. (industrial
Suite 501 electronics); Director of Morgan Stanley Dean
Chicago, IL 60601 Witter Institutional Fund, Inc. and Morgan Stanley
11/11/39 Dean Witter Strategic Adviser Fund, Inc.; Formerly
Chairman and Chief Executive Officer of Rand
McNally & Company (publishing).

Samuel T. Reeves Director Chief Executive Officer, Pinnacle Trading LLC
8211 North Fresno Street (investments); Director of Morgan Stanley Dean
Fresno, CA 93720 Witter Institutional Fund, Inc. and Morgan Stanley
7/28/34 Dean Witter Strategic Adviser Fund, Inc. and
Morgan Stanley Dean Witter India Investment Fund,
Inc.

Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd Plastics Corporation (injection molding); Trustee
Pawling, NY 12564 and Director of Vista Mutual Fund Group; Director
8/12/32 of Morgan Stanley Dean Witter Institutional Fund,
Inc. and Morgan Stanley Dean Witter Strategic
Adviser Fund, Inc. and Morgan Stanley Dean Witter
India Investment Fund, Inc.

Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm, P.C.;
2025 North Third Street Formerly, of Counsel, Bryan, Cave LLP (law firms);
Suite 300 Director of Morgan Stanley Dean Witter
Phoenix, AZ 85004 Institutional Fund, Inc. and Morgan Stanley Dean
1/24/34 Witter Strategic Adviser Fund, Inc.
</TABLE>

32
<PAGE>

<S> <C> <C>
Harold J. Schaaff, Jr. Vice President Principal of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Management Inc.; General Counsel and Secretary
1221 Avenue of the Americas of Morgan Stanley Dean Witter Investment
New York, NY 10020 Management Inc.; Vice President of various U.S.
6/10/60 registered investment companies managed by
Morgan Stanley Dean Witter Investment Management
Inc.

Joseph P. Stadler Vice President Principal of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Management Inc.; Previously with Price
1221 Avenue of the Americas Waterhouse LLP (now PricewaterhouseCoopers LLP)
New York, NY 10020 (accounting); Vice President of various U.S.
6/7/54 registered investment companies managed by
Morgan Stanley Dean Witter Investment Management
Inc.
Richard J. Shoch Vice President Vice President of Morgan Stanley Dean Witter &
Miller Anderson & Sherrerd, Co.; Fund Administration Manager, Miller
LLP Anderson & Sherrerd, LLP; Secretary of MAS
One Tower Bridge Funds; formerly Fund Legal Administrator and
West Conshohocken, PA 19428 then Counsel, Vice President and Assistant
10/28/66 Secretary, SEI Corporation.

Stefanie V. Chang Vice President Vice President of Morgan Stanley & Co.
Morgan Stanley Dean Witter Incorporated and Morgan Stanley Dean Witter
Investment Management Investment Management Inc.; Vice President of
1221 Avenue of the Americas various U.S. registered investment companies
New York, NY 10020 managed by Morgan Stanley Dean Witter Investment
11/30/66 Management Inc. Previously practiced law with
the New York law firm of Rogers & Wells.

James A. Gallo Vice President Vice President of Morgan Stanley Dean Witter &
Miller Anderson & Sherrerd, Co.; Head of Fund Administration, Miller
LLP Anderson & Sherrerd, LLP; Vice President and
One Tower Bridge Treasurer MAS Funds; formerly Manager, Internal
West Conshohocken, PA 19428 Accounting and then Vice President and Director
6/18/64 of Investment Accounting, PFPC, Inc.

Belinda A. Brady Treasurer Fund Administration Manager, Chase Global Funds
Chase Global Funds Services Services Company; Treasurer of various U.S.
Company registered investment companies managed by
73 Tremont Street Morgan Stanley Dean Witter Investment Management
Boston, MA 02108-3913 Inc. Previously was senior auditor at Price
1/23/68 Waterhouse LLP (now PricewaterhouseCoopers LLP).

Mary E. Mullin Secretary Vice President of Morgan Stanley & Co.
Morgan Stanley Dean Witter Incorporated and Morgan Stanley Dean Witter
Investment Management Inc. Investment Management Inc.; Secretary of various
1221 Avenue of the Americas U.S. registered investment companies managed by
New York, NY 10020 Morgan Stanley Dean Witter Investment Management
3/22/67 Inc. Previously practiced law with the New York
law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP.

Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General
Chase Global Funds Services Counsel of Chase Global Funds Services Company;
Company Previously President, Secretary and General
73 Tremont Street Counsel, Leland, O'Brien, Rubinstein Associates,
Boston, MA 02108-3913 Inc. (investments).
3/7/55
</TABLE>
-------
* "Interested Person" within the meaning of the 1940 Act.

33
<PAGE>

Remuneration of Directors and Officers

Members of the Board of Directors who are not "interested persons" within the
meaning of the 1940 Act ("Non-interested Directors") receive compensation from
the Fund and from other investment companies advised by MSDW Investment
Management or MAS (or by affiliated companies) (the Fund and such other
investment companies are referred to as the "Fund Complex"). The open-end
investment companies in the Fund Complex pay each of the Noninterested
Directors an annual aggregate compensation of $65,000, plus out-of-pocket
expenses, and pay each of the Noninterested Directors on the Board Audit
Committees additional annual aggregate compensation of $10,000 for serving on
such committees. The aggregate of such compensation for each Noninterested
Director is allocated among the open-end investment companies in direct
proportion to their respective average annual net assets. For the fiscal year
ended December 31, 1998, the Fund paid approximately $8,655 in Directors fees
and expenses. Column (2) in the following table sets forth the portions of the
annual aggregate compensation paid by the Fund to each Director for serving as
a Director of the Fund for the fiscal year ended December 31, 1998. Column (5)
in the table sets forth aggregate compensation paid by the Fund and Fund
Complex to each Director during the fiscal year ended December 31, 1998.
Compensation amounts do not include reimbursements of out-of-pocket expenses.
Directors who are officers or otherwise "interested persons" receive no
remuneration for their services as Directors. Directors and Officers of the
Fund do not own shares of the Fund.

Compensation Table

<TABLE>
<CAPTION>
(5)
Total
(3) (4) Compensation
Pension or Estimated From Fund
(2) Retirement Annual and Fund
Aggregate Benefits Accrued Benefits Complex
(1) Compensation as Part of Fund Upon Paid to
Name of Director From Fund Expenses Retirement Directors
---------------- ------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Barton M. Biggs $ 0 $ 0 $ 0 $ 0
Michael F. Klein 0 0 0 0
John D. Barrett, II(a) 1,340 0 0 65,000(c)
Gerard E. Jones(a) 1,340 0 0 72,100(c)(d)
Andrew McNally, IV(a)(b) 1,545 0 0 81,808(c)
Samuel T. Reeves(a)(b) 1,545 0 0 95,078(c)
Fergus Reid(a) 1,340 0 0 107,774(c)(d)
Frederick O. 1,545 0 0 75,000(c)
Robertshaw(a)(b)
</TABLE>
-------
(a) Of the amounts payable to Messrs. Barrett, Jones, McNally, Reeves, Reid and
Robertshaw, nothing was deferred pursuant to the Fund's deferred
compensation plan in the fiscal year ended December 31, 1998.
(b) Member of Audit Committee of the Board of Directors of the Fund.
(c) Number of other investment companies in Fund Complex from whom Director
received compensation: Mr. Barrett--2; Mr. Jones--3; Mr. McNally--2; Mr.
Reeves--3; Mr. Reid--3; Mr. Robertshaw--2.
(d) Includes amounts paid for service as Director of a closed-end investment
company in the Fund Complex, in addition to amounts paid by the open-end
investment companies.

The Fund maintains an unfunded Deferred Compensation Plan which allows each
independent Director to defer payment of all, or a portion, of the fees he or
she receives for attending meetings of the Board of Directors throughout the
year. Each eligible Director generally may elect to have the deferred amounts
credited with a return equal to either of the following: (i) a rate equal to
the prevailing rate for 90-day U.S. Treasury Bills, or (ii) a rate equal to the
total return on one or more portfolios of the Fund or other funds in the Fund
Complex selected by the Director. Distributions generally are in the form of
equal annual installments over a period of five years beginning on the first
day of the year following the year in which the Director's service terminates,
except that the Board of Directors, in its sole discretion, may accelerate or
extend such distribution. The Fund intends that the Deferred Compensation Plan
shall be maintained at all times on an unfunded basis for federal income tax
purposes under the Code. The rights of an eligible Director and the
beneficiaries to the amounts held under the Deferred Compensation Plan are
unsecured and such amounts are subject to the claims of the creditors of the
Fund.

Code of Ethics

The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-
1 of the 1940 Act which incorporates the Code of Ethics adopted by the Advisers
(together, the "Codes"). The Codes are intended to ensure that the interests of
shareholders and other clients are placed ahead of any personal interest, that
no undue personal benefit is obtained from a person's employment

34
<PAGE>

activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the Codes require,
among other things, that personal securities transactions by employees of the
Advisers be subject to an advance clearance process to monitor that such
transactions are not in conflict with transactions in which the Funds are or
may be engaged. The Codes ban the purchase of securities in an initial public
offering and profiting on short-term trading of a security. The Codes comport
with regulatory requirements and the recommendations in the 1994 report by the
Investment Company Institute Advisory Group on Personal Investing.

Investment Advisory, Sub-Advisory And Administrative Agreements

MSDW Investment Management is a wholly owned subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"). The principal offices of MSDW are located at 1585
Broadway, New York, New York 10036 and the principal offices of MSDW Investment
Management are located at 1221 Avenue of the Americas, New York, New York
10020. MAS, with principal offices located at One Tower Bridge, West
Conshohocken, Pennsylvania 19428, is also a subsidiary of MSDW.

Pursuant to an investment advisory agreement, MSDW Investment Management and
MAS receive compensation for providing investment advisory services in the
amounts described below.

Advisory Fees

The following table shows for each Portfolio the advisory fee paid for each of
the past three fiscal years.

MSDW Investment Management Advised Portfolios:*

<TABLE>
<CAPTION>
Advisory Fee Paid (000)
---------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Portfolio 1998 1997 1996
--------- -------------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
Equity Growth Portfolio $26 (net of fee waivers of $136) $0/1/ (net of fee waivers of $30 N/A
and reimbursements of $36)
U.S. Real Estate $24 (net of fee waivers of $92) $0/2/ (net of fee waivers of $49 N/A
Portfolio and reimbursements of $26)
Emerging Markets Debt $74 (net of fee waivers of $143) $8/3/ (net of fee waivers of $63) N/A
Portfolio
Global Equity Portfolio $95 (net of fee waivers of $141) $0/1/ (net of fee waivers of $62 N/A
and reimbursements of $37)
International Magnum $51 (net of fee waivers of $220) $0/1/ (net of fee waivers of $116 N/A
Portfolio and reimbursements of $119)
Emerging Markets Equity $0 (net of fee waivers of $447 $0 (net of fee waivers of $279 $0/4/ (net of fee waivers of $32
Portfolio and reimbursements of $87) and reimbursements of $240) and reimbursements of $82)
Asian Equity Portfolio $0 (net of fee waivers of $93 $0/2/ (net of fee waivers of $68 N/A
and reimbursements of $91) and reimbursements of $81)
</TABLE>
-------
* The Money Market, Latin American, Active International Allocation and
Technology Portfolios were not operational in the fiscal years ended December
31, 1998, 1997 and 1996. Consequently, no advisory fees were paid by these
Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.
/2/For the period from March 3, 1997 to December 31, 1997.
/3/For the period from June 16, 1997 to December 31, 1997.
/4/For the period from October 1, 1996 to December 31, 1996.

MAS Advised Portfolios:**

<TABLE>
<CAPTION>
Advisory Fee Paid (000)
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Portfolio 1998 1997 1996
--------- ------------------------------- -------------------------------- ------------
<S> <C> <C> <C>
Fixed Income Portfolio $17 (net of fee waivers of $93) $0/1/ (net of fee waivers of $38 N/A
and reimbursements of $58)
High Yield Portfolio $34 (net of fee waivers of $77) $0/1/ (net of fee waivers of $49 N/A
and reimbursements of $36)
Value Portfolio $14 (net of fee waivers of $86) $0/1/ (net of fee waivers of $38 N/A
and reimbursements of $32)
Mid Cap Value Portfolio $44 (net of fee waivers of $99) $0/1/ (net of fee waivers of $47 N/A
and reimbursements of $22)
</TABLE>
-------
** The Balanced, Core Equity, International Fixed Income, Mid Cap Growth and
Multi-Asset-Class Portfolios were not operational in the fiscal years ended
December 31, 1998, 1997 and 1996. Consequently, no advisory fees were paid
by these Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.

35
<PAGE>

Sub-Advisory Fees

Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"), with principal
offices at Two World Trade Center, New York, New York 10048, serves as the
investment sub-adviser to the Money Market Portfolio pursuant to an investment
sub-advisory agreement with MSDW Investment Management. As compensation for
managing the day-to-day investments of the Money Market Portfolio, MSDW
Investment Management pays MSDW Advisors 40% of the investment advisory fee
that MSDW Investment Management receives from this Portfolio.

Administration Fees

Pursuant to separate Administration Agreements with the Fund, MSDW Investment
Management and MAS provide administrative services to MSDW Investment
Management Advised Portfolios and MAS Advised Portfolios, respectively. For its
services under the Administration agreement, the Fund pays each Adviser a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of each Portfolio managed by that Adviser.

Under a Sub-Administration Agreement between each Adviser and Chase Global
Funds Services Company ("Chase Global"), a corporate affiliate of The Chase
Manhattan Bank, Chase Global provides certain administrative services to the
Fund. Chase Global's business address is 73 Tremont Street, Boston,
Massachusetts 02108-3913.

European Currency Transition. On January 1, 1999, the European Monetary Union
(EMU) implemented a new currency unit, the Euro, which is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world. Implementation of this plan means that financial
transactions and market information, including share quotations and company
accounts, in participating countries are now denominated in Euros. Monetary
policy for participating countries is uniformly managed by a new central bank,
the European Central Bank (ECB).

The transition to the Euro may change the economic environment and behavior of
investors, particularly in European markets. For example, the process of
implementing the Euro may adversely affect financial markets world-wide and may
result in changes in the relative strength and value of the U.S. dollar or
other major currencies, as well as possible adverse tax consequences. The
transition to the Euro is likely to have a significant impact on fiscal and
monetary policy in the participating countries and may produce unpredictable
effects on trade and commerce generally. These resulting uncertainties could
create increased volatility in financial markets world-wide.

Year 2000

The management and distribution services provided to the Fund by the Advisers,
MSDW Advisors and Morgan Stanley & Co. Incorporated ("'Morgan Stanley") depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the handling of securities trades,
pricing and account services. The Advisers, MSDW Advisors and Morgan Stanley
have been actively working on necessary changes to their own computer systems
to deal with the year 2000 problem and expect that their systems will be
adapted before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Advisers, MSDW Advisors and Morgan Stanley are monitoring
their remedial efforts, however, there can be no assurance that they and the
services they provide will not be adversely affected.

In addition, it is possible that the markets for securities in which the
Portfolios invest may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Portfolios' investments may be
adversely affected.

Distribution of Fund Shares

Under a Distribution Agreement with the Fund, Morgan Stanley, a subsidiary of
MSDW, serves as exclusive distributor of the Portfolios and sells shares of
each Portfolio on the terms described in the Fund's Prospectus.

36
<PAGE>

Principal Holders of Securities

As of July 31, 1999, the following persons were beneficial owners of 5% or more
of the outstanding shares of the following Portfolios:

<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<C> <S> <C>
Fixed Income Portfolio Allmerica Financial Life 41%
Insurance & Annuity Company*/1/
440 Lincoln St., S-310
Worcester, MA 01653

General American Life Insurance Company* 21%
700 Market Street
St. Louis, MO 63101

Transamerica Life Insurance and Annuity Company* 9%
Separate Account VA6
401 North Tryon Street
Charlotte, NC 28210

ICMG Registered Variable Life* 8%
Separate Account
PO Box 2999
Hartford, CT 06104

Annuity Investors Life Insurance Company* 7%
PO Box 5423
Cincinnati, OH 45201

American General Life Insurance Company* 6%
PO Box 1591
Houston, TX 77251

High Yield Portfolio Hartford Life & Annuity Insurance Company*/2/ 38%
Separate Account Three
PO Box 2999
Hartford, CT 06104

American General Life Insurance Company* 18%
PO Box 1591
Houston, TX 77251

Integrity Life Insurance Company* 18%
515 West Market Street
Louisville, KY 40202

National Integrity Life Insurance Company* 9%
515 West Market Street
Louisville, KY 40202

Transamerica Life Insurance and Annuity Company* 9%
Separate Account VA6
401 North Tryon Street
Charlotte, NC 28210

Equity Growth Portfolio Northbrook Life Insurance Company*/3/ 48%
3100 Sanders Road
Northbrook, IL 60062

American General Life Insurance Company* 24%
PO Box 1591
Houston, TX 77251
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------

<S> <C> <C>
AIG Life Insurance Company* 12%
1 Alico Plaza
Wilmington, DE 19801

Signature IIA* 6%
c/o Life Insurance Strategies
1610 Des Peres Road, Suite 370
Saint Louis, MO 63131

General American Life Insurance Company* 6%
700 Market Street
St. Louis, MO 63101

Value Portfolio American General Life Insurance Company*/4/ 43%
PO Box 1591
Houston, TX 77251

AIG Life Insurance Company* 22%
1 Alico Plaza
Wilmington, DE 19801

The Travelers Insurance Company* 13%
One Tower Square
Hartford, CT 06183

General American Life Insurance Company* 10%
700 Market Street
St. Louis, MO 63101

Mid Cap Value American General Life Insurance Company*/4/ 46%
Portfolio PO Box 1591
Houston, TX 77251

Hartford Life & Annuity Insurance Company*/2/ 33%
Separate Account Three
P.O. Box 2999
Hartford, CT 06104

The Travelers Insurance Company* 12%
One Tower Square
Hartford, CT 06183

U.S. Real Northbrook Life Insurance Company*/3/ 29%
Estate 3100 Sanders Road
Portfolio Northbrook, IL 60062

Ameritas Variable Life Insurance Company* 24%
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501

Integrity Life Insurance Company* 14%
515 West Market Street
Louisville, KY 40202

CIGNA Corporate Insurance* 9%
PO Box 2975
Hartford, CT 06104

Annuity Investors Life Insurance Company* 9%
PO Box 5423
Cincinnati, OH 45201

Ameritas Variable Life Insurance Company* 5%
Separate Account V
P.O. Box 82550
Lincoln, NE 68501
</TABLE>

38
<PAGE>

<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------

<S> <C> <C>
National Integrity Life Insurance Company* 5%
515 West Market Street
Louisville, KY 40202

Global Equity Fidelity Investments Life Insurance Company*/5/ 37%
Portfolio 82 Devonshire Street, R258
Boston, MA 02109

Ameritas Variable Life Insurance Company* 22%
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501

American General Life Insurance Company* 19%
P.O. Box 1591
Houston, TX 77251

The Travelers Insurance Company* 8%
One Tower Square
Hartford, CT 06183

Ameritas Variable Life Insurance Company* 5%
P.O. Box 82550
Lincoln, NE 68501

International Fidelity Investments Life Insurance Company* 22%
Magnum 82 Devonshire Street, R258
Portfolio Boston, MA 02109

General American Life Insurance Company* 21%
700 Market Street
St. Louis, MO 63101

American General Life Insurance Company* 19%
P.O. Box 1591
Houston, TX 77251

Ameritas Variable Life Insurance Company* 13%
P.O. Box 82550
Lincoln, NE 68501

Northbrook Life Insurance Company* 12%
3100 Sanders Road
Northbrook, IL 60062

Emerging Fidelity Investments Life Insurance Company*/5/ 28%
Markets 82 Devonshire Street, R258
Equity Boston, MA 02109
Portfolio

New York Life Insurance and Annuity 27%
Corporation*/6/
300 Interpace Parkway
Parsippany, NJ 07054

Northbrook Life Insurance Company* 11%
3100 Sanders Road
Northbrook, IL 60062

Ameritas Variable Life Insurance Company* 7%
P.O. Box 82550
Lincoln, NE 68501

Empire Fidelity Investments Life Insurance Company* 6%
200 Liberty Street
One Financial Center
New York, NY 10281
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------

<S> <C> <C>
Penn Mutual Life Insurance Company* 5%
Variable Annuity Account 03
Independence Square
Philadelphia, PA 19172

Asian Equity Morgan Stanley Dean Witter & Co./7/ 37%
Portfolio 1585 Broadway
New York, NY 10036

Ameritas Variable Life Insurance Company* 22%
P.O. Box 82550
Lincoln, NE 68501

Integrity Life Insurance Company* 21%
515 West Market Street
Louisville, KY 40202

National Integrity Life Insurance Company* 10%
515 West Market Street
Louisville, KY 40202

American General Life Insurance Company* 6%
P.O. Box 1591
Houston, TX 77251

Emerging Nationwide Life Insurance Company*/8/ 29%
Markets Debt P.O. Box 182029
Portfolio Columbus, OH 43218

Nationwide Life Insurance Company* 18%
P.O. Box 182029
Columbus, OH 43218

Morgan Stanley Dean Witter & Co. 18%
1585 Broadway
New York, NY 10036

Integrity Life Insurance Company* 13%
515 West Market Street
Louisville, KY 40202

Fidelity Investments Life Insurance Company* 9%
82 Devonshire Street, R258
Boston, MA 02109

Money Market AIG Life Insurance Co.*/9/ 100%
Portfolio 1 Alico Plaza
Wilmington, DE 19801
</TABLE>
-------

* Shares of the Portfolio are sold to insurance companies for their variable
annuity contracts and variable life insurance policies.
1 Allmerica Financial Life Insurance & Annuity Company's state of incorporation
is Massachusetts.
2 Hartford Life & Annuity Insurance Company's parent company is The Hartford
Financial Services Group and its state of incorporation is Connecticut.
3 Northbrook Life Insurance Company's parent company is Allstate Life Insurance
Company and its state of incorporation is Arizona.
4 American General Life Insurance Company's parent company is American General
Corporation and its state of incorporation is Texas.
5 Fidelity Investments Life Insurance Company's parent company is FMR
Corporation and its state of incorporation is Utah.
6 New York Life Insurance and Annuity Corporation's parent company is New York
Life Insurance company and its state of incorporation is Delaware.
7 Morgan Stanley Dean Witter & Co.'s state of incorporation is Delaware.
8 Nationwide Life Insurance Company's parent company is Nationwide Financial
Services, Inc. and its state of incorporation is Ohio.
9 AIG Life Insurance Company's parent company is American International Group
and its state of incorporation is Delaware.

40
<PAGE>

As currently required under law, the insurance companies vote their shares of
the Portfolios in accordance with instructions received from their variable
annuity contract and variable life insurance policy owners. MSDW will vote the
shares of each Portfolio that it owns in the same proportions as shares of the
Portfolio are voted by the insurance companies. Accordingly, neither MSDW nor
the insurance companies are deemed to be in control of the Portfolios.

Net Asset Value for the Money Market Portfolio

The Money Market Portfolio seeks to maintain a stable net asset value per share
of $1.00. The Portfolio uses the amortized cost method of valuing its
securities, which does not take into account unrealized gains or losses. The
use of amortized cost and the maintenance of the Portfolio's per share net
asset value at $1.00 is based on the Portfolio's election to operate under the
provisions of Rule 2a-7 under the 1940 Act. As a condition of operating under
that Rule, the Money Market Portfolio must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less, and invest only in securities which
are of "eligible quality" as determined in accordance with regulations of the
SEC.

The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and the
Portfolio's investment objectives, to stabilize the net asset value per share
as computed for the purposes of sales and redemptions at $1.00. These
procedures include periodic review, as the Directors deem appropriate and at
such intervals as are reasonable in light of current market conditions, of the
relationship between the amortized cost value per share and a net asset value
per share based upon available indications of market value. In such review,
investments for which market quotations are readily available are valued at the
most recent bid price or quoted yield available for such securities or for
securities of comparable maturity, quality and type as obtained from one or
more of the major market makers for the securities to be valued. Other
investments and assets are valued at fair value, as determined in good faith by
the Directors.

In the event of a deviation of over 1/2 of 1% between the Portfolio's net asset
value based upon available market quotations or market equivalents and $1.00
per share based on amortized cost, the Directors will promptly consider what
action, if any, should be taken. The Directors will also take such action as
they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise
from differences between the two. Such action may include redemption in kind,
selling instruments prior to maturity to realize capital gains or losses or to
shorten the average maturity, withholding dividends, paying distributions from
capital or capital gains or utilizing a net asset value per share as determined
by using available market quotations.

The Money Market Portfolio values its assets at amortized cost while also
monitoring the available market bid price, or yield equivalents. Since
dividends from net investment income will be declared daily and paid monthly,
the net asset value per share of the Portfolio will ordinarily remain at $1.00,
but the Portfolio's daily dividends will vary in amount. Net realized gains, if
any, will normally be declared and paid monthly.

Portfolio Transactions

The policy of the Fund regarding purchase and sales of securities for its
Portfolios is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Advisers from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisers rely upon their experience
and knowledge regarding commissions generally charged by various brokers and on
their judgment in evaluating the brokerage and research services received from
the broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.

In seeking to implement the Fund's policies, the Advisers effect transactions
with those brokers and dealers who the Advisers believe provide the most
favorable prices and are capable of providing efficient executions. If the
Advisers believe such prices and executions are obtainable from more than one
broker or dealer, they may give consideration to placing portfolio transactions
with those brokers and dealers who also furnish research and other services to
the Fund or Advisers. The Advisers may pay broker-dealers (other than their
affiliates) higher commissions than another broker-dealer may have charged on
the Fund's brokerage transactions in recognition of research services. During
the fiscal year ended December 31, 1998, the Fund directed transactions of
$631,584,903 and paid related commissions of $674,339 to brokers because of
research services provided. Such services may include, but are not limited to,
any one or more of the following: reports on industries and companies, economic
analyses and review of business conditions, portfolio strategy, analytic
computer software, account performance services, computer terminal and various
trading and/or quotation equipment. They also include advice from

41
<PAGE>

broker-dealers as to the value of securities, availability of securities,
availability of buyers, and availability of sellers. In addition, they include
recommendations as to purchase and sale of individual securities and timing of
such transactions.

The information and services received by the Advisers from brokers and dealers
may be of benefit to them in the management of accounts of some of their other
clients and may not in all cases benefit the Fund directly. While the receipt
of such information and services is useful in varying decrees and would
generally reduce the amount of research or services otherwise performed by the
Advisers and thereby reduce their expenses, it is of indeterminable value and
the advisory fees paid to an Adviser is not reduced by any amount that may be
attributable to the value of such services.

In over-the-counter transactions, orders are placed directly with a principal
market-maker and such purchases normally include a mark-up over the bid to the
broker-dealer based on the spread between the bid and the asked price for the
security.

Portfolio securities will not be purchased from, or through, or sold to or
through, the Advisers or MSDW or any of its affiliates when such entities are
acting as principals, except to the extent permitted by law.

Brokerage Fees

The following table shows the brokerage commissions paid by the Portfolios to
Morgan Stanley and its affiliates for the fiscal years ended December 31, 1998.

<TABLE>
<CAPTION>
Brokerage Commissions Paid During
Fiscal Year Ended December 31, 1998
------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Global Equity $ 90,498.00 $11,900.00 13.15% 13.95%
International Magnum 92,226.00 8,842.00 9.58 9.01
Emerging Markets Equity 221,754.00 8,780.00 3.96 3.19
Asian Equity 106,953.00 3,438.00 3.21 4.05
</TABLE>
-------
* The Fixed Income, High Yield, Equity Growth, Value, Mid Cap Value, U.S. Real
Estate and Emerging Markets Debt Portfolios did not pay any commissions to
affiliated brokers for the fiscal year ended December 31, 1998. The Money
Market, Latin American, Active International Allocation, Technology,
Balanced, Core Equity, International Fixed Income, Mid Cap Growth and Multi-
Asset-Class Portfolios were not operational in the fiscal year ended
December 31, 1998, and consequently, no brokerage fees were paid by these
Portfolios.

The following table shows the brokerage commissions paid by the Portfolios to
Morgan Stanley and its affiliates for the fiscal years ended December 31, 1997.

<TABLE>
<CAPTION>
Brokerage Commissions Paid During
Fiscal Year Ended December 31, 1997
---------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed Income $ 143.75/1/ $ 0 0% 0%
Equity Growth 24,660.00/1/ 24.00 0.10 0.15
Global Equity 27,665.00/1/ 2,406.00 8.70 7.25
International Magnum 48,111.00/1/ 221.00 0.46 0.29
Emerging Markets Equity 170,785.00 7,454.00 4.37 3.86
Asian Equity 164,416.00 1,698.00 1.03 1.87
</TABLE>
-------

* The High Yield, Value and Mid Cap Value Portfolios did not pay any
commissions to affiliated brokers for the period from January 2, 1997 to
December 31, 1997. The U.S. Real Estate Portfolio did not pay any
commissions to affiliated brokers for the period from March 3, 1997 to
December 31, 1997. The Emerging Markets Debt Portfolio did not pay any
commissions to affiliated brokers for the period from June 16, 1997 to
December 31, 1997. The Money Market, Latin American, Active International
Allocation, Technology, Balanced, Core Equity, International Fixed Income,
Mid Cap Growth and Multi-Asset-Class Portfolios were not operational in the
fiscal year ended December 31, 1997, and consequently, no brokerage fees
were paid by these Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.

42
<PAGE>

The following table shows the brokerage commissions paid by the Emerging
Markets Equity Portfolio to Morgan Stanley and its affiliates for the period
from October 1, 1996 (commencement of operations) through December 31, 1996.

<TABLE>
<CAPTION>
Brokerage Commissions Paid for the Period from October 1, 1996
(commencement of operations) Through December 31, 1996
----------------------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Emerging Markets Equity $42,941.00 $26.00 0.06% 0%
</TABLE>
-------
* The Emerging Markets Equity Portfolio was the only Portfolio operational in
the fiscal year ended December 31, 1996.

Directed Brokerage. During the fiscal year ended December 31, 1998, the
Portfolios paid brokerage commissions to brokers because of research services
provided as follows:

<TABLE>
<CAPTION>
Brokerage Commissions in Aggregate Dollar Amount of
Connection with Research Transactions for Which Such
Services Provided for Fiscal Commissions were Paid for
Year Ended December 31, Fiscal Year Ended December 31,
Portfolio 1998 1998
--------- ---------------------------- ------------------------------
<S> <C> <C>
Equity Growth Portfolio $ 76,835 $ 64,149,719
Asian Equity Portfolio $ 35,930 $ 8,264,690
Emerging Markets Equity
Portfolio $221,981 $ 65,707,126
U.S. Real Estate
Portfolio $ 64,188 $ 26,679,693
Emerging Markets Debt
Portfolio $ 0 $ 0
Global Equity Portfolio $ 87,342 $ 32,064,291
International Magnum
Portfolio $ 86,762 $ 37,886,905
Value Portfolio $ 23,125 $ 15,870,713
Fixed Income Portfolio $ 3,864 $290,417,368
Mid Cap Value Portfolio $ 78,285 $ 60,144,010
High Yield Portfolio $ 69 $ 31,408,319
</TABLE>

Regular Broker-Dealers. The Funds's regular broker-dealers are (i) the ten
broker-dealers that received the greatest dollar amount of brokerage commission
from the Fund; (ii) the ten broker-dealers that engaged as principal in the
largest dollar amount of portfolio transactions; and (iii) the ten broker-
dealers that sold the largest dollar amount of Portfolio shares. During the
fiscal year ended December 31, 1998, the following Portfolios purchased
securities issued by the Fund's regular broker-dealers:

<TABLE>
<CAPTION>
Value of Portfolio Holding
Portfolio Regular Broker-Dealer as of December 31, 1998
--------- ------------------------- --------------------------
<S> <C> <C>
Fixed Income............... Merrill Lynch & Co., Inc. $144,000
Lehman Brothers, Inc. $ 53,000
Mid Cap Value.............. Lehman Brothers, Inc. $101,000
Equity Growth.............. Merrill Lynch & Co., Inc. $294,000
</TABLE>

43
<PAGE>

Portfolio Turnover

The Portfolios (except for the Technology Portfolio) generally do not invest
for short-term trading purposes; however, when circumstances warrant, each
Portfolio may sell investment securities without regard to the length of time
they have been held. Market conditions in a given year could result in a
higher or lower portfolio turnover rate than expected and the Portfolios will
not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with their investment objectives and policies. Higher
portfolio turnover (e.g., over 100%) necessarily will cause the Portfolios to
pay correspondingly increased brokerage and trading costs.

Performance Information

Performance figures for the Portfolios may be quoted from time to time to
illustrate their past performance.

Performance quotations by investment companies are subject to rules adopted by
the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance quotations may be quoted
but must be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods
used by the Fund to compute or express performance follows.

Total Return

Total return on an investment in the Portfolios may be advertised from time to
time. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-,
5-, and 10-year periods (or over the life of the Portfolio) that would equate
an initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.

These total returns are calculated according to the following formula:

P(1 + T)n = ERV

where:
P=a hypothetical initial payment of $1,000
T=average annual total return
n=number of years
ERV= ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or
10-year periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion thereof).

Performance Chart

The following table shows the total return numbers for the one year ended
December 31, 1998 and the average annual total return since inception for each
of the Portfolios.*

<TABLE>
<CAPTION>
Average
Annual Average
Total Annual
Return One Total
Inception Year ended Return Since
Name of Portfolio* Date 12/31/98 Inception
------------------ --------- ---------- ------------
<S> <C> <C> <C>
Fixed Income 1/02/97 7.90% 8.94%
High Yield 1/02/97 4.80% 9.10%
Equity Growth 1/02/97 19.29% 26.06%
Value 1/02/97 -2.13% 8.84%
Mid Cap Value 1/02/97 15.85% 27.86%
U.S. Real Estate 3/03/97 -10.86% 2.79%
Emerging Markets Debt 6/16/97 -28.38% -19.06%
Global Equity 1/02/97 13.47% 16.76%
International Magnum 1/02/97 8.97% 8.16%
Emerging Markets Equity 10/01/96 -24.34% -12.26%
Asian Equity 3/03/97 -6.45% -29.43%
</TABLE>
-------
* The Money Market, Latin American, Active International Allocation,
Technology, Balanced, Core Equity, International Fixed Income, Mid Cap
Growth and Multi-Asset-Class Portfolios were not operational in the fiscal
year ended December 31, 1998. Consequently, total return numbers are not
available.

Calculation of Yield For Non-Money Market Fixed Income Portfolios

Portfolio yield may be advertised from time to time.

Current yield reflects the income per share earned by a Portfolio's
investments.

Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base
period.

Yield is obtained using the following formula:
Yield = 2[(a - b + 1)/6/ - 1]
-----
cd
where:
a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements)
c= the average daily number of shares outstanding during the period that were
entitled to receive income distributions
d= the maximum offering price per share on the last day of the period.

The respective current yields for certain of the Fund's Portfolios for the 30-
day period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Portfolio Name 30-Day Yield
-------------- ------------
<S> <C>
Emerging Markets Debt.............................................. 13.03%
Fixed Income....................................................... 4.97%
High Yield......................................................... 9.02%
</TABLE>

44
<PAGE>

Calculation of Yield For The Money Market Portfolio

The current yield of the Money Market Portfolio is calculated daily on a base
period return for a hypothetical account having a beginning balance of one
share for a particular period of time (generally 7 days). The return is
determined by dividing the net change (exclusive of any capital changes in such
account) by its average net asset value for the period, and then multiplying it
by 365/7 to determine the annualized current yield. The calculation of net
change reflects the value of additional shares purchased with the dividends by
the Portfolio, including dividends on both the original share and on such
additional shares. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all
dividends reinvested, may also be calculated for the Portfolio by dividing the
base period return by 7, adding 1 to the quotient, raising the sum to the 365th
power, and subtracting 1 from the result.

The yield of a Portfolio will fluctuate. The annualization of a week's dividend
is not a representation by the Portfolio as to what an investment in the
Portfolio will actually yield in the future. Actual yields will depend on such
variables as investment quality, average maturity, the type of instruments the
Portfolio invests in, changes in interest rates on instruments, changes in the
expenses of the Fund and other factors. Yields are one basis investors may use
to analyze the Portfolios of the Fund, and other investment vehicles; however,
yields of other investment vehicles may not be comparable because of the
factors set forth in the preceding sentence. differences in the time periods
compared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.

Comparisons

To help investors better evaluate how an investment in a Portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages.

In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the Fund's Portfolios and
that the indices and averages are generally unmanaged and do not reflect the
deduction of any fees or expenses. In addition, there can be no assurance that
the relative performance of the Fund to such averages and indices will
continue.

General Performance Information

Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze a Portfolio as compared to other funds and other investment
vehicles. However, performance of other funds and other investment vehicles may
not be comparable because of the foregoing variables, and differences in the
methods used in valuing their portfolio instruments, computing net asset value
and determining performance.

From time to time, the investment performance of a Portfolio may be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example, Morningstar, Inc. may be quoted in advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance. Rankings that compare the
performance of funds to one another in appropriate categories over specific
periods of time may also be quoted in advertising.

Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. Performance of these capital markets may be used in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any of
these capital markets. The risks associated with the security types in any
capital market may or may not correspond directly to those of the Portfolios.
The Portfolios may also compare their performance to that of other compilations
or indices that may be developed and made available in the future.

Advertisements may include charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, foreign securities, stocks, bonds, treasury bills
and shares of a Portfolio. In addition, advertisements may include a discussion
of certain attributes or benefits to be derived by an investment in a Portfolio
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and various investment alternatives.

Advertisements may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing. such as asset allocation, diversification,
risk tolerance, goal setting questionnaires designed to help create

45
<PAGE>

a personal financial profile, worksheets used to project savings needs based on
assumed rates of inflation and hypothetical rates of return and action plans
offering investment alternatives), investment management techniques, policies
or investment suitability of a Portfolio (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax- deferred and taxable investments). In addition, advertisements and sales
materials relating to a Portfolio may include information regarding the
background and experience of its portfolio managers; the resources, expertise
and support made available to the portfolio managers by MSDW Investment
Management and MAS; and the portfolio managers' goals, strategies and
investment techniques.

Advertisements may discuss economic and political conditions of the United
States and foreign countries, the relationship between sectors of the U.S., a
foreign or the global economy and the U.S., a foreign, or the global economy as
a whole, and the effects of inflation. Discussions and illustrations of the
growth potential of various global markets including, but not limited to,
Africa, Asia, Europe, Latin America, North America, South America, Emerging
Markets and individual countries, may be included in advertisements. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market
performance; and the underlying data which supports such forecasts. From time
to time, advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of MSDW Investment Management and MAS as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Portfolio.

The Portfolios' advertisements may quote various measures of volatility and
benchmark correlation and the measures may be compared to those of other funds.
Measures of volatility seek to compare the historical share price fluctuations
or total returns to those of a benchmark. Measures of benchmark correlation
indicate how valid a comparative benchmark may be. Measures of volatility and
correlation may be calculated using averages of historical data. The Portfolios
may also advertise their current interest rate sensitivity, duration, weighted
average maturity or similar maturity characteristics.

The Portfolios may advertise examples of the effects of periodic investment
plans, including the principal of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard against
loss in a declining market, the investor's average cost per share can be lower
than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.

General Information

Description of Shares and Voting Rights

The Fund's Articles of Incorporation permit the Directors to issue 11 billion
shares of common stock, par value $.001 per share, from an unlimited number of
classes ("Portfolios") of shares. Currently the Fund consists of shares of 20
Portfolios.

The shares of each Portfolio of the Fund are fully paid and nonassessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each Portfolio of the Fund have no pre-emptive rights.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. A shareholder is entitled
to one vote for each full share held (and a fractional vote for each fractional
share held), then standing in his name on the books of the Fund.

Dividends and Capital Gains Distributions

The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted. Any dividend or
distribution paid shortly after the purchase of shares of a Portfolio by an
investor may have the effect of reducing the per share net asset value of that
Portfolio by the per share amount of the dividend or distribution.

Custody Arrangements

Chase serves as the Custodian of the assets of the Portfolios. Chase is not an
affiliate of either of the Advisers or the Distributor. In maintaining custody
of foreign assets held outside the United States, Chase 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.

Prior to October 1, 1998, Morgan Stanley Trust Company acted as the Fund's
custodian for foreign assets held outside the United States. MSTC, an affiliate
of MSDW, received custody fees of $369,055 for the period from January 1, 1998
through September 30, 1998.
46
<PAGE>

In the selection of foreign sub-custodians, the Directors or their delegates
consider a number of factors, including, but not limited to, the reliability
and financial stability of the institution, the ability of the institution to
provide efficiently the custodial services required for the Fund, and the
reputation of the institution in the particular country or region.

Legal Matters

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

Description of Ratings

Description of Commercial Paper Ratings

Description of Moody's Ratings of State and Municipal Notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-l--best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2--high quality with margins of protection ample
although not so large as in the preceding group; MIG-3--favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.

Description of Moody's Highest Commercial Paper Rating: Prime-1 ("P1")--Judged
to be of the best quality. Their short-term debt obligations carry the smallest
degree of investment risk.

Excerpt From S&P's Rating of Municipal Note Issues: SP-1+ --very strong
capacity to pay principal and interest; SP-2--strong capacity to pay principal
and interest.

Description of S&P's Highest Commercial Paper Ratings: A-1+ --this designation
indicates the degree of safety regarding timely payment is overwhelming. A-1--
this designation indicates the degree of safety regarding timely payment is
very strong.

Description of Moody's Corporate Bond Ratings:

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

AA--Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as for Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.

A--Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

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

BA--Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.

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

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

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

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

Moody's applies numerical modifiers 1, 2 and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

Description of S&P's Corporate Bond Ratings:

AAA--Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.

47
<PAGE>

AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.

A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

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

BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments.

B--Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.

CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.

CC--Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.

C--The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.

CI--The rating CI is reserved for income bonds on which no interest is being
paid.

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

Financial Statements

The Fund's financial statements for the fiscal year ended December 31, 1998,
including the notes thereto and the report of PricewaterhouseCoopers LLP, are
herein incorporated by reference from the Fund's Annual Report to Shareholders.
A copy of the Fund's Annual Report must accompany the delivery of this
Statement of Additional Information.
48