DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS, N-3/A, 1996-11-19

DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
N-3/A, 1996-11-19

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1996

REGISTRATION NOS. 333-08543

811-07717
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM N-3
------------------------

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO. 1 [X]

POST-EFFECTIVE AMENDMENT NO. [ ]

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 1 [X]

(CHECK APPROPRIATE BOX OR BOXES.)
------------------------

DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
(EXACT NAME OF REGISTRANT)

AUSA LIFE INSURANCE COMPANY, INC.
(NAME OF INSURANCE COMPANY)

4 MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(ADDRESS OF INSURANCE COMPANY'S PRINCIPAL EXECUTIVE OFFICES)

(914) 697-8000
(INSURANCE COMPANY TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------

ROBERT F. COLBY, ESQ.
AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(NAME AND ADDRESS OF AGENT FOR SERVICE)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this registration statement.

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant hereby declares that an indefinite amount of securities (variable
annuity contracts) is being registered by this registration statement.
------------------------

The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2

CROSS REFERENCE SHEET
(REQUIRED BY RULES 481(A) AND 495)

<TABLE>
<CAPTION>
PART A
ITEM NO. LOCATION
- -------- -------------------------------------
<C> <S> <C>
1. Cover Page.................................................. Cover Page
2. Definitions................................................. Definitions
3. Synopsis.................................................... Synopsis
4. Condensed Financial Information............................. Not Applicable
5. General Description of Registrant and Insurance Company..... AUSA Life Insurance Company, Inc.,
Diversified Investors Strategic
Variable Funds, Diversified Investors
Portfolios
6. Management.................................................. Diversified Investors Strategic
Variable Funds -- Management
7. Deductions and Expenses..................................... Charges
8. General Description of Variable Annuity Contracts........... Summary of The Contracts
9. Annuity Period.............................................. Payment Options
10. Death Benefit............................................... Death Benefit; Payments To A
Beneficiary Following The Annuitant's
Death
11. Purchases and Contract Value................................ Credit of Purchase Payments;
Allocation of Purchase Payments;
Determination of Unit Value
12. Redemptions................................................. Redemption During The Accumulation
Period; Restrictions Under The Texas
Optional Retirement Program
13. Taxes....................................................... Federal Tax Status; Tax Treatment of
AUSA; Section 403(b) Annuities;
Section 401(a) Plans; Section 408
(IRA) Contracts; Section 457 Plans;
Section 457(f) Plans; Section 72
Flexible Annuities; Non-Qualified
Deferred Compensation Contracts;
Income Tax Withholding
14. Legal Proceedings........................................... Legal Proceedings
15. Table of Contents of the Statement of Additional
Information................................................. Table of Contents of Statement of
Additional Information
PART B
16. Cover Page.................................................. Cover Page
17. Table of Contents........................................... Table of Contents
18. General Information and History............................. Not Applicable
19. Investment Objectives and Policies.......................... Investment Objectives and Policies
20. Management.................................................. Management
21. Investment Advisory and Other Services...................... Management-Investment Advisory
Services
22. Brokerage Allocation........................................ Brokerage Allocation
23. Purchase and Pricing of Securities Being Offered............ Not Applicable
24. Underwriters................................................ Sale of Contracts/Principal
Underwriter
25. Calculation of Performance Data............................. Performance Data
26. Annuity Payments............................................ Not Applicable
27. Financial Statements........................................ Financial Statements and Notes to
Financial Statements
</TABLE>

PART C

INFORMATION REQUIRED TO BE INCLUDED IN PART C IS SET FORTH UNDER THE APPROPRIATE
ITEM, SO NUMBERED IN PART C OF THIS REGISTRATION STATEMENT.

<TABLE>
<C> <S> <C>
28. Financial Statements and Exhibits........................................................... C-1
29. Directors and Officers of the Insurance Company............................................. C-2
30. Persons Controlled by or Under Common Control with the Insurance Company or Registrant...... C-2
31. Number of Contractowners.................................................................... C-2
32. Indemnification............................................................................. C-2
33. Business and Other Connections of the Investment Adviser....................................
34. Principal Underwriters...................................................................... C-2
35. Location of Accounts and Records............................................................ C-3
36. Management Services......................................................................... C-3
37. Undertakings................................................................................ C-3
</TABLE>
<PAGE> 3

DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS

GROUP VARIABLE ANNUITY CONTRACTS

SECTIONS 401(a), 401(k), 403(b), 408(IRA), 457 AND NQDC

ISSUED BY

AUSA LIFE INSURANCE COMPANY, INC. ("AUSA")
4 MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577; (914) 697-8000

The Group Variable Annuity Contracts ("Contracts") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt organizations,
IRA Contractholders, taxed organizations in the case of the Section 401(a)
and/or Section 401(k) Contracts and corporate nonqualified deferred compensation
contracts ("NQDC").

Insofar as possible, the provisions of the Contracts are identical, and the
information provided in this Prospectus is generally applicable to all
Contracts. However, whenever statutory or administrative considerations require
significant differences among the Contracts, such differences are explained
separately for each.

Purchase Payments under the Contracts are allocated to a segregated
investment account of AUSA Life Insurance Company, Inc. which account has been
designated the Diversified Investors Strategic Variable Funds. Purchase Payments
directed to the Diversified Investors Strategic Variable Funds may be allocated
among such of the subaccounts in the Diversified Investors Strategic Variable
Funds as are made available under the Contracts. The three currently available
subaccounts (the "Subaccounts") are the Diversified Investors Conservative
Strategic Variable Fund, the Diversified Investors Moderate Strategic Variable
Fund and the Diversified Investors Aggressive Strategic Variable Fund.
Diversified Investment Advisors, Inc. ("Diversified") is the investment adviser
(the "Adviser") to each Subaccount and seeks to achieve the investment objective
of each Subaccount by investing in a diversified portfolio of units issued by
subaccounts of Diversified Investors Variable Funds (the "Underlying Diversified
Subaccounts"), a segregated investment account of AUSA with twelve subaccounts
(with varying investment objectives) available for investment in by Subaccounts.
See "Diversified Investors Strategic Variable Funds -- Description of the
Underlying Diversified Subaccounts/Portfolios" at page 12.

The value of the Accumulation Accounts maintained in the Diversified
Investors Strategic Variable Funds will vary based upon the investment
experience of the Subaccounts to which Purchase Payments are allocated. The
investment experience of the Subaccounts will vary based on the underlying
investment performance of the Underlying Diversified Subaccounts invested in.

This Prospectus sets forth the basic information that a prospective
purchaser should know before investing. Please keep this Prospectus for future
reference.

A Statement of Additional Information dated November , 1996 incorporated
herein by reference, and containing additional information about the Contracts
has been filed with the Securities and Exchange Commission. The Statement of
Additional Information is available from AUSA without charge upon written
request to the above address or by telephoning (914) 697-8000. The Table of
Contents of the Statement of Additional Information can be found on page 39 of
this Prospectus.

This Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy the Contracts in any jurisdiction in which such may not be
lawfully made.

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

Dated November , 1996

<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................ 3
Synopsis................................... 5
Fee Table................................ 5
The Contracts............................ 7
Diversified Investors Variable Funds..... 7
Charges.................................. 8
Credit And Allocation Of Purchase
Payments............................... 8
Redemption............................... 8
Transfers................................ 8
Payment Options.......................... 9
Voting Rights............................ 9
Death Benefit............................ 9
Distribution Of The Contracts............ 9
Financial Information.................... 9
AUSA....................................... 9
Diversified Investors Strategic Variable
Funds.................................... 9
Investment Objectives of the
Subaccounts............................ 10
Description of the Underlying Diversified
Subaccounts/Portfolios................. 13
Underlying Diversified Subaccounts
Available to all Subaccounts........... 13
Underlying Diversified Subaccounts Also
Available to the Moderate and
Aggressive Funds....................... 16
Special Risks and Considerations......... 18
Investment Policies of the Underlying
Diversified Subaccounts/Portfolios..... 18
Master/Feeder Structure.................. 20
Management............................... 21
Charges.................................... 24
Charges for Mortality and Expense
Risks.................................. 24
Annual Contract Charge................... 25
Investment Management Fee................ 25
Summary Of The Contracts................... 25
Eligible Purchasers...................... 25
Ownership................................ 26
Purchase Payments........................ 26
Employer Sponsored Plan Requirements..... 26
Rights Of The Participant Under The
Contract............................... 26
Rights Upon Suspension Of Contract or
Termination Of Plan.................... 27
403(b) Contract.......................... 27
401(a) Contract/401(k) Contract and
NQDC................................... 27
457, 457(f), Flexible Annuity, and 408
(IRA).................................. 27
Failure Of Qualification................. 27
Transfers................................ 27
Rights Reserved By AUSA.................... 28
Credit Of Purchase Payments................ 28
Allocation Of Purchase Payments.......... 29
Determination Of Unit Values............. 29
Death Benefit.............................. 29
Redemption During The Accumulation
Period................................... 30
Restrictions Under The Texas Optional
Retirement Program....................... 30
Payment Options............................ 31
Annuity Purchase Date.................... 31
Fixed Annuity............................ 31
Fixed Annuity Options.................... 32
Payments To A Beneficiary Following The
Annuitant's Death...................... 32
Voting Rights............................ 33
Distribution Of The Contracts............ 34
Federal Tax Status....................... 34
Tax Treatment of AUSA.................. 34
Taxation of Diversified Investors
Portfolios........................... 34
Section 403(b) Annuities............... 35
Section 401(a) Plans................... 36
Section 408 (IRA) Contracts............ 36
Minimum Distribution Requirements...... 36
Section 457 Plans...................... 37
Non-Qualified Deferred Compensation
Contracts............................ 37
Income Tax Withholding................. 37
Performance Data......................... 38
Independent Accountants.................. 39
Legal Proceedings........................ 39
Financial Statements..................... 39
Additional Information................... 39
Table of Contents of Statement of
Additional Information................. 40
Request For Diversified Investors
Strategic Variable Funds Statement of
Additional Information................. 41
APPENDIX................................. A-1
</TABLE>

2
<PAGE> 5

DEFINITIONS

As used in this Prospectus, the following terms have the indicated meaning:

ACCUMULATION ACCOUNT: an account maintained for each Participant in which
is recorded the number of Units held for his/her credit.

ACCUMULATION PERIOD: the accumulation period for each Participant is the
period during which Purchase Payments may be made on his/her behalf. It begins
when the Participant begins participation under the Plan and ends as of his/her
Annuity Purchase Date (See "Annuity Purchase Date" on page 30), or earlier
termination of his/her Accumulation Account.

AGGRESSIVE EQUITY PORTFOLIO: Diversified Investors Aggressive Equity
Portfolio, a series of Diversified Investors Portfolios.

CONTRACT(S): the group variable annuity contract(s) offered by AUSA to
Contractholders, IRA Contractholders or NQDL Contractholders as described in
this Prospectus.

CONTRACTHOLDER: a state educational organization or certain tax-exempt
organization employer or employer association for affiliated employers, taxed
subsidiaries of tax-exempt organizations and taxed stand alone organizations.

CONTRACT YEAR: a period of 12 months measured from the date of the Contract
issued to or adopted by the Contractholder, and anniversaries thereof.

DIVERSIFIED: Diversified Investment Advisors, Inc., a registered investment
adviser under the Investment Advisers Act of 1940, as amended, and an affiliate
of AUSA.

DIVERSIFIED INVESTORS PORTFOLIOS: Diversified Investors Portfolios, an
open-end diversified management investment company registered under the
Investment Company Act of 1940, as amended.

EQUITY GROWTH PORTFOLIO: Diversified Investors Equity Growth Portfolio, a
series of Diversified Investors Portfolios.

EQUITY INCOME PORTFOLIO: Diversified Investors Equity Income Portfolio, a
series of Diversified Investors Portfolios.

EQUITY VALUE PORTFOLIO: Diversified Investors Equity Value Portfolio, a
series of Diversified Investors Portfolios.

FIXED ANNUITY: an annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.

GOVERNMENT/CORPORATE BOND PORTFOLIO: Diversified Investors
Government/Corporate Bond Portfolio, a series of Diversified Investors
Portfolios.

GROWTH & INCOME PORTFOLIO: Diversified Investors Growth & Income Portfolio,
a series of Diversified Investors Portfolios.

HIGH QUALITY BOND PORTFOLIO: Diversified Investors High Quality Bond
Portfolio, a series of Diversified Investors Portfolios.

HIGH-YIELD BOND PORTFOLIO: Diversified Investors High-Yield Bond Portfolio,
a series of Diversified Investors Portfolios.

INTERMEDIATE GOVERNMENT BOND PORTFOLIO: Diversified Investors Intermediate
Government Bond Portfolio, a series of Diversified Investors Portfolios.

INTERNATIONAL EQUITY PORTFOLIO: Diversified Investors International Equity
Portfolio, a series of Diversified Investors Portfolios.

IRA CONTRACTHOLDER: a tax-exempt, or taxed organization or an association
of members who share a common interest.

3
<PAGE> 6

MONEY MARKET PORTFOLIO: Diversified Investors Money Market Portfolio, a
series of Diversified Investors Portfolios.

NQDC: Non-qualified deferred compensation arrangement available to taxed
organizations only.

PARTICIPANT: an employee participating under a Contract issued to or
adopted by his/her employer or an individual participating under a Contract
issued to an IRA Contractholder.

PLAN: a retirement plan or program under which benefits are to be provided
pursuant to a Contract described herein or by a Participant.

PURCHASE PAYMENT: the amount contributed and remitted to AUSA by an
employer on behalf of a Participant.

SPECIAL EQUITY PORTFOLIO: Diversified Investors Special Equity Portfolio, a
series of Diversified Investors Portfolios.

SUBACCOUNT: a subdivision of Diversified Investors Strategic Variable Funds
which is available for the allocation of Purchase Payments under the Contracts.

UNDERLYING DIVERSIFIED PORTFOLIO: a series of Diversified Investors
Portfolios which is invested in by a corresponding Underlying Diversified
Subaccount.

UNDERLYING DIVERSIFIED SUBACCOUNT: a subdivision of Diversified Investors
Variable Funds which is available for investment in by a Subaccount. Twelve
Underlying Diversified Subaccounts, each of which invest in a corresponding
series of Diversified Investors Portfolios, are presently available for
investment in by a Subaccount.

UNIT: the measure by which the value of an investor's interest in each
Subaccount is determined.

VALUATION DATE: each day at the close of business of the New York Stock
Exchange (currently at 4:00 p.m. New York City time), each day that the New York
Stock Exchange is open for trading, or any other day on which there is
sufficient trading in securities of a series of Diversified Investors Portfolios
to affect materially the value of the Units of a Subaccount. If the New York
Stock Exchange extends its closing beyond 4:00 p.m. New York City time, and
continues to value after the time of closing of the New York Stock Exchange,
AUSA reserves the right to treat any payment or communication received after
4:00 p.m. New York City time as being received as of the beginning of the next
day.

VALUATION PERIOD: The period between the ending of two successive Valuation
Dates.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE TO ANY PERSON TO
WHOM SUCH OFFER WOULD BE UNLAWFUL IN SUCH STATE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.

4
<PAGE> 7

SYNOPSIS

AUSA LIFE INSURANCE COMPANY, INC.
DIVERSIFIED INVESTORS VARIABLE FUNDS

FEE TABLE

The purpose of these tables is to assist you in understanding the various
costs and expenses that a Contractholder allocating Purchase Payments under the
Contracts to Diversified Investors Strategic Variable Funds would incur directly
and indirectly as a result of each Subaccount's investment in the Underlying
Diversified Subaccounts and Underlying Diversified Portfolios (Series). Each
Subaccount will bear directly only a Management Fee equal to .20% of average
daily net assets of the Subaccount. However, each Subaccount also will bear,
indirectly, its pro rata share of (i) the mortality and expense risk fees
charged at the Underlying Diversified Subaccount level and (ii) fees and
expenses (including investment management fees) incurred by the Series of
Underlying Diversified Portfolios. The investment returns of each Subaccount
will be net of all such expenses. (See "Charges", below, for a more complete
description of certain of these fees and expenses.) Accordingly, the total fees
and expenses associated with an investment in Diversified Investors Variable
Funds will be an aggregate of the expenses incurred at the three levels.

<TABLE>
<S> <C>
Annual Contract Fee*................................................ None
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees (charged to the Subaccounts)........................ .20%
Mortality and Expense Risk Fees** (charged to Underlying Diversified
Subaccounts)...................................................... .90%
Other Expenses...................................................... None
-----
Total Annual Expenses**............................................. 1.10%
=====
</TABLE>

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

* AUSA reserves the right to deduct an annual contract charge
from a Participant's Accumulation Account not to exceed $50.
See "Charges -- Annual Contract Charge" at page .

** AUSA reserves the right to charge maximum mortality and
expense risk fees of up to 1.25% upon notice.

As described above, each Subaccount will also pay a pro rata portion of the
expenses of the Underlying Diversified Portfolios (Series). The following table
provides the expense ratios (net of waivers and reimbursements) as a percentage
of net assets for each series of the Underlying Diversified Portfolios in which
the Subaccount will, indirectly, invest.

5
<PAGE> 8

<TABLE>
<CAPTION>
MANAGEMENT
CONSERVATIVE STRATEGIC FEE (AFTER OTHER TOTAL ANNUAL
VARIABLE FUND REIMBURSEMENTS) EXPENSES(1) SERIES EXPENSES(2)
----------------------------------- --------------- ----------- ------------------
<S> <C> <C> <C>
Money Market Series(3)............. .23% .07% .30%
High Quality Bond Series........... .35% .05% .40%
Intermed. Government Bond Series... .28% .12% .40%
Government/Corporate Bond Series... .35% .04% .39%
High Yield Bond Series............. .54% .06% .60%
Equity Income Series............... .45% .04% .49%
Equity Value Series................ .43% .07% .60%
Growth & Income Series............. .58% .07% .65%

<CAPTION>
MANAGEMENT
MODERATE AND AGGRESSIVE FEE (AFTER OTHER TOTAL ANNUAL
STRATEGIC VARIABLE FUNDS REIMBURSEMENTS) EXPENSES(1) SERIES EXPENSES(2)
----------------------------------- --------------- ----------- ------------------
<S> <C> <C> <C>
Money Market Series(3)............. .23% .07% .30%
High Quality Bond Series........... .35% .05% .40%
Intermed. Government Bond Series... .28% .12% .40%
Government/Corporate Bond Series... .35% .04% .39%
High Yield Bond Series............. .54% .06% .60%
Equity Income Series............... .45% .04% .49%
Equity Value Series................ .43% .17% .60%
Growth & Income Series............. .58% .07% .65%
Equity Growth Series(3)............ .60% .05% .65%
Special Equity Series.............. .76% .09% .85%
Aggressive Equity Series........... .87% .13% 1.00%
International Equity Series........ .75% .15% .90%
</TABLE>

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

(1) "Other Expenses" have been estimated for the current fiscal
year based upon the following projected level of average
daily net assets for the following Underlying Diversified
Portfolios: High Quality Bond Series -- $150 million;
High-Yield Bond Series -- $50 million; Equity Value
Series -- $50 million; Aggressive Equity Series -- $50
million; and International Equity Series -- $100 million.
There can be no assurance that these levels of average daily
net assets will be achieved. If average daily net assets are
lower for any such series, "Other Expenses" may be a higher
percentage than indicated above of such series' average
daily net assets. "Other Expenses" for all other Underlying
Diversified Portfolios are actual for the year ended
December 31, 1995.

(2) "Total Annual Series Expenses" for certain of the Underlying
Diversified Portfolios reflect voluntary waivers and
reimbursements by Diversified. In the absence of such
waivers and reimbursements, "Total Annual Series Expenses"
would be as follows for the following series: Intermediate
Government Bond Series -- .45%; High-Yield Bond
Series -- .61%; Balanced Series -- .54%; Equity Value
Series -- .74%; Growth & Income Series -- .68%; Special
Equity Series -- .88%; and Aggressive Equity
Series -- 1.10%.

(3) AUSA has agreed to provide reimbursements to limit total
expenses to .10% and .50% for investors in the Underlying
Diversified Subaccounts which invest in the Money Market
Series and Equity Growth Series, respectively.

Based on the foregoing, the range of the average weighted expense ratio for
the Conservative Strategic Variable Fund is expected to be 1.46% to 1.63%, for
the Moderate Strategic Variable Fund 1.52% to 1.89% and for the Aggressive
Strategic Variable Fund 1.52% to 1.90%. A range is provided since the average
assets of the Subaccounts invested in each of the Underlying Diversified
Subaccounts will fluctuate.

6
<PAGE> 9

Example

If you (i) surrender your contract at the end of the applicable time
period, (ii) annuitize at the end of the applicable time period or (iii) do not
surrender your contract, you would pay, using the midpoint of the ranges set
forth above, the following expenses on a $1,000 investment, assuming a 5% annual
rate of return.

<TABLE>
<CAPTION>
AFTER AFTER
STRATEGIC VARIABLE FUND 1 YEAR 3 YEARS
---------------------------------------------------- ------ -------
<S> <C> <C>
Conservative Strategic Variable Fund................ $ 16 $49
Moderate Strategic Variable Fund.................... $ 17 $54
Aggressive Strategic Variable Fund.................. $ 17 $54
</TABLE>

This example should not be considered a representation of past or future
expenses, and actual expenses may be greater or lesser than those shown. Premium
taxes may also be applicable.

THE CONTRACTS

The Group Variable Annuity Contract(s) ("Contract(s)") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt organizations,
IRA Contractholders and for taxed organizations for Section 401(a) and/or
Section 401(k) Contracts and corporate nonqualified deferred compensation
Contracts ("NQDC"). The Section 401(k) Contract will fund the benefits for
tax-qualified pension and profit-sharing plans from employee/employer
contributions of such organizations. The Section 403(b) Contract will purchase
tax-deferred annuities for employees of these same organizations. The Section
457 Contract will provide deferred compensation eligible for deferred tax
treatment. The Section 401(a) Contract will fund benefits for tax-qualified
pension and profit-sharing Plans of such tax-exempt organizations as well as
taxed subsidiaries of these organizations and stand alone taxed organizations;
the NQDC Contracts will fund benefits for taxed organizations. The Section 408
(Individual Retirement Account ("IRA")) Contract is a Group Variable Annuity
Contract which will provide for on-going or rollover contributions from
individuals who are eligible under Section 408 to make such contributions.
Section references are to the Internal Revenue Code of 1986, as amended (the
"Code").

With respect to the Section 401(a), Section 401(k) and NQDC Contracts, the
employer and/or the employee will make contributions pursuant to the terms and
conditions of the underlying retirement Plan. As to the Section 403(b) and
Section 457 Contracts, the employer will make Purchase Payments for each
participating employee pursuant to either a salary reduction agreement or an
agreement to forego a salary increase under which the employee decides the level
and number of Purchase Payments to his/her Accumulation Account, except with
respect to employer-sponsored Section 401(a) Plans under which the employer will
make contributions pursuant to the underlying retirement Plan. In the case of
the Section 408 IRA Contract, Purchase Payments will be made by the employer on
behalf of and as determined by each participating employee pursuant to a salary
reduction agreement or by the Participant.

DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS

Purchase Payments under the Contract(s) are allocated to the Diversified
Investors Strategic Variable Funds which is a separate account of AUSA.
Diversified Investors Strategic Variable Funds is divided into three
Subaccounts, the Diversified Investors Conservative Strategic Variable Fund, the
Diversified Investors Moderate Strategic Variable Fund and the Diversified
Investors Aggressive Strategic Variable Fund. Diversified, an affiliate of AUSA,
is the investment adviser to each Subaccount and seeks to achieve the investment
objective of each Subaccount by investing in a diversified portfolio of units
issued by Underlying Diversified Subaccounts. There are currently twelve
Underlying Diversified Subaccounts with varying investment objectives available
for investment in by Subaccounts. See "Diversified Investors Strategic

7
<PAGE> 10

Variable Funds -- Underlying Diversified Subaccounts/Portfolios" at page 12. The
assets in each Underlying Diversified Subaccount are invested in a corresponding
series of Diversified Investors Portfolios. Each series of Diversified Investors
Portfolios is managed by Diversified. Diversified Investors Securities Corp., a
wholly-owned subsidiary of Diversified, is the principal underwriter and
distributor.

The value of a Participant's Accumulation Account maintained in Diversified
Investors Strategic Variable Funds will vary based upon the investment
experience of the Underlying Diversified Subaccounts and the corresponding
series of Diversified Investors Portfolios to which Purchase Payments are
allocated.

CHARGES

Diversified, as investment adviser to each Subaccount, imposes a charge
against the net assets of each Subaccount, computed daily, at an annual rate of
.20% for investment advisory and other services.

AUSA makes daily charges against the net assets of the Underlying
Diversified Subaccounts at a maximum annual rate of 1.25%, consisting of .80%
for mortality risks and .45% for administrative expense risks. Currently, the
annual rate charged is .90% consisting of .60% for mortality risks and .30% for
administrative expense risk. However, AUSA reserves the right to charge a
maximum fee of 1.25% upon notice thereafter. (See "Charges -- Charges for
Mortality and Expense Risks" on page 23). In addition, AUSA reserves the right
to deduct an annual contract charge not to exceed $50 from a Participant's
Accumulation Account (see "Charges -- Annual Contract Charge" on page 24).

In addition to the charges set forth above, Diversified, which serves as
investment adviser to each series of Diversified Investors Portfolios, imposes a
charge against the net asset value of each series of Diversified Investors
Portfolios, computed daily, for investment advisory services and other expenses.

Premium taxes may be payable on annuity considerations. Under present laws,
the range of premium taxes is from .5% to 4.0%. (See "Charges -- Premium Tax" on
page ).

CREDIT AND ALLOCATION OF PURCHASE PAYMENTS

Purchase Payments will be credited to the Subaccounts designated by the
Participant in the form of Units. The number of Units credited will not change
but the dollar value of a Unit will vary depending upon the investment
experience of the Underlying Diversified Subaccounts and the corresponding
series of Diversified Investors Portfolios. (See "Credit of Purchase Payments"
on page 27).

REDEMPTION

A Participant may redeem at any time prior to the time an annuity benefit
takes effect and prior to his death all or a portion of the Units credited to
his Accumulation Account without any charge, subject to any limitations in the
underlying Plan. There are no redemption charges. (See "Restrictions Under the
Texas Optional Retirement Program" on page 29 for withdrawal restrictions
applicable to Contracts issued under the Texas Optional Retirement Program.)

A penalty tax may be payable under the Code upon the redemption of amounts
from an Accumulation Account under a Contract and other significant withdrawal
restrictions may be imposed by the Code. (See "Federal Tax Status" on page .

TRANSFERS

A Participant may transfer all or a portion of his/her Accumulation Account
in Diversified Investors Strategic Variable Funds among the Subaccounts. No
transfer charges are imposed, and there is no limit to the number of transfers.
While AUSA has no present intention to do so, it reserves the right to impose
transfer charges at a later date. Transfers may be made in writing or by
telephone by calling (914) 697-8000. (See "Transfers" on page 26). AUSA reserves
the right to discontinue allowing telephone transfers.

8
<PAGE> 11

PAYMENT OPTIONS

Unless a Fixed Annuity is elected, a Participant will receive a lump sum
payment at the end of the Accumulation Period. The Contracts may provide for
several Fixed Annuity options: Life Annuity, Life Annuity With Period Certain,
Specified Fixed Period Annuity, Contingent Annuity and Contingent Annuity With
Period Certain. For NQDC, an installment payment option may also be available.
(See "Payment Options" on page 29).

VOTING RIGHTS

To the extent required by law, AUSA will vote the interests in Underlying
Diversified Subaccounts held in Diversified Investors Strategic Variable Funds
in accordance with the instructions received from Contractholders, IRA
Contractholders and NQDC Contractholders; the Contractholders will instruct AUSA
in accordance with the instructions received from Participants. (See "Voting
Rights" on page 32).

DEATH BENEFIT

If a Participant dies before the Annuity Purchase Date, the Accumulation
Account value will be paid to his/her beneficiary in a lump sum. (See "Death
Benefit" on page 28).

DISTRIBUTION OF THE CONTRACTS

Diversified Investors Securities Corp. ("DISC") will be the principal
underwriter and distributor of the Contracts which will be sold by registered
representatives who are also licensed insurance agents of AUSA. The Contracts
may also be sold through registered representatives of other broker-dealers
authorized by DISC and applicable law who may be insurance agents licensed by an
insurance company other than AUSA. (See "Distribution of the Contracts" on page
33).

AUSA

AUSA Life Insurance Company, Inc. is a stock life insurance company which
was organized under the laws of the State of New York on October 3, 1947. AUSA
is an indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AEGON"), a
financial services holding company whose primary emphasis is life insurance and
annuity and investment products. AEGON is an indirect, wholly-owned subsidiary
of AEGON nv, a Netherlands corporation which is a publicly traded international
insurance group. AUSA's principal place of business is 4 Manhattanville Road,
Purchase, N.Y. 10577; (914) 697-8000. Effective July 1, 1996, International Life
Investors Insurance Company merged with AUSA. At that time, the statutory-basis
assets, liabilities and surplus of such company were $688,233,328.64,
$635,188,675.56 and $53,044,653.08, respectively.

DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS

Diversified Investors Strategic Variable Funds was established by AUSA
under New York Insurance Law on April 15, 1996 as a separate account.
Diversified Investors Strategic Variable Funds will hold assets that are
segregated from all of AUSA's other assets and at present are used only to
support the Contracts. AUSA the legal holder of the assets in Diversified
Investors Strategic Variable Funds and will at all times maintain assets in
Diversified Investors Strategic Variable Funds with a total market value at
least equal to the contract liabilities for Diversified Investors Strategic
Variable Funds. The obligations under the Contracts are obligations of AUSA.
Income, gains, and losses, whether or not realized, from assets allocated to
Diversified Investors Strategic Variable Funds, are, in accordance with the
Contracts, credited to or charged against Diversified Investors Strategic
Variable Funds without regard to other income, gains, or losses of AUSA. The
assets in Diversified Investors Strategic Variable Funds may not be charged with
liabilities which arise from any other business AUSA conducts. Diversified
Investors Strategic Variable Funds assets may include accumulation of the
charges AUSA makes against a Contract participating in Diversified Investors
Strategic

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<PAGE> 12

Variable Funds. From time to time, any such additional assets may be transferred
in cash to AUSA's general account.

Diversified Investors Strategic Variable Funds is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended, ("1940 Act") as a management investment company, which is a
type of investment company. This does not involve any supervision by the SEC of
the management or investment policies or practices of Diversified Investors
Strategic Variable Funds. For state law purposes, Diversified Investors
Strategic Variable Funds is treated as a part or division of AUSA.

INVESTMENT OBJECTIVES OF THE SUBACCOUNTS

As a fundamental policy, each Subaccount offers a professionally managed
asset allocation investment program by acquiring units of Underlying Diversified
Subaccounts. Consistent with its investment objective described below, each
Subaccount will allocate its assets among the Underlying Diversified Subaccounts
according to Diversified's outlook for the economy, financial markets and
relative market valuation of the Underlying Diversified Subaccounts. Each
Subaccount allocates its assets among Underlying Diversified Subaccounts. Each
Subaccount's share price will fluctuate with changing market conditions and the
value of the Underlying Diversified Subaccounts in which it invests. Purchase
Payments should not be allocated to the Subaccounts for short-term financial
needs nor used to play short-term swings in the stock or bond markets. The
Subaccounts cannot guarantee that they will achieve their objectives.

Each Underlying Diversified Subaccount is a subaccount of Diversified
Investors Variable Funds, a separate account of AUSA which is registered with
the SEC under the 1940 Act as a unit investment trust, which is a type of
investment company. Each Underlying Diversified Subaccount seeks to achieve its
investment objective by investing all of its assets in a corresponding series of
Diversified Investors Portfolios (the "Underlying Diversified Portfolios"), an
open-end diversified management investment company with separate series which
have the same investment objectives as the Underlying Diversified Subaccounts.
See "Core/Feeder Structure" below. Diversified is the investment adviser for
each series of the Underlying Diversified Portfolios and appoints one or more
subadvisers to provide day-to-day investment management services. The twelve
Underlying Diversified Subaccounts in which the Subaccounts may invest, their
general investment characteristics and their subadvisers are as follows:

<TABLE>
<CAPTION>
UNDERLYING INVESTMENT
DIVERSIFIED SUBACCOUNT CHARACTERISTIC SUBADVISER
- ------------------------------ ------------------- -----------------------------------
<S> <C> <C>
Money Market Stability Capital Management Group
High Quality Bond Income Merganser Capital Management
Corporation
Intermediate Government Bond Income Capital Management Group
Government/Corporate Bond Income Capital Management Group
High-Yield Bond Aggressive Income Delaware Investment Advisors
Equity Income Growth & Income Asset Management Group
Equity Value Growth & Income Ark Asset Management, Inc.
Growth & Income Growth & Income The Putnam Advisory Company, Inc.
Equity Growth Growth Chancellor LGT Asset Management,
Inc.
Special Equity Growth Liberty Investment Management,
Inc., Ark Asset Management Co.,
Inc., Pilgrim Baxter & Associates,
Westport Asset Management, Inc.
Aggressive Equity Growth McKinley Capital Management, Inc.
International Equity Growth Capital Guardian Trust Company
</TABLE>

The High Quality Bond Subaccount, Intermediate Government Bond Subaccount,
Government/Corporate Bond Subaccount and the High-Yield Bond Subaccount are
herein collectively referred to as the "Fixed Income Underlying Subaccounts" and
the Equity Income Subaccount, Equity Value Subaccount, Growth &

10
<PAGE> 13

Income Subaccount, Equity Growth Subaccount, Special Equity Subaccount,
Aggressive Equity Subaccount and International Equity Subaccount are herein
collectively referred to as the "Equity Underlying Subaccounts".

CONSERVATIVE STRATEGIC VARIABLE FUND. The investment objective of the
Conservative Strategic Variable Fund is a high level of income and preservation
of capital. Under normal circumstances, at least 65% of the assets of the
Conservative Strategic Variable Fund will be invested in a combination of
Fixed-Income Underlying Subaccounts and the Money Market Subaccount. The
Conservative Strategic Allocation Fund may also invest in the Equity Income
Subaccount, Equity Value Subaccount or the Growth & Income Subaccount; it will
not invest in the other Equity Underlying Subaccounts. Under normal
circumstances, approximately 10% of the Conservative Strategic Variable Fund's
assets will be invested in the Money Market Subaccount. Diversified may increase
the allocation to the Money Market Subaccount in order to reduce volatility or
to provide a reserve for future allocations to other Underlying Diversified
Subaccounts. During periods of abnormal market or economic conditions,
Diversified may allocate assets to the Money Market Subaccount as a temporary
defensive measure.

For the Conservative Strategic Variable Fund, Diversified has established
the following general ranges for the allocation of assets among the three
classes of Underlying Diversified Subaccounts: Fixed Income Underlying
Subaccounts -- 50% - 100%; Equity Underlying Subaccounts -- 0% - 20%; and Money
Market Subaccount -- 0% - 50%. In addition, Diversified has established the
following target ranges for allocation of assets to specific Underlying
Diversified Subaccounts:

<TABLE>
<S> <C>
Money Market Subaccount --.............................. 0% - 50%
High Quality Bond Subaccount --......................... 10% - 40%
Intermediate Government Bond Subaccount --.............. 10% - 40%
Government/Corporate Bond Subaccount --................. 10% - 50%
High-Yield Bond Subaccount --........................... 0% - 30%
Equity Income Subaccount --............................. 0% - 10%
Equity Value Subaccount --.............................. 0% - 10%
Growth & Income Subaccount --........................... 0% - 10%
</TABLE>

11
<PAGE> 14

These general ranges reflect Diversified's present strategy for the
allocation of assets during normal market conditions to achieve the investment
objective of the Conservative Strategic Variable Fund and may be changed at any
time without the approval of unitholders.

MODERATE STRATEGIC VARIABLE FUND. The investment objective of the Moderate
Strategic Variable Fund is a high total investment return. The Moderate
Strategic Variable Fund will seek to achieve this objective by investing
substantially all of its assets in a managed mix of Equity Underlying
Subaccounts, Fixed-Income Underlying Subaccounts and the Money Market
Subaccount. Diversified will determine the proportions of each type of
investment to achieve an asset mix it believes appropriate for an investor who
desires diversification of investment. The Moderate Strategic Variable Fund will
vary the proportion of each Underlying Diversified Subaccount purchased
according to Diversified's interpretations of changes in economic conditions and
the sensitivity of each type of investment to those changes. Diversified will
shift emphasis among Equity Underlying Subaccounts, Fixed-Income Underlying
Subaccounts and the Money Market Subaccount to maximize participation in
positive markets and preservation of capital in negative markets and otherwise
in response to market conditions. In addition, Diversified may allocate assets
to the Money Market Subaccount in order to reduce volatility or to provide a
reserve for future allocations to other Underlying Diversified Subaccounts.
During periods of abnormal market or economic conditions, Diversified may
allocate assets to the Money Market Subaccount as a temporary defensive measure.

For the Moderate Strategic Variable Fund, Diversified has established the
following general ranges for the allocation of assets among the three classes of
Underlying Diversified Subaccounts: Fixed Income Underlying Subaccounts -- 25% -
75%; Equity Underlying Subaccounts -- 25% - 75%; and Money Market
Subaccount -- 0% -- 25%. In addition, Diversified has established the following
target ranges for allocation of assets to specific Underlying Diversified
Subaccounts:

<TABLE>
<S> <C>
Money Market Subaccount................................... 0% - 25%
High Quality Bond Subaccount.............................. 5% - 30%
Intermediate Government Bond Subaccount................... 5% - 30%
Government/Corporate Bond Subaccount...................... 5% - 40%
High-Yield Bond Subaccount................................ 0% - 20%
Equity Income Subaccount.................................. 0% - 20%
Equity Value Subaccount................................... 0% - 20%
Growth & Income Subaccount................................ 0% - 20%
Equity Growth Subaccount.................................. 0% - 10%
Special Equity Subaccount................................. 0% - 10%
Aggressive Equity Subaccount.............................. 0% - 10%
International Equity Subaccount........................... 0% - 10%
</TABLE>

These general ranges reflect Diversified's present strategy for the
allocation of assets during normal market conditions to achieve the investment
objective of the Moderate Strategic Variable Fund and may be changed at any time
without the approval of unitholders.

AGGRESSIVE STRATEGIC VARIABLE FUND. The investment objective of the
Aggressive Strategic Variable Fund is long-term growth of capital and growth of
income. Under normal circumstances, at least 65% of the assets of the Aggressive
Strategic Variable Fund will be invested in Equity Underlying Subaccounts. The
Aggressive Strategic Variable Fund may also invest in any of the Fixed-Income
Underlying Subaccounts. Diversified may also allocate assets to the Money Market
Subaccount in order to reduce volatility or to provide a reserve for future
allocations to Underlying Diversified Subaccounts. During periods of abnormal
market or economic conditions, Diversified may allocate assets to the Money
Market Subaccount as a temporary defensive measure.

For the Aggressive Strategic Variable Fund, Diversified has established the
following general ranges for the allocation of assets among the three classes of
Underlying Diversified Subaccounts: Fixed Income Underlying Subaccounts -- 0% -
50%; Equity Underlying Subaccounts -- 50% - 100%; and Money Market

12
<PAGE> 15

Subaccounts -- 0% - 20%. In addition, Diversified has established the following
target ranges for allocation of assets to specific Underlying Diversified
Subaccounts:

<TABLE>
<S> <C>
Money Market Subaccount................................... 0% - 20%
High Quality Bond Subaccount.............................. 0% - 30%
Intermediate Government Bond Subaccount................... 0% - 20%
Government/Corporate Bond Subaccount...................... 0% - 10%
High-Yield Bond Subaccount................................ 0% - 10%
Equity Income Subaccount.................................. 5% - 30%
Equity Value Subaccount................................... 5% - 30%
Growth & Income Subaccount................................ 5% - 30%
Equity Growth Subaccount.................................. 5% - 20%
Special Equity Subaccount................................. 0% - 15%
Aggressive Equity Subaccount.............................. 0% - 15%
International Equity Subaccount........................... 5% - 20%
</TABLE>

These general ranges reflect Diversified's present strategy for the
allocation of assets during normal market conditions to achieve the investment
objective of the Aggressive Strategic Variable Fund and may be changed at any
time without the approval of unitholders.

DESCRIPTION OF THE UNDERLYING DIVERSIFIED SUBACCOUNTS/PORTFOLIOS

The following is a brief description of the investment objective and
principal investment practices of the Underlying Diversified
Subaccounts/Portfolios. Additional investment practices are described in the
Special Risks and Considerations section on page 17, the Statement of Additional
Information and the prospectus for the Underlying Diversified Subaccounts. As
noted above, the Underlying Diversified Subaccounts seek to achieve their
investment objectives by investing all of their investable assets in Underlying
Diversified Portfolios with investment objectives that correspond with their
own. See "Core/Feeder Structure" below. Because each Underlying Diversified
Subaccount seeks its objective by investing in a corresponding Underlying
Diversified Portfolio, the investment policies of the Underlying Diversified
Portfolios are described below. Since each Underlying Diversified Subaccount has
a different investment objective, each can be expected to have different
investment results and to be subject to different market and financial risks.

Diversified has contracted with one or more Subadvisers for each Underlying
Diversified Portfolio for certain investment advisory services. Diversified and
the Subadviser or Subadvisers for a particular Underlying Diversified Portfolio
are referred to herein collectively as the "Advisers".

The investment objective of an Underlying Diversified Subaccount or an
Underlying Diversified Portfolio may be changed without the vote of the holders
of the outstanding voting securities of such Underlying Diversified Subaccount
or Underlying Diversified Portfolio. Unitholders of an Underlying Diversified
Subaccount will receive 30 days' prior written notice of any change in the
investment objective of that Underlying Diversified Subaccount or its
corresponding Underlying Diversified Portfolio. There can be no assurance that
any investment objective of any Underlying Diversified Subaccount or Underlying
Diversified Portfolio will be met.

UNDERLYING DIVERSIFIED SUBACCOUNTS AVAILABLE TO ALL SUBACCOUNTS

MONEY MARKET SUBACCOUNT/PORTFOLIO. The investment objective of the Money
Market Portfolio is to provide liquidity and as high a level of current income
as is consistent with the preservation of capital. The Money Market Portfolio
invests in high quality short-term money market instruments. Securities in which
the Money Market Portfolio invests may not earn as high a level of current
income as long-term or lower quality securities, which generally have less
liquidity, greater market risk and more fluctuation in market value. To achieve
its investment objective, the Money Market Portfolio invests in U.S.
dollar-denominated short-term money market obligations, including securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations

13
<PAGE> 16

issued by domestic banks and foreign banks, and high quality commercial paper
and other short-term corporate obligations, including those with floating or
variable rates of interest. In addition, the Money Market Portfolio may lend its
portfolio securities, enter into repurchase agreements and reverse repurchase
agreements, and invest in securities issued by foreign banks and corporations
outside the United States. The Money Market Portfolio reserves the right to
concentrate 25% or more of its total assets in obligations of domestic banks.

In accordance with Rule 2a-7 under the 1940 Act, the Money Market Portfolio
will 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 U.S. dollar-denominated securities determined in accordance with
procedures established by the Board of Trustees (the "Board of Trustees") to
present minimal credit risks and which are rated in one of the two highest
rating categories for debt obligations by at least two nationally recognized
statistical rating organizations (an "NRSRO") (or one NRSRO if the instrument
was rated by only one such organization) or, if unrated, are of comparable
quality as determined in accordance with procedures established by the Board of
Trustees (collectively, "Eligible Securities"). Eligible Securities include
"First Tier Securities" and "Second Tier Securities". First Tier Securities
include those that possess a rating in the highest category in the case of a
single-rated security or at least two ratings in the highest rating category in
the case of multiple-rated securities or, if the securities do not possess a
rating, are determined to be of comparable quality by the Advisers pursuant to
the guidelines adopted by the Board of Trustees. All other Eligible Securities
are Second Tier Securities. The Money Market Portfolio will invest at least 95%
of its total assets in First Tier Securities.

HIGH QUALITY BOND SUBACCOUNT/PORTFOLIO. The investment objective of the
High Quality Bond Portfolio is to provide as high a level of current income as
is consistent with the preservation of capital. The yield of the High Quality
Bond Portfolio normally is expected to be higher than a money market fund but
lower than a longer-term or lower quality bond fund. Unlike a money market fund,
the High Quality Bond Fund does not seek to maintain a stable net asset value
and may not be able to return dollar-for-dollar the money invested. The High
Quality Bond Portfolio pursues its investment objective by investing at least
65% of its assets under normal circumstances in high quality debt securities
with short and intermediate maturities (including repurchase agreements and
reverse repurchase agreements). The Advisers attempt to maintain the Portfolio's
"duration" between one and four years, which means that the Portfolio's overall
sensitivity to interest rates should be slightly more than that of bonds and
notes with remaining average maturities from one to four years. The Portfolio's
dollar-weighted average maturity (or dollar-weighted average life in the case of
asset-backed and mortgage-backed securities) may be longer than four years from
time to time, but will not exceed five years under normal conditions. The
Portfolio may hold individual securities with remaining maturities of up to
thirty years. The Portfolio seeks consistency of return with minimal exposure to
negative total returns on an annual basis. The Advisers' strategy is to position
the Portfolio in those high quality sectors of the fixed income market that
offer the most attractive yields on a risk-adjusted basis. The duration of the
Portfolio will be a function of the security and sector selection process and
market conditions in general. Since the value of fixed income securities
generally fluctuates inversely with changes in interest rates, the value of
securities held by the Portfolio will tend to decline during periods of rising
interest rates.

INTERMEDIATE GOVERNMENT BOND SUBACCOUNT/PORTFOLIO. The investment objective
of the Intermediate Government Bond Portfolio is to provide as high a level of
current income as is consistent with the preservation of capital. The yield of
the Intermediate Government Bond Portfolio normally is expected to be higher
than a money market fund but lower than a longer-term or lower quality bond
fund. The Intermediate Government Bond Portfolio pursues its investment
objective by investing in high quality U.S. Government obligations and high
quality short-term obligations (including repurchase agreements and reverse
repurchase agreements). The Intermediate Government Bond Portfolio normally will
invest at least 65% of its assets in U.S. Government obligations. The Advisers
attempt to maintain the Intermediate Government Bond Portfolio's "duration"
between one and five years, which means that the Intermediate Government Bond
Portfolio's overall sensitivity to interest rates should be similar to that of
bonds and notes with remaining average maturities from one to five years. The
Intermediate Government Bond Portfolio's dollar-weighted average maturity (or
dollar-weighted average life in the case of mortgage-backed securities) may be
longer

14
<PAGE> 17

than five years from time to time, but will not exceed ten years or be less than
three years under normal conditions. The Intermediate Government Bond Portfolio
may hold individual securities with remaining maturities of up to thirty years.

GOVERNMENT/CORPORATE BOND SUBACCOUNT/PORTFOLIO. The investment objective of
the Government/Corporate Bond Portfolio is to achieve the maximum total return.
The Government/Corporate Bond Portfolio's yield normally is expected to be
higher than a money market fund but lower than a longer-term or lower quality
bond fund. The Government/Corporate Bond Portfolio pursues its investment
objective by investing in investment grade debt securities, U.S. Government
obligations, including U.S. Government agency and instrumentality obligations
and collateralized mortgage obligations guaranteed by these agencies and
instrumentalities, and high quality short-term obligations (including repurchase
agreements and reverse repurchase agreements). Under normal circumstances, at
least 65% of the Portfolio's assets is invested in U.S. Government securities,
corporate bonds and short-term instruments. The Advisers attempt to maintain the
Government/Corporate Bond Portfolio's "duration" between three and ten years,
which means that the Portfolio's overall sensitivity to interest rates should be
slightly more than that of bonds and notes with remaining average maturities
from three to fifteen years. The Government/Corporate Bond Portfolio's dollar-
weighted average maturity (or dollar-weighted average life in the case of
mortgage-backed securities) may be longer than fifteen years from time to time,
but will not exceed thirty years under normal conditions. The
Government/Corporate Bond Portfolio may hold individual securities with
remaining maturities of up to thirty years.

HIGH-YIELD BOND SUBACCOUNT/PORTFOLIO. The investment objective of the
High-Yield Bond Portfolio is to seek a high level of current income. The
High-Yield Bond Portfolio pursues its investment objective by investing in a
diversified portfolio consisting primarily of high-yielding, fixed-income and
zero coupon securities, such as bonds, debentures and notes, convertible
securities and preferred stocks. The Portfolio may invest all or a substantial
portion of its assets in lower-rated debt securities, commonly referred to as
"junk bonds". Such investments may include foreign securities and obligations
issued or guaranteed by the U.S. Government, any of its states or territories,
any foreign government or any of their respective subdivisions, agencies or
instrumentalities. The High-Yield Bond Portfolio normally will invest at least
65% of its assets in high-yielding, income producing debt securities and
preferred stocks, including convertible and zero coupon securities. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their face value. Certain zero coupon securities also
are sold at substantial discounts but provide for the commencement of regular
interest payments at a deferred date. The Portfolio may invest up to 35% of its
assets in equity securities, including common stocks, warrants and rights.

Lower-rated debt securities usually are defined as securities rated Ba or
lower by Moody's Investors Service, Inc. or BB or lower by Standard & Poors
Ratings Group. Lower-rated debt securities are considered speculative and
involve greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher-rated securities and are more sensitive to changes
in the issuer's capacity to pay. Investing in lower-rated debt securities is an
aggressive approach to income investing. The 1980s saw a dramatic increase in
the use of lower-rated debt securities to finance highly leveraged corporate
acquisitions and restructurings. Past experience may not provide an accurate
indication of future performance of lower-rated debt securities, especially
during periods of economic recession. In fact, from 1989 to 1991, the percentage
of lower-rated debt securities that defaulted rose significantly above prior
levels. Lower-rated debt securities may be thinly traded, which can adversely
affect the prices at which they can be sold and can result in high transaction
costs. If market quotations are not available, these lower-rated debt securities
will be valued in accordance with standards set by the Board of Trustees,
including the use of outside pricing services. Judgment plays a greater role in
valuing lower-rated debt securities than securities for which more extensive
quotations and last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing services
used by the Portfolio to value its portfolio securities, and the Portfolio's
ability to dispose of the lower-rated bonds. The market prices of lower-rated
debt securities may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. During an
economic downturn or a prolonged period of rising interest rates, the ability of
issuers of lower-rated debt to service their payment obligations, meet projected
goals, or obtain additional financing may be impaired. The Portfolio may choose,

15
<PAGE> 18

at its own expense or in conjunction with others, to pursue litigation or
otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the interest of
Portfolio investors.

The considerations discussed above for lower-rated debt securities also are
applicable to lower quality unrated debt instruments of all types, including
loans and other direct indebtedness of businesses with poor credit standing.
Unrated debt instruments are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers.

EQUITY INCOME SUBACCOUNT/PORTFOLIO. The investment objective of the Equity
Income Portfolio is to provide a high level of current income through investment
in a diversified portfolio of common stocks with relatively high current yields;
capital appreciation is a secondary objective. The Equity Income Portfolio seeks
to achieve its investment objective by investing primarily in a diversified
portfolio of stocks of companies which, in the opinion of the Advisers, are
fundamentally sound financially and which pay relatively high dividends on a
consistent basis. The Advisers attempt to manage the Portfolio so that it will
outperform other equity income funds in negative markets. As a result of this
objective, the Portfolio may underperform relative to other equity income funds
in positive markets. The Portfolio invests primarily in common stocks and
preferred stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, in stocks that are traded
over-the-counter. The Portfolio also invests in bonds and short-term obligations
as well as securities convertible into common stocks, preferred stocks, debt
securities and short-term obligations. The Portfolio allocates its investments
among different industries and companies, and changes its portfolio securities
for investment considerations and not for trading purposes.

EQUITY VALUE SUBACCOUNT/PORTFOLIO. The investment objective of the Equity
Value Portfolio is to provide a high total investment return through investment
in a diversified portfolio of common stocks. The Equity Value Portfolio seeks to
achieve its investment objective by investing primarily in a diversified
portfolio of stocks of companies which, in the opinion of the Advisers, are
trading at low valuations relative to market and/or historical levels. These
stocks tend to have relatively low price/earnings ratios and/or relatively low
price/book value ratios. Low price/earnings ratios or price/book value ratios
means that the stock is less expensive than average relative to the company's
earnings or book value, respectively. The Portfolio invests primarily in common
stocks listed on the New York Stock Exchange and on other national securities
exchanges and, to a lesser extent, in stocks that are traded over-the-counter.
The Portfolio may also invest in bonds and short-term obligations as well as
securities convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Portfolio allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.

GROWTH & INCOME SUBACCOUNT/PORTFOLIO. The investment objective of the
Growth & Income Portfolio is to provide current income and capital appreciation.
The Growth & Income Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of securities selected for their
potential to generate current income or long-term capital appreciation. In
general, the objective of the Portfolio is to achieve greater potential for
capital appreciation than an income fund and less price volatility than a growth
fund. The Growth & Income Portfolio invests primarily in common stocks and
preferred stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, in stocks that are traded
over-the-counter. The Portfolio also invests in bonds and short-term obligations
as well as securities convertible into common stocks, preferred stocks, debt
securities and short-term obligations. The Portfolio allocates its investments
among different industries and companies and changes its portfolio securities
for investment considerations and not for trading purposes. In general, the
Portfolio seeks to invest in growing, financially stable and undervalued
companies.

UNDERLYING DIVERSIFIED SUBACCOUNTS ALSO AVAILABLE TO THE MODERATE AND AGGRESSIVE
FUNDS

EQUITY GROWTH SUBACCOUNT/PORTFOLIO. The investment objective of the Equity
Growth Portfolio is to provide a high level of capital appreciation through
investment in a diversified portfolio of common stocks with potential for above
average growth in earnings and dividends; current income is a secondary
objective. The Equity Growth Portfolio seeks to achieve its investment objective
by investing primarily in a diversified

16
<PAGE> 19

portfolio of common stocks, but may also invest in other types of securities
such as preferred stocks, convertible and non-convertible bonds, warrants and
foreign securities including American Depository Receipts ("ADRs"). Under normal
circumstances, at least 65% of the assets of the Portfolio are invested in
equity securities. The Equity Growth Portfolio invests primarily in stocks of
companies that have a market value of all their issued and outstanding common
stock of $10 to $15 billion and preferred stocks listed on the New York Stock
Exchange and on other national securities exchanges and, to a lesser extent, in
stocks that are traded over-the-counter. The Portfolio also invests in bonds and
short-term obligations as well as securities convertible into common stocks,
preferred stocks, debt securities and short-term obligations. The Portfolio
allocates its investments among different industries and companies, and changes
its portfolio securities for investment considerations and not for trading
purposes.

SPECIAL EQUITY SUBACCOUNT/PORTFOLIO. The investment objective of the
Special Equity Portfolio is to provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks of small to
medium sized companies. The Special Equity Portfolio is designed for investors
in search of substantial long-term growth who can accept above-average stock
market risk and little or no current income. The Special Equity Portfolio seeks
to achieve its investment objective by investing primarily in a diversified
portfolio of stocks of small to medium sized companies which, in the opinion of
the Advisers, will present an opportunity for significant increases in earnings
and/or value, without consideration for current income. The Portfolio's primary
equity investments will be common stocks of small and medium sized U.S.
companies with market capitalizations of less than $2 billion. Multiple managers
are used to control the volatility often associated with investments in small to
medium size companies and to maximize opportunities in positive markets. The
Portfolio may also invest in bonds and short-term obligations as well as
securities convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Special Equity Portfolio allocates its investments
among different industries and companies, and changes its portfolio securities
for investment considerations and not for trading purposes.

AGGRESSIVE EQUITY SUBACCOUNT/PORTFOLIO. The investment objective of the
Aggressive Equity Portfolio is to provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks of small to
medium size companies. The Aggressive Equity Portfolio is designed for investors
in search of substantial long-term growth who can accept above-average stock
market risk and little or no current income. The Aggressive Equity Portfolio
seeks to achieve its investment objective by investing primarily in a
diversified portfolio of stocks of small to medium size companies which, in the
opinion of the Advisers, will present an opportunity for significant increases
in earnings, revenue and/or value, without consideration for current income. The
Portfolio's primary equity investment are common stocks of small and medium
sized U.S. companies with market capitalizations between $750 million and $2.5
billion. The Portfolio may also invest in bonds and short-term obligations as
well as securities convertible into common stocks, preferred stocks, debt
securities and short-term obligations. The Aggressive Equity Portfolio allocates
its investments among different industries and companies, and changes its
portfolio securities for investment considerations and not for trading purposes.

INTERNATIONAL EQUITY SUBACCOUNT/PORTFOLIO. The investment objective of the
International Equity Portfolio is to provide a high level of long-term capital
appreciation through investment in a diversified portfolio of securities of
foreign issuers. The International Equity Portfolio seeks to achieve its
investment objective by investing primarily in foreign securities. Foreign
securities are defined as securities of issuers, wherever organized, which trade
solely on a foreign exchange or over-the-counter market, or, of issuers which,
in the judgment of the Advisers, have their principal activities outside of the
United States. In determining whether an issuer's principal activities and
interests are outside the United States, the Advisers will look at such factors
as the location of the issuer's facilities, personnel, sales and earnings. Under
normal circumstances, at least 65% of the assets of the Portfolio are invested
in foreign equity securities. The Advisers will purchase securities of companies
in a minimum of 3 countries outside the United States.

The International Equity Portfolio may invest up to 10% of its assets in
securities of issuers in the world's emerging markets. Countries with emerging
markets include those that have an emerging stock market as defined by the
International Finance Corporation, those with low-to middle-income economies
according to the World Bank, and those listed in World Bank publications as
developing. While the Advisers believe that

17
<PAGE> 20

these investments present the possibility for significant growth over the
long-term, they also entail significant risks. Many investments in emerging
markets can be considered speculative, and their prices can be much more
volatile than those in the more developed nations of the world. This difference
reflects the greater uncertainties of investing in less established markets and
economies.

SPECIAL RISKS AND CONSIDERATIONS

Prospective investors should consider the following special risks and
considerations:

- -- The investments of each Subaccount are concentrated in the Underlying
Diversified Subaccounts, so each Fund's investment performance is directly
related to the investment performance of these Underlying Diversified
Subaccounts.

- -- As a matter of fundamental policy, the Subaccounts must allocate their
investments among the Underlying Diversified Subaccounts. As a result, they
do not have the same flexibility to invest as a subaccount without such
constraints.

- -- The members of the Managing Board presently serve as trustees of the
Underlying Diversified Portfolios. Therefore, conflicts may arise as these
persons fulfill their fiduciary responsibilities to the Subaccounts and the
Underlying Diversified Portfolios.

- -- Each Subaccount may invest in Equity Underlying Subaccounts. The Equity
Underlying Subaccounts seek to reduce risk of loss of principal due to
changes in the value of individual stocks by investing in a diversified
portfolio of common stocks and through the use of options on stocks. Such
investment techniques do not, however, eliminate all risks. Smaller
capitalization companies may experience higher growth rates and higher
failure rates than do larger capitalization companies due to the risk related
to markets, market share, product performance and financial resources. The
limited volume and frequency of trading of small capitalization companies may
subject their stocks to greater price deviation than stocks of larger
companies.

- -- Each Subaccount may invest a portion of its assets in the High-Yield Bond
Underlying Diversified Subaccount. As a result each Subaccount will be
subject to some of the risks resulting from high yield investing.

- -- Each of the Subaccounts may invest a portion of its assets in Underlying
Diversified Subaccounts which invest in medium grade bonds. If these bonds
are downgraded, the Subaccounts will consider whether to increase or decrease
their investment in the affected Underlying Diversified Subaccounts.

- -- The Moderate and Aggressive Strategic Variable Funds may invest in the
International Equity Underlying Diversified Subaccount, which invests
primarily in foreign equity securities. These investments will subject the
Subaccounts to risks associated with investing in foreign securities.

Investment Policies of the Underlying Diversified Subaccounts/Portfolios

In pursuing its investment objective, each of the Underlying Diversified
Portfolios is permitted to engage in a wide range of investment policies.
Certain of these policies are described below and further information about the
Underlying Diversified Subaccounts/Portfolios is contained in the Statement of
Additional Information as well as the prospectus for such funds. Because each
Subaccount invests in the Underlying Diversified Subaccounts, investors in each
Subaccount will be affected by these investment policies in direct proportion to
the amount of assets each Subaccount allocates to the Underlying Diversified
Subaccounts/
Portfolios pursuing such policies.

OPTIONS AND FUTURES CONTRACTS. Each Underlying Diversified Portfolio may
enter into transactions in futures contracts, options on futures contracts,
options on securities indexes and options on securities, for the purpose of
hedging each Underlying Diversified Portfolio's securities, which would have the
effect of reducing the volatility of its net asset value. In general, each such
transaction involves the establishment of a position which is expected to move
in a direction opposite to that of the security or securities being hedged.
Options and futures contracts can be highly volatile and a Portfolio's attempt
to hedge may not be successful.

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<PAGE> 21

SHORT-TERM INSTRUMENTS. Each Underlying Diversified Portfolio may invest in
cash, commercial paper, short-term obligations, repurchase agreements or other
forms of debt securities (including, without limitation, a short-term investment
fund investing in any of such securities).

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each Underlying
Diversified Portfolio may enter into repurchase agreements. A repurchase
agreement arises when a buyer purchases securities from a seller, which is
usually a member bank of the Federal Reserve System or a member firm of the New
York Stock Exchange (or a subsidiary thereof), with the agreement that the
seller will repurchase the securities at a higher price at a later date. In the
event of a bankruptcy or default of certain sellers of repurchase agreements,
the Portfolio could experience costs and delays in liquidating the underlying
security, which is held as collateral, and the Portfolio might incur a loss if
the value of the collateral held declines during this period.

Each Underlying Diversified Portfolio may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage. One means of borrowing is by agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time a Portfolio enters into a reverse repurchase agreement
it will place in a segregated custodial account cash, U.S. Government securities
or high-grade debt obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve the risk that
the market value of the securities sold may decline below the repurchase price
of those securities.

FOREIGN SECURITIES. Certain Underlying Diversified Portfolios invest all or
a portion of their assets in securities of foreign issuers, including
investments in sponsored American Depository Receipts ("ADRs"). ADRs are
receipts typically issued by an American bank or trust company evidencing
ownership of the underlying foreign securities. Investments in foreign equity
and debt securities involve increased or additional risks from those encountered
when investing in securities of domestic issuers. Risks and opportunities must
be evaluated when investing in particular foreign securities. Such risks include
(1) currency fluctuations; (2) restrictions on, and costs associated with, the
exchange of currencies; (3) the difficulty in obtaining or enforcing a court
judgment abroad; (4) reduced levels of publicly available information concerning
issuers; (5) restrictions on foreign investment in other jurisdictions; (6)
reduced levels of governmental regulation of foreign securities markets; (7)
difficulties in effecting the repatriation of capital invested abroad; (8)
difficulties in transaction settlements and the effect of this delay on
shareholder equity; (9) foreign withholding taxes; (10) political, economic, and
similar risks, including expropriation and nationalization; (11) different
accounting, auditing, and financial standards; (12) price volatility; and (13)
the diverse structure and liquidity of the securities markets of various
countries and regions.

LENDING OF PORTFOLIO SECURITIES. The Underlying Diversified Portfolios may
lend their portfolio securities to brokers, dealers and other financial
organizations. By lending its securities, a Portfolio can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid when U.S. Government obligations are used as collateral.
There may be risks of delay in receiving additional collateral or risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. A Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the Portfolio must
receive at least 100% cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever the market
value of the loaned securities including accrued interest exceeds the level of
the collateral; (iii) the Portfolio must be able to terminate the loan at any
time; (iv) the Portfolio must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities, and
any increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate the
loan and regain the right to vote the securities.

GENERAL. As "diversified" funds, no more than 5% of the assets of any
Underlying Diversified Portfolio may be invested in the securities of one issuer
(other than U.S. Government securities), except that up to 25% of each
Portfolio's assets may be invested without regard to this limitation. No
Underlying Diversified

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<PAGE> 22

Portfolio will invest more than 25% of its assets in the securities of issuers
in any one industry. These are fundamental investment policies which may not be
changed without investor approval. As a non-fundamental operating policy, no
more than 15% (10% in the case of the Money Market Portfolio) of the net assets
of any Underlying Diversified Portfolio may be invested in (i) securities the
resale of which are subject to legal or contractual restrictions is restricted
under federal securities laws and (ii) illiquid or not readily marketable
securities (including repurchase agreements maturing in more than seven days).

Core/Feeder Structure

The Underlying Diversified Subaccounts invest in the Underlying Diversified
Portfolios through a two-tier, core/feeder fund structure. Unlike other
investment companies which directly acquire and manage their own portfolio of
securities, each of the Underlying Diversified Subaccounts is an investment
company which seeks to achieve its investment objective by investing all of its
investable assets in its corresponding Underlying Diversified Portfolio, a
separate registered investment company with the same investment objective as its
corresponding Underlying Diversified Subaccount. The investment objective of an
Underlying Diversified Portfolio may be changed only with the approval of the
holders of the outstanding interests in such Underlying Diversified Portfolio.

In addition to selling beneficial interests to the Underlying Diversified
Subaccounts, the Underlying Diversified Portfolios may sell beneficial interests
to other mutual funds, insurance company separate accounts, collective
investment vehicles or institutional investors. Such investors will invest in
the Underlying Diversified Portfolios on the same terms and conditions as the
Underlying Diversified Subaccounts and will pay a proportionate share of the
Underlying Diversified Portfolios' expenses. However, the other investors are
not required to sell their shares at the same public offering price as the
Underlying Diversified Subaccounts due to variations in sales commissions and
other operating expenses. Therefore, all investors should be aware that these
differences may result in differences in returns experienced by investors in the
different entities that invest in each Underlying Diversified Portfolio.
Information concerning other holders of interests in the Underlying Diversified
Portfolios is available from Diversified at (914) 697-8000.

AUSA may withdraw the investment of any Underlying Diversified Subaccount
from its corresponding Underlying Diversified Portfolio at any time if the Board
of Directors of AUSA determines that it is in the best interests of the
Underlying Diversified Subaccount to do so. Upon any such withdrawal, the Board
would consider what action might be taken, including the investment of all the
assets of the Underlying Diversified Subaccount in another pooled investment
entity having the same investment objective and restrictions as the Underlying
Diversified Portfolio or the retaining of an investment adviser to manage the
Underlying Diversified Subaccount's assets in accordance with the investment
policies described below with respect to its corresponding Underlying
Diversified Portfolio.

Smaller entities investing in an Underlying Diversified Portfolio may be
materially affected by the actions of larger entities investing in that
Portfolio. For example, if a large fund withdraws from an Underlying Diversified
Portfolio, the remaining investors may experience higher pro rata operating
expenses, thereby producing lower returns. Additionally, the affected Portfolio
may become less diverse, resulting in increased portfolio risk. (However, this
possibility also exists for any type of collective investment vehicle which has
institutional or other large investors.) Also, investors with a greater pro rata
ownership in an Underlying Diversified Portfolio could have effective voting
control of the operations of that Portfolio.

Certain changes in the investment objectives, policies or restrictions of
an Underlying Diversified Portfolio may require that the Underlying Diversified
Subaccounts withdraw its interest in that Portfolio. Any such withdrawal could
result in a distribution "in kind" of portfolio securities (as opposed to a cash
distribution from the series). If securities are distributed, an Underlying
Diversified Subaccounts could incur brokerage or other charges in converting the
securities to cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of an
Underlying Diversified Subaccount. Notwithstanding the above, there are other
means for meeting shareholders' redemption requests such as temporary
borrowings.

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<PAGE> 23

Management

Subject to such policies as the Board of Directors of AUSA may determine
and pursuant to the Investment Advisory Agreement (the "Advisory Agreement")
with AUSA with respect to the Subaccounts, Diversified manages the assets of
each Subaccount in accordance with the investment policies approved by the Board
of Directors of AUSA. Subject to such policies, Diversified provides general
investment advice to each Subaccount. For its services under the Advisory
Agreement, Diversified receives from each Subaccount fees accrued daily and paid
monthly at an annual rate equal to 0.20% of the average daily net assets.
Investment management decisions are taken by a committee of Diversified's
personnel and not by a particular individual.

The management of each Subaccount's business and affairs is the
responsibility of the Board of Directors of AUSA. The Board of Directors of AUSA
has established a managing board (the "Managing Board") and has delegated
certain responsibilities for the operation of the Subaccounts to the Managing
Board. A majority of the members of the Managing Board will be non-interested
persons as defined in Section 2(a)(19) of the 1940 Act. However, the members of
the Managing Board also serve in similar positions with the Underlying
Diversified Portfolios. Thus, if the interests of a Subaccount and the
Underlying Diversified Portfolios were ever to become divergent, it is possible
that a conflict of interest could arise and affect how this group of persons
fulfill their fiduciary duties to that Subaccount and the Underlying Diversified
Portfolios. The Managing Board believes they have structured each Subaccount to
avoid these concerns. However, it is conceivable that a situation could occur
where proper action for a Subaccount could be adverse to the interests of an
Underlying Diversified Portfolio, or vice versa. If such a possibility arises,
the Trustees/Directors and Officers of the affected funds and Diversified will
carefully analyze the situation and take all steps they believe reasonable to
minimize and, where possible eliminate the potential conflict. Moreover, close
and continuous monitoring will be exercised to avoid, insofar as possible, these
concerns.

Before approving any advisory contract, the Managing Board, including a
majority of the members who are not "interested persons" as defined in Section
2(a)(19) of the 1940 Act, must find that advisory fees charged under such
contract are based on services provided that are in addition to, rather than
duplicative of, services provided pursuant to any Underlying Diversified
Portfolio advisory contract. Such finding, and the basis upon which the finding
was made, will be recorded fully in the minute books of the Managing Board. Such
procedures were followed by the Managing Board with respect to the Advisory
Agreement.

MANAGEMENT OF THE UNDERLYING DIVERSIFIED PORTFOLIOS. Diversified serves as
investment manager to all of the Underlying Diversified Portfolios and is
responsible for selection and management of the Underlying Diversified
Portfolios' subadvisers and portfolio investments. Diversified is an indirect,
wholly-owned subsidiary of AEGON, a financial services holding company whose
primary emphasis is life and health insurance and annuity and investment
products. AEGON is an indirect, wholly-owned subsidiary of AEGON nv, a
Netherlands corporation which is a publicly traded international insurance
group. Diversified was incorporated in 1992 for the purpose of acting as
investment adviser to the Underlying Diversified Portfolios. At September 30,
1996 Diversified served as investment adviser to mutual funds with approximately
$3.05 billion in assets.

The determination of how each Underlying Diversified Portfolio's assets
will be invested will be made by Diversified and the appropriate subadviser(s)
pursuant to the investment objectives and policies of each Underlying
Diversified Portfolio and guidelines established by its Board of Trustees.

For each Underlying Diversified Portfolio, Diversified has entered into an
Investment Subadvisory Agreement (each a "Subadvisory Agreement") with the
subadvisers listed in the table below (each a "Subadviser", and collectively the
"Subadvisers"). For its services under each Subadvisory Agreement, the
Subadvisers receive a fee from Diversified at an annual rate equal to the
percentages specified in the table below of the corresponding Portfolio's
average net assets. Each fee will be accrued monthly by multiplying the

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<PAGE> 24

arithmetic average of the beginning and ending monthly net assets in the
Portfolio by the fee schedule and dividing by 12. Each fee will be paid on a
quarterly basis.

<TABLE>
<CAPTION>
UNDERLYING DIVERSIFIED PORTFOLIO DIVERSIFIED SUBADVISERS
PORTFOLIO SUBADVISERS COMPENSATION(1) COMPENSATION
- ------------------------ -------------------------------------- --------------- ------------
<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25% 0.05%
High Quality Bond Merganser Capital 0.35 (2)
Portfolio
Intermediate Government Management Corporation Capital 0.35 0.15
Bond Portfolio Management Group
Government/Corporate Capital Management Group 0.35 0.15
Bond Portfolio
High-Yield Bond Delaware Investment 0.55 (3)
Portfolio
Equity Income Portfolio Advisers Asset Management Group 0.45 0.25
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (4)
Growth & Income Putnam Advisory Company, Inc. 0.60 (5)
Portfolio
Equity Growth Portfolio Chancellor LGT Asset Management, Inc. 0.62 (6)
Special Equity Portfolio (7) 0.80 0.50
Aggressive Equity McKinley Capital Management 0.97 (8)
Portfolio
International Equity Capital Guardian Trust Company 0.75 (9)
Portfolio
</TABLE>

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

(1) Diversified is currently waiving a portion of its fee. See "Fees and
Expenses" on page 5 for a discussion of the fee waivers currently in effect.

(2) 0.50% on the first $10,000,000 in assets, 0.375% on the next $15,000,000 in
assets, 0.25% on the next $75,000,000 in assets and 0.1875% on all assets in
excess of $100,000,000.

(3) 0.40% on the first $20,000,000 in assets, 0.30% on the next $20,000,000 in
assets and 0.20% on assets in excess of $40,000,000.

(4) 0.45% on the first $100,000,000 in assets, 0.40% on the next $50,000,000 in
assets and 0.35% on the next $50,000,000 in assets; when the Portfolio
achieves $200,000,000 in assets, the rate shall be 0.40% on assets up to
$200,000,000 and 0.35% on assets in excess of $200,000,000 so long as the
Portfolio continues to have more than $200,000,000 in assets.

(5) 0.30% on the first $100,000,000 in assets and 0.20% on assets in excess of
$100,000,000.

(6) 0.50% on the first $50,000,000 in assets, 0.30% on the next $75,000,000 in
assets, 0.25% on the next $75,000,000 in assets; when the Portfolio achieves
$200,000,000 in assets, the rate shall be 0.20% on assets in excess of
$200,000,000 so long as the Portfolio continues to have more than $200,000
in assets.

(7) The Special Equity Portfolio has four Subadvisers: Pilgrim Baxter &
Associates, Ltd.; Ark Asset Management Co., Inc.; Liberty Investment
Management, Inc.; and Westport Asset Management, Inc.

(8) 0.90% on the first $10,000,000 in assets, 0.80% on the next $15,000,000 in
assets, 0.60% on the next $25,000,000 in assets, 0.40% on the next
$50,000,000 in assets and 0.35% on assets in excess of $100,000,000.

(9) 0.75% on the first $25,000,000 in assets, 0.60% on the next $25,000,000 to
$50,000,000 in assets, 0.425% on the next $50,000,000 to $250,000,000 in
assets and 0.375% on all assets in excess of $250,000,000.

It is the responsibility of a Subadviser to make the day-to-day investment
decisions of the Underlying Diversified Portfolio and to place the purchase and
sales orders for securities transactions of such Portfolio, subject in all cases
to the general supervision of Diversified. Each Subadviser makes the investment
selections for its respective Underlying Diversified Portfolio consistent with
the guidelines and directions set by Diversified and the Board of Trustees of
the Portfolio Series. Each Subadviser furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the corresponding
Portfolio's investments and effecting securities transactions for a Portfolio.

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<PAGE> 25

Diversified has entered into separate Subadvisory Agreements with respect
to each of the Money Market Portfolio, Intermediate Government Bond Portfolio
and Government/Corporate Bond Portfolio with Capital Management Group, a
division of 1740 Advisers, Inc., a wholly-owned subsidiary of The Mutual Life
Insurance Company of New York ("MONY"). The address of Capital Management Group
is 1740 Broadway, New York, New York 10019. Total assets under management by
Capital Management Group at December 31, 1995 were approximately $639 million,
$594 million of which were assets of registered investment companies. Investment
management decisions of Capital Management Group are made by committee and not
by managers individually.

Diversified has entered into a Subadvisory Agreement with respect to the
Equity Income Portfolio with Asset Management Group, a division of 1740
Advisers, Inc. a wholly-owned subsidiary of MONY. The address of Asset
Management Group is 1740 Broadway, New York, New York 10019. Total assets under
management by Asset Management Group at December 31, 1995 were approximately
$1.0 billion, $910 million of which were assets of registered investment
companies. Investment management decisions of Asset Management Group are made by
committee and not by managers individually.

Diversified has entered into a Subadvisory Agreement with respect to the
High Quality Bond Portfolio with Merganser Capital Management Corporation
("Merganser"). Merganser was formed in September 1987 and is owned by certain of
its employees. Total assets under management for all institutional bond clients
at December 31, 1995 were approximately $2.1 billion, $203.5 million of which
were assets of registered investment companies. The principal business address
of Merganser is One Cambridge Center, Cambridge, Massachusetts 02142. Investment
management decisions of Merganser are made by committee and not by managers
individually.

Diversified has entered into a Subadvisory Agreement with respect to the
High-Yield Bond Portfolio with Delaware Investment Advisers (a division of
Delaware Management Company, Inc.) ("Delaware"). Delaware was formed in February
1985 and is owned by Lincoln National Corp. Total assets under management for
all high-yield bond clients at December 31, 1995 were approximately $2 billion,
$1.5 billion of which were assets of registered investment companies. The
principal business address of Delaware is 2005 Market Street, Philadelphia,
Pennsylvania 19103. Investment management decisions of Delaware are made by
committee and not by managers individually.

Diversified has entered into a Subadvisory Agreement with respect to the
Equity Value Portfolio with Ark Asset Management Co., Inc. ("Ark"). Ark was
formed in July 1989 and is owned by certain employees of ARK Asset Holdings,
Inc. The principal address of Ark is 55 Water Street, New York, NY 10041. Total
assets under management for equity value clients at December 31, 1995 were
approximately $9.8 billion, $75 million of which were assets of registered
investment companies. Investment management decisions of Ark are made by
committee and not by managers individually.

Diversified has entered into a Subadvisory Agreement with respect to the
Growth & Income Portfolio with The Putnam Advisory Company, Inc. ("Putnam").
Putnam was formed in 1937 and is owned by Marsh & McLennan Companies Inc. The
principal address of Putnam is One Post Office Square, Boston, MA 02109. Total
assets under management for growth & income clients at December 31, 1995 were
approximately $868 million, $125 million of which were assets of registered
investment companies. Investment management decisions of Putnam are made by
committee and not by managers individually.

Diversified has entered into a Subadvisory Agreement with respect to the
Equity Growth Portfolio with Chancellor LGT Asset Management, Inc.
("Chancellor"). Chancellor was formed on October 31, 1996 and is owned by
Liechtenstein Global Trust. Chancellor succeeded to the investment management
business of Chancellor Asset Managment, Inc. The principal address of Chancellor
is 1166 Avenue of the Americas New York, New York 10036. Total assets under
management for Select-Growth clients as of December 31, 1995 were approximately
$1.4 billion, none of which were assets of registered investment companies.
Investment decisions of Chancellor are made by committee not by managers
individually.

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<PAGE> 26

Diversified has entered into a Subadvisory Agreement with respect to the
Aggressive Equity Portfolio with McKinley Capital Management, Inc. ("McKinley").
McKinley was formed in March 1991 and is owned by Robert Gillam. Total assets
under management for all aggressive equity clients at December 31, 1995 were
approximately $375 million, none of which were assets of registered investment
companies. The principal business address of McKinley is 3301 C Street,
Anchorage, Alaska 99503. Investment management decisions of McKinley are made by
committee and not by managers individually.

Diversified has entered into a Subadvisory Agreement with respect to the
International Equity Portfolio with Capital Guardian Trust Company ("CGTC").
CGTC was formed in 1968 and is owned by The Capital Group Companies, Inc. The
principal address of CGTC is 333 South Hope Street, Los Angeles, California
90071. Total assets under management for all international equity clients by
CGTC at December 31, 1995 were approximately $15 billion, and total assets under
management of registered investment companies for which CGTC acts as subadviser
was $612 million as of that date. CGTC uses a system of multiple portfolio
managers pursuant to which the Portfolio is divided into segments that are
assigned to individual portfolio managers. With investment guidelines, each
portfolio manager makes individual decisions as to company, country, industry,
timing and percentage based on extensive field research and direct company
contact.

With respect to the Special Equity Portfolio, Diversified has entered into
Subadvisory Agreements with four Subadvisers as follows:

-- ARK Asset Management Co., Inc. ("ARK") was formed in July 1989 and is
owned by certain employees of ARK Asset Holdings, Inc. Total assets
under management for all small capitalization clients at December 31,
1995 were approximately $1.7 billion, $83 million of which were assets
of registered investment companies. The principal business address of
ARK is 55 Water Street, New York, NY 10041.

-- Liberty Investment Management, Inc. ("Liberty") was formed in 1994 and
is owned by certain of its employees. Liberty succeeded to certain of
the investment management businesses of Eagle Asset Management, Inc.,
Total assets under management for all equity clients at December 31,
1995 were approximately $401 million, $91 million of which were assets
of registered investment companies. The principal business address of
Liberty is 880 Carillon Parkway, St. Petersburg, FL 33716.

-- Pilgrim Baxter & Associates, Ltd. ("Pilgrim") was formed in 1995 and is
owned by United Asset Management, Inc., a publicly-owned corporation.
Pilgrim succeeded to certain of the investment management businesses,
and acquired the corporate name of, Pilgrim Baxter & Associates, Ltd. in
April 1995. Total assets under management for all equity clients at
December 31, 1995 were approximately $4.7 billion, $2.6 million of which
were assets of registered investment companies. The principal business
address of Pilgrim is 1255 Drummers Lanes, Wayne, PA 19087.

-- Westport Asset Management, Inc. ("Westport") was formed in July 1993 and
is owned by certain of its employees. Total assets under management for
all equity clients at December 31, 1995 were approximately $520 million,
$119 million of which were assets of registered investment companies.
The principal business address of Westport is 253 Riverside Avenue,
Westport, CT 06880.

Investment management decisions by each of these Subadvisers are made by
committee and not by managers individually.

CHARGES

CHARGES FOR MORTALITY AND EXPENSE RISKS

The maximum daily charges against the Underlying Diversified Subaccounts
for mortality and expense risks assumed by AUSA are computed and deducted from
the value of the net assets of the Underlying Diversified Subaccounts. The
maximum daily charge will be at the rate of 0.003425% (equivalent to an annual
rate of 1.25%) of the average daily net assets of the Underlying Diversified
Subaccounts. The daily charge will be deducted from the net asset value of each
Underlying Diversified Subaccount on each Valuation Date. Where the previous day
(or days) was not a Valuation Date, the maximum deduction on the Valuation Date
will be 0.003425% multiplied by the number of days since the last Valuation
Date. The sum of these charges on an annual basis will not exceed 1.25% of the
average net assets invested in the Underlying Diversified

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<PAGE> 27

Subaccounts. Of this charge, AUSA estimates that .80% is for mortality risk and
.45% is for expense risk. (The daily charge from the Underlying Diversified
Subaccounts based on an annual mortality and expense risk rate of .90%, .60% for
mortality risks and .30% for administrative expense risks, is 0.002466%).

The mortality risk is that individuals may live for a longer period of time
than projected and therefore a greater amount of annuity benefits than projected
will be payable. The expense risk is that expenses incurred in issuing and
administering the Contract will exceed the administrative expense charge
provided in the Contract. AUSA believes that this level of charge is within the
range of industry practice for comparable group variable annuity contracts.

Sales distribution expenses and any other expenses in excess of the
described charges will be paid from AUSA's general account and not directly from
Diversified Investors Strategic Variable Funds, the Underlying Diversified
Subaccounts or from the mortality and expense risk charges. However, asset
charges for AUSA's assumption of mortality and expense risks might be a source
of contribution to the surplus in AUSA's general account.

ANNUAL CONTRACT CHARGE

AUSA reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account to reimburse AUSA for administrative expenses
relating to the maintenance of the Contracts. AUSA has no present intention to
impose such a charge, however, AUSA may, in the future, impose such a charge in
accordance with the provisions of the Contracts. Any such annual charge will not
exceed $50. AUSA also reserves the right, if such a charge is imposed, to waive,
on a temporary or permanent basis, all or part of such charge for certain
classes of Contracts or for certain new classes of Contracts which may be sold
in the future where circumstances exist that result in differences in AUSA's
costs or in the services required from AUSA. For example, waivers may be granted
for Contractholders with large numbers of participants with large account
balances or for Contractholders which assume certain administrative expenses
which AUSA would otherwise bear. If imposed, this charge would represent
reimbursement for administrative costs expected to be incurred over the life of
the Contracts. AUSA does not anticipate any profit from this charge.

INVESTMENT MANAGEMENT FEE

For its services as investment adviser to each Subaccount, Diversified
receives fees, accrued daily and paid monthly at an annual rate equal to 0.20%
of the average daily net assets.

Because Diversified Investors Strategic Variable Funds purchases interests
in Underlying Diversified Subaccounts which, in turn, purchase interests in
certain series of Diversified Investors Portfolios, the net assets of
Diversified Investors Strategic Variable Funds will reflect the investment
management fee and other expenses incurred by these series of Diversified
Investors Portfolios.

Diversified serves as the investment adviser to each series of Diversified
Investors Portfolios. For information with respect to the arrangements under
which Diversified provides such advisory services, including charges and
arrangements with subadvisers, reference is made to the information set forth
under "Management of Diversified Investors Portfolios" at page .

Under the laws of certain jurisdictions, premium taxes are payable on
annuity considerations which can include Purchase Payments or the Accumulation
Account under the Contracts. Any applicable premium taxes will generally be
deducted when the Accumulation Account under a Contract is applied to purchase
an annuity. Under present laws, the range of premium taxes is from .5% to 4.0%.
Attached as an Appendix to this Prospectus is a schedule of applicable premium
taxes payable upon annuitization which are in effect as of the date of this
Prospectus. The laws of the various jurisdictions relating to annuity taxes and
the interpretations of such laws are subject to changes which may affect the
deductions, if any, under the Contracts for such taxes.

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<PAGE> 28

SUMMARY OF THE CONTRACTS

ELIGIBLE PURCHASERS

State educational organizations and organizations that qualify for
tax-exempt status under Code Section 501(c)(3), including associations thereof
that qualify for tax-exempt status under Code Section 501(c)(3), are eligible
purchasers. In addition, any organization qualifying as an IRA Contractholder
may purchase or hold an IRA Contract. Any type of non-profit organization as
well as taxed subsidiaries of tax-exempt organizations and taxed stand-alone
organizations may purchase a Section 401(a) and/or a Section 401(k) or an NQDC
Contract(s).

OWNERSHIP

The organization purchasing or holding a Contract is the owner of the
Contract for the benefit of the Participants. The Contract will cover all
eligible Participants under a Plan. Each Participant will receive a certificate
at the time his/her first annuity payment becomes payable, or earlier, if
required by applicable law. The certificate summarizes the Participant's
benefits under the Contract.

PURCHASE PAYMENTS

With respect to the Section 401(a) Contract, the employer and/or employee
will make contributions pursuant to the underlying retirement Plan. The Section
401(k) and NQDC Contracts will accept employer and/or employee contributions
pursuant to the terms and conditions of the underlying Plan. As to the Section
403(b) Contract, the employer will make Purchase Payments in accordance with a
salary reduction agreement or an agreement to forego a salary increase, except
with respect to employer-sponsored Section 403(b) Plans under which the employer
will make contributions pursuant to the underlying retirement Plan. In the case
of the Section 408 IRA Contract, Purchase Payments will be made by the employer
on behalf of and as determined by each participating employee pursuant to a
salary reduction agreement or by the Participant. An Accumulation Account will
be established for each Participant which will record the number of Units held
in each Subaccount. Purchase Payments may be allocated among any of the
Subaccounts.

All Purchase Payments in Diversified Investors Strategic Variable Funds
credited to an Accumulation Account are vested and nonforfeitable. However,
Purchase Payments made by employers, including all such payments made under a
Section 401(a) Contract, which are not the result of a reduction in salary or a
give up in salary agreement, under an employer-sponsored Plan may be forfeitable
but are generally subject to the vesting requirements, where applicable, of the
Employee Retirement Income Security Act of 1974, as amended. In general, all
Purchase Payments made to NQDC and Section 457 Contracts may be forfeitable even
though partially or fully vested.

EMPLOYER SPONSORED PLAN REQUIREMENTS

Since the Contracts are intended to implement the Plans of state
educational organizations, organizations that qualify for tax-exempt status
under Code Section 501(c)(3), IRA Contractholders and, in the case of Section
401(a) and/or Section 401(k) and NQDC Contracts, for taxed subsidiaries of such
organizations and stand-alone taxed organizations and since such Plans may be
sponsored by employers or associations who may have their own desires regarding
certain Plan details and the manner in which the Plan is to be administered,
there will be some variations in details in the Contract and Plan to reflect
such desires. Reference to the provisions of the Plan in which the individual is
a Participant must be made in all cases for particulars.

RIGHTS OF THE PARTICIPANT UNDER THE CONTRACT

There are no stipulated or required Purchase Payments to be made under the
Contract. Except for the 15 days prior to a Participant's Annuity Purchase Date
(See "Annuity Purchase Date" on page 31) during which no Purchase Payments will
be accepted by AUSA, during a Participant's Accumulation Period Purchase
Payments may be made in the amount authorized by the Participant. The Contract
permits the Participant to elect his/her Annuity Purchase Date, to allocate
Purchase Payments, to redeem all or a portion

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<PAGE> 29

of the Units in his/her Accumulation Account, to designate beneficiaries, and to
elect Fixed Annuity options, except that employer-sponsored Plans may affect
these rights.

During a Participant's Accumulation Period, one's rights and those of the
Contractholder or IRA Contractholder shall be as set forth in the Contract and
Plan. On and after the Annuity Purchase Date, or on the Participant's death, if
earlier, all rights, as specified in the Contract and Plan, shall belong to the
Participant or beneficiary as the case may be.

RIGHTS UPON SUSPENSION OF CONTRACT OR TERMINATION OF PLAN

403(b) Contract

In the event that the making or receipt of all Purchase Payments under
certain 403(b) Contracts is discontinued or a Contractholder terminates its Plan
or discontinues Purchase Payments for a Participant, AUSA shall give written
notice thereof to the appropriate Participant(s) together with notice of the
right of the Participant to elect to have the value of his/her Accumulation
Account applied under one of the following options: (1) to be held and
distributed by AUSA in accordance with the terms of the Contract, (2) to be paid
to him/her in cash, or (3) in the event of suspension of the Contract or
termination of the Plan, to be transferred to an alternate funding agency (e.g.,
another insurance company). Certain other 403(b) Contracts require the
Contractholder, not AUSA, to give written notice thereof to Participants.

401(a) Contract/401(k) Contract and NQDC Contracts

If the Contractholder terminates its Plan or discontinues Purchase
Payments, it is the Contractholder's responsibility, and not AUSA's, to give
written notice thereof to the affected Participants. In such cases, the
Contractholder shall elect to have the entire balance held under the Contract
applied under one of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract; (2) to be transferred to an
alternate funding agency (e.g., another insurance company); or (3) to purchase
deferred, paid-up life annuity benefits for Participants.

457 and 408(IRA) Contracts

If the Contractholder or IRA Contractholder terminates its Plan or
discontinues Purchase Payments for a Participant, AUSA shall give written notice
thereof to the appropriate Participant(s) together with notice of the right of
the Participant to elect to have the value of his/her Accumulation Account
applied under either of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract or (2) to be paid to him/her
in cash, except that, under the terms of certain 457 Contracts, the
Contractholder, not AUSA, shall give notice to affected Participants.

FAILURE OF QUALIFICATION

In the event that a Plan, Contractholder or IRA Contractholder or a
Participant, thereunder becomes ineligible for any previously applicable tax
benefits under the Code, AUSA upon notice thereof shall refuse during the period
of such ineligibility to accept Purchase Payments with respect to that Plan or
Participant. A failure of qualification under a particular Contract shall have
no effect on other issued and outstanding Contracts.

TRANSFERS

No transfers may be made between any of the Contracts; however, the
following transfers are permissible with respect to each Contract.

401(a), 401(k), 403(b), 457, 408(IRA) and NQDC Contracts

A Participant may transfer all or a portion of his/her Accumulation Account
in Diversified Investors Strategic Variable Funds among the various Subaccounts.
No transfer charges are imposed, and there is no

27
<PAGE> 30

limit to the number of transfers permitted. While AUSA has no present intention
to do so, AUSA reserves the right to impose transfer charges at a later date.

Transfers from the Section 403(b), 401(a) and (k) and NQDC Group Fixed
Annuity Contracts to a Participant's Accumulation Account under the Diversified
Investors Strategic Variable Funds Contracts are permitted only to the Moderate
Strategic Variable Fund or the Aggressive Strategic Variable Fund. Certain other
restrictions which apply to transfers from the AUSA Section 403(b), Section
401(a), Section 401(k), NQDC and Section 408(IRA) Group Fixed Annuity Contracts
to the Diversified Investors Strategic Variable Funds Contracts are contained in
the AUSA Section 403(b) and Section 401(a) and NQDC and 408(IRA) Group Fixed
Annuity Contracts.

Transfers may be made in writing or by telephoning (914) 697-8000.
Transfers are effective within 48 hours of receipt of instructions. All
Participants should be aware that a transfer authorized by telephone and
reasonably believed to be genuine by AUSA may subject the Participant to risk of
loss if such instruction is subsequently found not to be genuine. AUSA will
employ reasonable procedures, including requiring Participants to give certain
identification information and tape recording of telephone instructions, to
confirm that instructions communicated by telephone are genuine. To the extent
that AUSA fails to use reasonable procedures to verify the genuineness of
telephone instructions, AUSA may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.

RIGHTS RESERVED BY AUSA

Subject to compliance with applicable laws and, when required by law,
approval of the Contractholders, IRA Contractholders, NQDC Contractholders
and/or Participants and any appropriate regulatory authority, AUSA reserves the
right to make the following changes:

(1) To operate Diversified Investors Strategic Variable Funds in any
form permitted under the 1940 Act or in any other form permitted by law;

(2) To take any action necessary to comply with or obtain and continue
any exemptions from the 1940 Act;

(3) To transfer any assets in a Subaccount to another Subaccount or to
one or more separate accounts, or to AUSA's general account to the extent
permitted by law or to add, combine or remove Subaccounts in a separate
account;

(4) To substitute, for the interests in a series of Diversified
Investors Portfolios held in any Underlying Diversified Subaccount,
interests in another series of Diversified Investors Portfolios or
interests in another investment company or any other investment permitted
by law; and

(5) To make any necessary technical changes in the Contracts in order
to conform with any of the above-described actions or as may be required or
permitted by applicable laws affecting Diversified Investors Strategic
Variable Funds or the Contracts.

AUSA will exercise its right to make any of these changes when, in AUSA's
judgment, such change is in the best interests of Contractholders and
Participants and/or such change is required under applicable law.
Contractholders will be notified of any changes and Participants will be
notified of any changes that result in a material change in their Contract or in
the investment options thereunder.

CREDIT OF PURCHASE PAYMENTS

A Participant's initial Purchase Payment will be credited to the
Participant's Accumulation Account to provide Units as of a Valuation Date for
the Valuation Period, not later than (1) two business days after receipt of the
Purchase Payment by AUSA at 4 Manhattanville Road, Purchase, New York 10577, if
the contract application and/or Participant's enrollment form is complete upon
receipt, or (2) two business days after an application and/or enrollment form
which is incomplete upon receipt by AUSA is made complete, provided that if such
information is not made complete within five business days after receipt, (i)
the

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<PAGE> 31

prospective Participant will be informed of the reasons for the delay, and (ii)
the initial Purchase Payment will be returned immediately and in full, unless
the prospective Participant specifically consents to AUSA retaining the Purchase
Payment until such information is made complete.

Subsequent Purchase Payments will be credited to the Participant's
Accumulation Account to provide Units as of the Valuation Date for the Valuation
Period in which the Purchase Payment is received in good order by AUSA.

ALLOCATION OF PURCHASE PAYMENTS

Upon receipt of a Purchase Payment, it will be credited to the Subaccount
designated by the Participant in the form of Units. The number of Units to be
credited is determined by dividing the dollar amount allocated to the particular
Subaccount(s) by the Unit value of that Subaccount for the Valuation Date for
the Valuation Period on which the Purchase Payment is received. The number of
Units shall not be changed by any subsequent change in the value of a Unit, but
the dollar allocation value of a Unit will vary in amount depending upon the
investment experience of the applicable Subaccount.

Allocation instructions may be changed at any time by sending to AUSA a
correctly completed allocation form. Any change in allocations will be effective
within 10 business days following receipt of the allocation form by AUSA. If an
allocation form is incorrectly completed, Purchase Payments will be credited in
accordance with the most recent allocation form on record. AUSA reserves the
right to limit a Participant's right to change allocation instructions to four
times a calendar year.

DETERMINATION OF UNIT VALUE

The Unit value for a Subaccount for any Valuation Date is determined by
subtracting (b) from (a) and dividing the result by (c), where

(a) is the aggregate net asset value on the Valuation Date of all
investments by the Subaccount in the Underlying Diversified Subaccounts,
and

(b) is the investment advisory fee accrued as of that Valuation Date;
and,

(c) is the total number of Units held in the Subaccount on the
Valuation Date before the purchase or redemption of any Units on that Date.

AUSA values the investment of each Subaccount at the respective unit values
of such Underlying Diversified Subaccounts invested in. The unit values of such
Underlying Diversified Subaccounts are, in turn, determined by the valuation
practices of the Underlying Diversified Portfolios. Underlying Diversified
Portfolios value the securities of the Money Market Series based on the
amortized cost method of valuation. Securities of other Underlying Diversified
Portfolios are valued based on their current market value when market quotations
are available. Where market quotations are not available, assets are valued at
fair value as determined in good faith under the direction of the Board of
Trustees of the Underlying Diversified Portfolios. Debt obligations with 60 days
or less remaining to maturity may be valued by the amortized cost method, which
the Board of Trustees of the Underlying Diversified Portfolios has determined to
constitute fair value for such securities.

DEATH BENEFIT

Under Section 403(b), Section 457, and 408(IRA) Contract, if a Participant
dies before the Annuity Purchase Date (See "Annuity Purchase Date" on page 31),
the value of his/her Accumulation Account will be paid to the beneficiary in a
lump sum. If the beneficiary is under the age of 75 at the time of the
Participant's death, the beneficiary may elect to have this lump sum applied to
provide a Fixed Annuity. A lump sum payment to some extent may be taxed as
ordinary income to the beneficiary in the year received. A beneficiary should
consider the possible tax advantages to electing an annuity. (See "Section
403(b) Annuities" on page 35). Under Section 401(a) and/or Section 401(k)
Contracts, however, the underlying tax-qualified Plan is generally required to
provide that in the case of a married Participant, a

29
<PAGE> 32

survivorship annuity death benefit will be paid to the surviving spouse if the
Participant dies prior to retirement. In each case involving Section 401(a)
and/or Section 401(k) Contracts, reference must be made to the underlying Plan
for particulars.

If the Participant dies before the Annuity Purchase Date, his/her entire
interest must generally be distributed within five years after the date of
death, or if payable to a designated beneficiary must be annuitized over the
life of that designated beneficiary or over a period not extending beyond the
life expectancy of that beneficiary, within one year after the date of death. If
the beneficiary is the Participant's spouse, distributions are not required to
be made until the April 1st after the end of the calendar year in which the
Participant would have attained age 70 1/2; if the spouse dies before
distributions begin, the rules discussed above will apply as if the spouse were
the Participant (owner).

If a lump sum payment is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period in which a certified
copy of the death certificate evidencing the Participant's death is received by
AUSA. If a Fixed Annuity is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period of the beneficiary's
Annuity Purchase Date. For Section 401(a) and/or Section 401(k) and NQDC
Contracts, the underlying Plan should be consulted to determine the options
available.

For NQDC Contracts, the remaining value will be paid to a designated
beneficiary. If no such beneficiary is so designated or in existence, the
remaining value will be paid in the following order: Participant's (1) spouse,
(2) children, (3) parents, (4) siblings and (5) estate.

For all Contracts except NQDC Contracts, the death benefit is guaranteed to
be not less than the total amount of all contributions, less any withdrawals,
made by the Participant.

REDEMPTION DURING THE ACCUMULATION PERIOD

For Section 403(b), Section 457 and Section 408(IRA) Contracts and subject
to applicable federal tax law restrictions, a Participant at any time during
his/her Accumulation Period and prior to his/her death may redeem all or a
portion of the Units credited to the Accumulation Account. There is no
redemption charge. (See "Federal Tax Status" on page ).

The Accumulation Account value redeemed or the Units remaining after a
partial redemption will be determined on the Valuation Date for the Valuation
Period in which a written request for a redemption on a form approved by AUSA is
received by AUSA. The Accumulation Account will be reduced by the lesser of the
number of Units obtained by dividing the amount of the redemption request by the
Unit value for that day or the number of Units remaining in the Accumulation
Account.

A full or partial redemption payment will be made within seven days after
receipt of the written request. A request for a partial redemption must specify
the Subaccount(s) from which the partial withdrawal is to be made. Payment may
be postponed as permitted by the 1940 Act. Currently, deferment is permissible
only when the New York Stock Exchange is closed or trading is restricted, when
an emergency exists as a result of which disposal of interests in Diversified
Investors Portfolios held by Underlying Diversified Subaccounts is not
reasonably practicable or it is not reasonably practicable to determine fairly
the value of these assets, or when the SEC has provided for such deferment for
the protection of Participants.

A withdrawal will generally have federal income tax consequences which may
include penalties. (See "Federal Tax Status" on page ).

With respect to Section 401(a), Section 401(k) and NQDC Contracts, the
ability to withdraw funds during the Accumulation Period is generally more
limited; however, in each instance the underlying Plan document should be
consulted to determine what options, if any, are available.

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<PAGE> 33

RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM

The Texas Optional Retirement Program ("Program") imposes on participants
in such Program certain restrictions on withdrawal, which affect redemptions
with respect to any variable annuity contract issued under the Program. Under
section 830.104 of the Texas Government Code, such participant in the Program,
in order to withdraw accumulated contributions from the retirement system, must
complete the required application form prescribed by the board of trustees. A
person who withdraws contributions pursuant to section 830.104 relinquishes all
accrued rights in the retirement system.

Nothing in section 830.105 of the Texas Government Code, entitled
Termination of Participation, precludes the election by a participant to
withdraw accumulated contributions pursuant to section 830.104. However, section
830.105 restricts the availability of an annuity purchased under the Program to
situations where the participant attains age 70 1/2 or terminates participation
in the Program by: death, retirement, or termination of employment in all
institutions of higher education.

PAYMENT OPTIONS

With respect to Section 403(b), Section 457 and Section 408(IRA) Contracts,
unless a Fixed Annuity as described below is elected, payment to the Participant
shall be made at the end of his/her Accumulation Period in a lump sum calculated
in the same manner as if a total withdrawal request of one's Accumulation
Account had been received by AUSA on his/her Annuity Purchase Date. (See page 30
for "Redemption During the Accumulation Period"). However, Section 401(a),
Section 401(k) and NQDC Contracts provide the funding for the Plans and
reference to the particular Plan must be made in each case for details. For
example, tax-qualified Plans must generally provide by law that in the case of a
married Participant who does not properly elect otherwise, retirement annuity
benefits will be paid in the form of a contingent annuity with a survivorship
annuity benefit for his surviving spouse at least equal to 50% of the amount
which would have been payable if the Participant were living. For NQDC
Contracts, the employer may also provide for installment payments without the
purchase of an annuity.

ANNUITY PURCHASE DATE

The Annuity Purchase Date is the first day of the month coincident with or
following the receipt by AUSA of written notice, submitted through the
Participant's employer, of the Participant's retirement (i.e., the termination
of employment with his/her employer). Subject to the terms of the Plan, a
Participant may elect to retire at any time and receive annuity benefits. As a
general rule, benefits must begin no later than April 1 of the calendar year
following the year in which the Participant attains age 70 1/2 at which time an
election to receive an annuity or lump sum benefit must be made.

In the case of a beneficiary who elects a Fixed Annuity, the Annuity
Purchase Date will be the first day of the month following receipt by AUSA of
the election of a Fixed Annuity; however, if any election is received during the
last 15 days of a month, the Annuity Purchase Date will be the first day of the
second month after receipt of the election.

For Section 408(IRA) Contracts, the Annuity Purchase Date is the date the
annuity first begins under the terms of the IRA Contract.

FIXED ANNUITY

Fixed Annuity payments are not made from Diversified Investors Variable
Funds but are made from the general account of AUSA which supports insurance and
annuity obligations. Because of exemptive and exclusionary provisions, Fixed
Annuity payments and interests in the general account have not been registered
under the Securities Act of 1933, as amended, (the "1933 Act") nor is the
general account registered as an investment company under the 1940 Act.
Accordingly, neither the general account nor any interests therein are generally
subject to the provisions of the 1933 or 1940 Acts. The SEC staff has not
reviewed the disclosures in this Prospectus that relate to the Fixed Annuity
payments and interests in the general account. Disclosures regarding Fixed
Annuity payments and the general account in this Prospectus, however, may be

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<PAGE> 34

subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.

A Fixed Annuity may not be elected if the initial monthly payment under the
form elected would be less than $20. Fixed Annuity payments will be made monthly
unless the annuitant elects to receive payments annually, semi-annually or
quarterly. Any such election must be made at the same time that the annuitant
elects to receive a Fixed Annuity and cannot be changed during the annuity
period. Once a Fixed Annuity takes effect, it may not be redeemed, surrendered
or changed to any other form of annuity.

FIXED ANNUITY OPTIONS

The following Fixed Annuity options may be available:

(i) Life Annuity -- Annuity payments will be made during the lifetime
of the annuitant. It would be possible for the annuitant to receive no
annuity payment if he/she died prior to the date of the first annuity
payment.

(ii) Life Annuity With Period Certain -- Annuity payments will be made
during the lifetime of the annuitant with the guarantee that if the
annuitant dies before a period certain elected, the beneficiary will
receive payments for the duration of the period. The period certain may be
any number of years between 5 and 20 inclusive.

(iii) Specified Fixed Period Annuity -- Annuity payments will be made
for a specified fixed period selected by the annuitant. If the annuitant
dies during the specified fixed period, the annuity payments for the
remainder of the period will be paid to the beneficiary. No annuity
payments are made after the expiration of the specified fixed period even
if the annuitant survives. The specified fixed period may be for any number
of years between 10 and 30 years inclusive.

(iv) Contingent Annuity -- Annuity payments will be made during the
joint lifetimes of the annuitant and a designated second person
("contingent annuitant") with payments continued during the remaining
lifetime of the contingent annuitant. Annuity payments to the contingent
annuitant may be made in the same amount paid while both annuitants lived
or a lesser percentage of this amount. For Section 401(a) and/or Section
401(k) Contracts, in the absence of a proper election by the Participant, a
contingent annuity with a survivorship annuity benefit for the surviving
spouse at least equal to 50% of the amount which would have been payable if
the Participant were living will be the normal form of benefit.

If the contingent annuitant dies before the first annuity payment to
the annuitant, the contingent annuity election will be void and the
annuitant will receive a Life Annuity. If the contingent annuitant dies
after the first annuity payment to the annuitant, but before the death of
the annuitant, annuity payments under the Contingent Annuity election will
be made to the annuitant during his/her lifetime. If the annuitant and the
contingent annuitant die before the date of the first annuity payment, no
annuity payments will be made.

(v) Contingent Annuity With Period Certain -- Annuity payments will be
made during the joint lifetimes of the annuitant and a designated second
person ("contingent annuitant"). Annuity payments to the contingent
annuitant may be in the same amount as paid to the annuitant or a lessor
percentage of that amount and will be made for a period certain of any
number of years between 5 and 20 years inclusive.

The Life Annuity With Period Certain and the Specified Fixed Period Annuity
may only be elected for a number of years that will not exceed an annuitant's
life expectancy. The annuity benefit option elected by the Participant will
affect the level of annuity payments the Participant will receive. The longer
annuity payments are projected to continue based upon actuarial possibilities,
the lower annuity payments will be.

The annuity purchase rates for these Fixed Annuity benefits shall not
exceed, during the initial period set forth in the Contract, the maximum rates
set forth in the Contract. Thereafter, the annuity purchase rate will be the
rate in effect as declared by AUSA or the Annuity Purchase Date. The guaranteed
level of Fixed Annuity payments will be determined based upon (i) a
Participant's Accumulation Account value on the

32
<PAGE> 35

Annuity Purchase Date, (ii) the applicable annuity purchase rate on the Annuity
Purchase Date which will reflect the age of the Participant and (iii) the type
of Fixed Annuity option elected.

PAYMENTS TO A BENEFICIARY FOLLOWING THE ANNUITANT'S DEATH

If any annuity payment is payable to the beneficiary after the death of an
annuitant on or after his/her Annuity Purchase Date but during a period certain,
it shall be payable as each payment becomes due to the beneficiary. If the
benefit is payable to more than one beneficiary, it shall be paid in equal
shares to such beneficiaries, the survivors or survivor, unless the annuitant
has elected otherwise. Upon the death of the last surviving beneficiary, AUSA
shall pay the commuted value of any remaining payments in a lump sum cash
payment to the estate of such last surviving beneficiary in lieu of any further
income payments.

The annuitant's beneficiary may direct in writing to AUSA that any income
payable after the death of the annuitant or contingent annuitant be terminated
and a single commuted value be paid to the beneficiary. The commuted values
referred to above shall be based upon the value of the payments for the balance
of the period certain determined as of the date AUSA receives written notice of
the beneficiary's election to receive the commuted value on the basis of the
interest rate (compounded annually) inherent in the annuity purchase rate
applied to provide the annuitant's Fixed Annuity.

VOTING RIGHTS

The assets held in the Subaccounts of Diversified Investors Strategic
Variable Funds will be invested in Underlying Diversified Subaccounts. AUSA is
the legal holder of these units in a Subaccount and as such has the right to
vote upon any matter that may be voted upon by holders of units. To the extent
required by law, AUSA will vote at regular and special meetings in accordance
with the instructions received from Contractholders, IRA Contractholders and
NQDC Contractholders. AUSA will furnish Contractholders, IRA Contractholders and
NQDC Contractholders with the proper forms to enable them to give it these
instructions.

Each Contractholder, IRA Contractholder and NQDC Contractholder will have
the equivalent of one vote per $100 of the dollar value of the Accumulation
Accounts in a Contract held in each Subaccount of Diversified Investors
Strategic Variable Funds, with fractional votes for amounts less than $100.
Interests held in each Subaccount for which no timely instructions from
Contractholders, IRA Contractholders or NQDC Contractholders are received will
be voted by AUSA in the same proportion as those interests in that Subaccount
for which instructions are received. Should applicable federal securities laws
or regulations permit, AUSA may elect to vote in its own right.

A Participant will have the right to instruct the Contractholder, IRA
Contractholder or NQDC Contractholder with respect to interests in Subaccounts
attributable to his/her portion of the Accumulation Account. Each Participant
under the Contract shall receive a statement of the amount attributable to
his/her participation in each Subaccount and stating his/her right to instruct
the Contractholder as to how to vote such interest. AUSA will provide voting
instruction materials to the Contractholder, IRA Contractholder or NQDC
Contractholder and to the Participants.

The Contractholder, IRA Contractholder and NQDC Contractholder shall
provide voting instructions to AUSA with respect to interests attributable to
the Accumulation Account values held in a Subaccount in accordance with
instructions received by Participants. For interests for which no timely
instructions from Participants are received, the Contractholder, IRA
Contractholder or NQDC Contractholder will instruct AUSA to vote these interests
in the same proportion as those shares for which instructions from Participants
are received.

Matters on which the Contractholder, IRA Contractholder or NQDC
Contractholder may give voting instructions include the following: (1) approval
of any change in the Investment Advisory Agreement corresponding to the
Contractholder's, IRA Contractholder's or NQDC Contractholder's selected
Subaccount(s); (2) any change in the fundamental investment policies of the
Contractholder's, IRA Contractholder's or NQDC Contractholder's selected
Subaccount(s); and (3) any other matter requiring a vote of

33
<PAGE> 36

the unitholders of a Subaccount. With respect to approval of the Investment
Advisory Agreements or any change in a fundamental investment policy,
Contractholders, IRA Contractholders and NQDC Contractholders participating in
that Subaccount will vote separately on the matter pursuant to the requirements
of Rule 18f-2 under the 1940 Act. On matters submitted for consideration by
holders of units of Underlying Diversified Subaccounts, AUSA will vote in
proportion to the vote of all other holders of units in that Underlying
Diversified Subaccount.

AUSA may, if required by state insurance officials, disregard voting
instructions if those instructions would require voting to cause a change in the
subclassification or investment objectives or policies of one or more of the
Subaccounts, or to approve or disapprove an investment adviser or principal
underwriter for one or more of the Subaccounts. In addition, AUSA may disregard
voting instructions that would require changes in the investment objectives or
policies of any Subaccount or in an investment adviser or principal underwriter,
if AUSA reasonably disapproves those changes in accordance with applicable
federal regulations. If AUSA disregards voting instructions, it will advise
Contractholders, IRA Contractholders, NQDC Contractholders and Participants of
that action and its reasons for the action in the next semiannual report to
Contractholders, IRA Contractholders, NQDC Contractholders and Participants.

DISTRIBUTION OF THE CONTRACTS

DISC will act as the principal underwriter and the distributor of the
Contracts. DISC will perform all sales, marketing and administrative functions
relative to the Contracts which participate in Diversified Investors Strategic
Variable Funds, with certain exceptions in connection with the use of other
authorized broker-dealers. DISC is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended, and is a member of the National
Association of Securities Dealers, Inc. The principal business address of DISC
is 4 Manhattanville Road, Purchase, New York 10577. The Contracts are sold by
individuals who are registered representatives of DISC and who are also licensed
as insurance agents for AUSA. The Contracts may also be sold through registered
representatives of other broker-dealers authorized by DISC and applicable law
who may be insurance agents licensed by an insurance company other than AUSA.
Commissions and other expenses directly related to the sale of the Contracts
will not exceed 8 percent of Purchase Payments. Additional expense allowance may
be paid for other services not directly related to the sale of the Contracts.
Such services include the training of personnel and the production of
promotional literature.

FEDERAL TAX STATUS

The ultimate effect of federal income taxes on Fixed Annuity payments and
on the economic benefit to the Participant, annuitant, payee and beneficiary
depends on the tax and employment status of the individual concerned.

The discussion which follows on the treatment of AUSA and of the Contracts
under federal income tax law is general in nature, is based upon AUSA's
understanding of current federal income tax laws, and is not intended as tax
advice. No representation is made regarding the likelihood of continuation of
the present federal income tax law or of the current interpretations by the
Internal Revenue Service. No attempt is made to consider any applicable state or
other tax laws. Each Contractholder, IRA Contractholder, NQDC Contractholders
and Participant contemplating investment in the Contracts should consult a
qualified tax adviser.

Participants receiving large distributions (generally those in excess of
$150,000 per year; or lump sum distributions in excess of $150,000) from
qualified retirement Plans, including those funded through Section 401(a),
Section 408(IRA) and Section 403(b) Contracts, may be subject to a 15% excise
tax on their distributions in excess of a specified amount.

TAX TREATMENT OF AUSA

AUSA is taxed as a life insurance company under the Code. Investment income
from the assets of Diversified Investors Strategic Variable Funds and the
Underlying Diversified Subaccounts are reinvested and

34
<PAGE> 37

taken into account in determining the value of Diversified Investors Strategic
Variable Funds and the Underlying Diversified Subaccounts. Under existing
federal income tax law, the investment income of Diversified Investors Strategic
Variable Funds and the Underlying Diversified Subaccounts, including realized
capital gains, is substantially not taxed to AUSA.

TAXATION OF DIVERSIFIED INVESTORS PORTFOLIOS

Diversified Investors Portfolios is organized as a New York trust. None of
its series are subject to any income or franchise tax in the State of New York.
AUSA, as an investor in a series of Diversified Investors Portfolios will be
taxable on its share (as determined in accordance with the governing instruments
of Diversified Investors Portfolios) of such series' ordinary income and capital
gain in determining its income tax liability. The determination of such share
will be made in accordance with the Code and regulations promulgated thereunder.
See "Tax Treatment of AUSA" above.

SECTION 403(b) ANNUITIES

Purchase Payments made under a Contract meeting the requirements of Section
403(b) of the Code afford certain federal income tax benefits to employees of
state educational organizations, and organizations which are tax-exempt under
Section 501(c)(3) of the Code.

The employer may make contributions to the Contract or the employer may
agree with the Participant that in return for employer contributions to the
Contract, the Participant will take a reduction in salary or give up a salary
increase. The agreement may not be changed with respect to earnings of the
Participant while the agreement is in effect. The Participant can only make one
agreement with his/her employer during the year, but the Participant may
terminate the agreement at any time with respect to amounts not yet earned. No
federal income tax is payable by the Participant on increases in the value of
his/her Accumulation Account until payments are received by the Participant.

Purchase Payments meeting the requirements of Sections 402(g), Section
403(b) and Section 415 of the Code are not includable in the gross income of the
Participant at the time they are made. Under Section 402(g) of the Code,
Purchase Payments made under a reduction in salary or a give up in salary
increase agreement ("elective deferrals") are excluded from a Participant's
gross income to the extent of the lesser of $9,500 or the Participant's
exclusion allowance. The $9,500 limit will be reduced on a dollar for dollar
basis by employee pre-tax elective deferrals made by that individual under a
Section 401(k) Plan, a simplified employee pension plan, or other tax deferred
annuity. Under Section 403(b) of the Code, Purchase Payments made under a
reduction in salary or a give up in salary agreement and/or contributed by the
employer are excluded from a Participant's gross income to the extent of the
applicable "exclusion allowance". The "exclusion allowance" is equal to 20% of a
Participant's includable compensation (taxable earnings) for the tax year,
multiplied by the number of years of employment, reduced by the total of
Purchase Payments made in prior tax years.

When Fixed Annuity payments commence, or if the Participant obtains a
partial or full redemption of the Units credited to his/her Accumulation Account
under the Contract, the amount received will be includable as ordinary income in
the year received, except that such portion of any amount received as is deemed
to represent a return of Purchase Payments originally included as gross income
made by the Participant will not be taxed. Full redemptions do not qualify for
special capital gains treatment nor 5-year income averaging applicable to
qualified plan lump sum distributions. However, if a Participant makes a full
redemption after attaining age 59 1/2 or on account of a separation from
service, he/she may delay including the distribution in income by making a
rollover transfer, subject to requirements set by the Code, to an Individual
Retirement Account or another Section 403(b) annuity. A partial redemption of at
least 50% of the balance to the credit of a Participant on account of a
separation from service may be rolled over to an Individual Retirement Account,
subject to requirements set by the Code.

If the Participant receives any amount under the Contract, the Participant
must pay an additional tax of 10% of the amount of the distribution includable
in gross income for the taxable year. This additional tax shall not apply to
distributions which are (1) made after the date on which the Participant attains
age 59 1/2,

35
<PAGE> 38

(2) made to a beneficiary on or after the death of the Participant, (3)
attributable to the Participant's becoming permanently disabled, (4) made after
separation from service in a series of substantially equal periodic payments
made for the life (or life expectancy) of the Participant or the joint lives (or
joint life expectancies) of the Participant and his beneficiary, (5) made to a
Participant after separation of service after attainment of age 55, (6) made to
a Participant for medical care (not to exceed the amount deductible by the
employee), or (7) paid to alternate payees under a qualified domestic relations
order.

RESTRICTIONS ON WITHDRAWALS OF ELECTIVE CONTRIBUTIONS. Effective January 1,
1989 and thereafter, any funds in the Participant's account balance other than
funds attributable to assets held at the close of the last year beginning before
January 1, 1989 will be restricted from withdrawal except upon attainment of age
59 1/2, separation from service, death, disability or hardship (hardship
withdrawals are to be limited to the amount of the Participant's own
contributions exclusive of earnings). However, any funds in the Participant's
account balance attributable to employer contributions, if any, and the earnings
thereon will not be restricted unless specifically provided for by the
employer's plan.

In tax years beginning after 1988, Section 403(b) Plans (other than church
plans) will be subject to nondiscrimination and coverage requirements, as well
as special rules with respect to minimum distributions.

SECTION 401(a) PLANS

An employer maintaining a pension or profit sharing Plan which satisfies
the requirements of Section 401(a) of the Code may make contributions to the
Contract which are generally currently deductible by the employer and are not
currently taxed to the Participants. The Code prescribes various limitations on
the maximum amount which may be contributed on behalf of any Participant. In
addition, Participants may make after-tax contributions to the Contract if their
Section 401(a) Plan permits.

When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received as is deemed to
represent a return of Participant after-tax Purchase Payments will not be taxed.
Full redemptions may qualify for special capital gains treatment or 5-year or
10-year income averaging if the payment constitutes a "lump sum distribution,"
as that term is defined in the Code.

The rules governing rollovers of distributions from a Section 401(a) Plan
are parallel to those dealing with distributions from Section 403(b) annuities.
In addition, the 10% penalty on premature distributions from Section 403(b)
annuities is also applicable to Section 401(a) Plan distributions.

SECTION 408 (IRA) CONTRACTS

An individual, participating under a Contract which satisfies the
requirements of Section 408 of the Code, may make contributions to the Contract.
The Code prescribes various limitations on the maximum amounts which may be
contributed by or on behalf of the Participant and on the deductibility of the
contributions for federal income tax purposes. No federal income tax is payable
by the Participant on increases in the value of his/her Accumulation Account
until payments are received by the Participant.

When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received which is deemed
to represent a return of Participant non-deductible Purchase Payments will not
be taxed. Full or partial redemptions do not qualify for special capital gains
treatment nor 10-year income averaging applicable to certain qualified plan
distributions.

If the Participant receives any amount under the Contract prior to
attainment of age 59 1/2, the Participant must pay an additional excise tax of
10% of the amount of the distribution includable in gross income for the taxable
year. The additional tax shall not apply to distributions which are (1) made to
a beneficiary on or after the death of the Participant, (2) attributable to the
Participant's becoming permanently disabled or (3) made in a series of
substantially equal periodic payments made for the life (or life expectancy) of
the Participant or

36
<PAGE> 39

the joint lives (or joint life expectancies) of the Participant and his/her
beneficiary. Any full or partial redemption will not be includable in ordinary
income if the Participant rolls over the distribution within 60 days to another
IRA.

MINIMUM DISTRIBUTION REQUIREMENTS

If the actual distributions from a qualified retirement plan, eligible
state or local government deferred compensation plan or an IRA are less than the
minimum required to be distributed commencing by April 1 in the calendar year
following the year the Participant attains age 70 1/2 (see "Annuity Purchase
Date", on page 23) the difference is considered to be an excess accumulation and
the IRS may impose a 50% excise tax on this excess amount.

SECTION 457 PLANS

Section 457 of the Code allows employees of or independent contractors who
furnish services to a state or local government to establish a deferred
compensation plan allowing the deferral of certain limited amounts of
compensation by way of salary reduction. State and local government includes a
state, a political subdivision of a state, any agency or instrumentality of
either of them, a tax-exempt rural electric cooperative or its tax-exempt
affiliates. Contributions are based on a special definition of compensation and
include any amounts contributed to a Section 403(b) tax sheltered annuity for
determining the contribution limits. All amounts deferred property bought with
those amounts or income earned on those amounts remain the property of the
employer and are subject to the claims of its general creditors. Distributions
from a Section 457 Plan are subject to Section 401(a)(9) of the Code in addition
to the rules applicable under Section 457 of the Code and must begin no later
than the April 1st of the calendar year following the year in which the
participant attains age 70 1/2.

NON-QUALIFIED DEFERRED COMPENSATION CONTRACTS

Taxed employers may establish a non-qualified deferred compensation
arrangement funded by non-qualified deferred compensation contracts allowing the
deferral of compensation through salary reduction. Such Plans include, but are
not limited to, excess benefit plans, plans maintained by an employer primarily
for a select group of management or highly compensated employees, as well as
rabbi and secular trusts. Taxed employers for these non-qualified deferred
compensation Plans include corporations, partnerships, S corporations and any of
their affiliates or subsidiaries. Contributions are determined on the Plan's
definition of compensation. All amounts deferred by employees and any income
earned thereon remain the property of the employer and are subject to the claims
of its general creditors. In-service withdrawals from deferred compensation
Plans may be permitted for reasons of hardship under certain conditions as
specified in the Plans. Distributions from these Plans are permitted when the
Participant terminates employment, becomes permanently disabled, retires, dies
or as otherwise specified in the Plan. As a general rule, the Participant is
subject to taxation upon receipt of the funds, and there is usually no tax
consequences to the employer, i.e., no deduction is available for an employee's
salary reduction agreement until paid out.

INCOME TAX WITHHOLDING

Unless the Participant or payee elects to have no withholding, the taxable
portion of distributions under a Contract will be subject to income tax
withholding under federal and certain state laws. AUSA will notify recipients of
taxable distributions under a Contract of their right to elect not to have
withholding apply.

For NQDC Contracts, no withholding is made and no election is needed.

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<PAGE> 40

Effective January 1, 1992, distributions from qualified retirement plans
and Section 403(b) Contracts, other than individual retirement arrangements
("IRAs") generally are subject to mandatory federal income tax withholding
unless they either are:

1. Part of a series of substantially equal periodic payments (at least
annually) for the participant's life or life expectancy, the joint lives or
life expectancies of the participant and his/her beneficiary, or a period
certain of not less than 10 years, or

2. Required by the Code upon the participant's attainment of age
70 1/2 or death.

Such withholding will apply even if the distribution is rolled over into
another qualified plan including an IRA. The withholding can be avoided if the
participant's interest is directly transferred by the old plan to another
eligible qualified plan including an IRA. A direct transfer to the new plan can
be made only in accordance with the terms of the old plan. If withholding is not
avoided, the amount withheld may be subject to income tax and penalties.

Pursuant to Revenue Ruling 90-24 of the Code, an exchange of a Section
403(b) annuity contract for another Section 403(b) annuity contract may qualify
as a tax-free exchange.

PERFORMANCE DATA

From time to time the performance of one or more of the Subaccounts may be
advertised. The performance data contained in these advertisements is based upon
historical earnings and is not indicative of future performance. The data for
each Subaccount reflects the results of the Underlying Diversified Subaccounts
invested in and the corresponding series of Diversified Investors Portfolios and
recurring charges and deductions borne by or imposed on the Subaccount, the
Underlying Diversified Subaccounts and on the corresponding series of the
Diversified Investors Portfolios.

The performance data for the Subaccounts will reflect the "yield" and
"total return". The "yield" of each of the Subaccounts refers to the income
generated by an investment in that Subaccount over the 30 day period stated in
the advertisement and is the result of dividing that income by the value of the
Subaccount. The value of each Subaccount is the average daily number of Units
outstanding multiplied by the Unit Value on the last day of the period. The
"yield" reflects deductions for all charges, expenses, and fees. "Annualized
total return" for each of the Subaccounts refers to the return a Contractholder
would receive during the period indicated if a $1,000 Purchase Payment was made
the indicated number of years ago. It reflects historical investment results
less charges and deductions, with the distribution being made in cash rather
than in the form of one of the settlement options, at the close of the period
for which the "annualized total return" data is given.

Total return is historical in nature and is not intended to indicate future
performance. Total return will be quoted for the most recent one-year period,
and the annualized total return will be quoted for the most recent five- and
ten-year periods, or the period from the commencement of the public offering of
the Contracts, if shorter.

Actual total return quotations may also be advertised for other specified
periods, such as calendar years and calendar quarters. Cumulative total return
for periods of more than one year may also be quoted. These figures will be
accompanied by the standard, annualized total return quotations.

From time to time, information may be provided concerning general economic
conditions and supply comparative performance data and rankings, with respect to
comparable investments for the same period, for unmanaged market indices such as
the Dow Jones Industrial Average and the Standard and Poor's 500, and from
recognized independent sources such as Donoghue's Money Fund Report, Bank Rate
Monitor, Money, Forbes, Barron's, Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc., Frank Russell Universe Data, Wiesenberger
Investment Companies Service, Mutual Fund Values, Mutual Fund Forecaster, VARDS
and Morningstar.

In addition, reference may be made in advertisements to various indices
including, without limitation, the Standard & Poor's 500 Stock Index, Salomon
Brothers Broad Investment Grade Index and Lehman Brothers

38
<PAGE> 41

Government/Corporate Bond Index, and Russell Price Driven Index, in order to
provide the reader a basis of comparison for performance.

Total returns calculated for any of the Subaccounts for any period which
includes a period prior to the effective date of the registration statement will
reflect the performance of all private accounts and collective investment
vehicles managed by Diversified during the periods indicated with investment
objectives, policies and restrictions substantially similar to the Conservative
Strategic Variable Fund, Moderate Strategic Variable Fund and Aggressive
Strategic Variable Fund, respectively, and which have been managed as they are
expected to be managed. The commencement date on which Diversified began
managing such collective investment vehicles is October 1, 1992. These returns
are adjusted to assume that all charges, expenses and fees of the Conservative
Fund, Moderate Fund and Aggressive Fund which are presently in effect were
deducted during such periods.

The average annual total returns at December 31, 1995 for all such private
accounts and collective investment vehicles managed by Diversified, adjusted to
assume that all such charges, expenses and fees presently in effect were
deducted, are as follows:

1 YEAR 3 YEARS SINCE INCEPTION
------ ------- ---------------
<S> <C> <C> <C>
Conservative Fund.......................... 15.36% 7.36% 6.75%
Moderate Fund.............................. 18.68% 9.45% 9.84%
Aggressive Fund............................ 23.01% 11.56% 13.24%
</TABLE>

INDEPENDENT ACCOUNTANTS

The financial statements of AUSA included in the Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, Des
Moines, Iowa. Coopers & Lybrand L.L.P., New York, New York serve as independent
accountants to Diversified Investors Strategic Variable Funds.

LEGAL PROCEEDINGS

There are no material legal proceedings to which AUSA or Diversified
Investors Strategic Variable Funds is a party.

FINANCIAL STATEMENTS

The financial statements for AUSA, included in the Statement of Additional
Information, should be distinguished from the financial statements of
Diversified Investors Strategic Variable Funds and should be considered only as
bearing on the ability of AUSA to meet its obligations under the Contracts. The
financial statements of AUSA should not be considered as bearing on the
investment performance of the assets held in Diversified Investors Strategic
Variable Funds.

ADDITIONAL INFORMATION

This prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted (including
financial statements relating to AUSA) pursuant to the rules and regulations of
the SEC. The omitted information may be obtained from the SEC's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.

For further information with respect to AUSA and the Contracts offered by
this Prospectus, including the Statement of Additional Information (which
includes financial statements relating to AUSA), contact AUSA at its address or
phone number set forth on the cover of this Prospectus.

39
<PAGE> 42

TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
ITEM PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
Independent Accountants............................................................... 2
Sale of Contracts/Principal Underwriter............................................... 2
Texas Optional Retirement Program..................................................... 2
Investment Objectives................................................................. 2
The Subaccounts.................................................................. 2
The Underlying Diversified Subaccounts/Portfolios................................ 2
Investment Restrictions............................................................... 16
Fundamental Policies............................................................. 16
Operating Policies............................................................... 16
Standard Performance Information................................................. 17
Comparison of Subaccount Performance............................................. 17
Determination of Unit Value; Valuation of Securities.................................. 19
Management............................................................................ 20
Brokerage Allocation.................................................................. 24
Financial Statements of AUSA.......................................................... 24
Appendix.............................................................................. A-1
Index to Financial Statements......................................................... F-1
</TABLE>

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<PAGE> 43

REQUEST FOR DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
STATEMENT OF ADDITIONAL INFORMATION

Detach and return in an envelope addressed to:

AUSA
4 Manhattanville Road
Purchase, New York 10577

Please make sure that your name and the address to which you wish AUSA to
send the current Diversified Investors Strategic Variable Funds Statement of
Additional Information appears below:

Name
----------------------------------------------------------------------------

Address
-------------------------------------------------------------------------

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

Employer
------------------------------------------------------------------------
41
<PAGE> 44

APPENDIX

APPLICABLE PREMIUM TAX RATES

<TABLE>
<CAPTION>
PREMIUM TAX RATE PERCENT
---------------------------
QUALIFIED NON-QUALIFIED
--------- -------------
<S> <C> <C>
California............................................................ .50% 2.35%
District of Columbia.................................................. 2.25% 2.25%
Kentucky.............................................................. 2.00% 2.00%
Maine................................................................. -- 2.00%
Nevada................................................................ -- 3.50%
Pennsylvania.......................................................... -- 2.00%
Puerto Rico........................................................... 1.00% 1.00%
South Dakota.......................................................... -- 1.25%
West Virginia......................................................... 1.00% 1.00%
Wyoming............................................................... -- 1.00%
</TABLE>

A-1
<PAGE> 45

STATEMENT OF ADDITIONAL INFORMATION

NOVEMBER , 1996

GROUP VARIABLE ANNUITY CONTRACTS

ISSUED BY

DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS

AND

AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD, PURCHASE, N.Y. 10577; (914) 697-8000

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT IT RELATES TO,
AND SHOULD BE READ IN CONJUNCTION WITH, THE PROSPECTUS DATED NOVEMBER , 1996
FOR THE GROUP VARIABLE ANNUITY CONTRACTS ISSUED BY AUSA LIFE INSURANCE COMPANY,
INC. ("AUSA") WHICH INVEST IN DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
("THE SUBACCOUNTS"). THE PROSPECTUS IS AVAILABLE, AT NO CHARGE, BY WRITING AUSA
LIFE AT 4 MANHATTANVILLE RD., PURCHASE, NEW YORK 10577 OR BY CALLING (914)
697-8000.

TABLE OF CONTENTS

<TABLE>
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ITEM PAGE
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<S> <C>
Independent Accountants............................................................... 2
Sale of Contract/Principal Underwriter................................................ 2
Texas Optional Retirement Program..................................................... 2
Investment Objectives and Policies.................................................... 2
The Subaccounts..................................................................... 2
The Underlying Diversified Subaccounts/Portfolios................................... 2
Investment Restrictions............................................................... 16
Fundamental Policies................................................................ 16
Operating Policies.................................................................. 16
Standard Performance Information.................................................... 17
Comparison of Subaccount Performance................................................ 17
Determination of Unit Value; Valuation of Securities.................................. 19
Management............................................................................ 20
Brokerage Allocation.................................................................. 24
Financial Statements of AUSA.......................................................... 24
Appendix.............................................................................. A-1
Index To Financial Statements......................................................... F-1
</TABLE>

<PAGE> 46

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P., New York, New York serve as independent
accountants to Diversified Investors Strategic Variable Funds. The financial
statements of AUSA appearing on the following pages have been audited by Ernst &
Young LLP, independent auditors, Des Moines, Iowa.

SALE OF CONTRACTS/PRINCIPAL UNDERWRITER

Diversified Investors Securities Corp. ("DISC") is the principal
underwriter and distributor of the Contracts which will be sold by registered
representatives who are also licensed insurance agents of AUSA. The Contracts
may also be sold through other broker-dealers authorized by DISC and applicable
law and who may be insurance agents licensed by an insurance company other than
AUSA. DISC is registered with the Securities and Exchange Commission as a
broker-dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc.

DISC will not receive underwriting commissions. Registration as a
broker-dealer does not mean that the SEC has passed upon the financial standing,
fitness or conduct of any broker or dealer, or upon the merits of any security
offering or upon any other matter relating to the business of any broker or
dealer.

TEXAS OPTIONAL RETIREMENT PROGRAM

Participants in the Texas Optional Retirement Program (the "Program") are
subject to certain restrictions pertaining to redemptions. (See "Restrictions
Under The Texas Optional Retirement Program" in the prospectus). Pursuant to
Rule 6c-7 of the Investment Company Act of 1940, as amended, ("1940 Act"), the
Registrant hereby represents that Rule 6c-7 of the 1940 Act is being relied upon
and that the provisions of paragraphs (a) through (d) of each Rule have been
complied with.

INVESTMENT OBJECTIVE AND POLICIES

THE SUBACCOUNTS

The investment objectives and policies of each Subaccount are described in
the Prospectus. There can, of course, be no assurance that a Subaccount will
achieve its investment objective.

THE UNDERLYING DIVERSIFIED SUBACCOUNTS/PORTFOLIOS

The following information supplements the discussion of the investment
objectives and policies of the Underlying Diversified Subaccounts/Portfolios
discussed in the Subaccounts' Prospectus. Set forth below are explanations of
various investment techniques which may be employed by the Underlying
Diversified Subaccounts/Portfolios.

BANK OBLIGATIONS. Domestic commercial banks organized under federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System. Domestic banks organized under
state law are supervised and examined by state banking authorities but are
members of the Federal Reserve System only if they elect to join. In addition,
state banks are subject to federal examination and to a substantial body of
federal law and regulation. As a result of federal or state laws and
regulations, domestic banks, among other things, generally are required to
maintain specified levels of reserves, are limited in the amounts which they can
loan to a single borrower, and are subject to other regulations designed to
promote financial soundness. However, not all of such laws and regulations apply
to the foreign branches of domestic banks.

Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("CDs") and time deposits ("TDs"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation

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and governmental regulation. Such obligations are subject to different risks
than are those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. These
foreign branches and subsidiaries are not necessarily subject to the same or
similar regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and financial
record keeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank.

Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.

In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the appropriate
regulatory authority; and (2) maintain assets within the state in an amount
equal to a specified percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or branches within the
state.

In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Advisers carefully evaluate such investments on a
case-by-case basis.

U.S. GOVERNMENT AND AGENCY SECURITIES. Securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities include U.S. Treasury
securities, which differ only in their interest rates, maturities and times of
issuance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds generally
have initial maturities of greater than ten years. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal Home Loan Banks, by the right of the issuer to borrow from
the Treasury; others, such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality; and others, such as those
issued by the Student Loan Marketing Association, only by the credit of the
agency or instrumentality. While the U.S. Government provides financial support
to such U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law. An
Underlying Diversified Portfolio will invest in such securities only when the
Advisers are satisfied that the credit risk with respect to the issuer is
minimal.

COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.

The Underlying Diversified Portfolios may purchase three types of
commercial paper, as classified by exemption from registration under the
Securities Act of 1933, as amended (the "1933 Act"). The three types include
open market, privately placed, and letter of credit commercial paper. Trading of
such commercial paper is conducted primarily by institutional investors through
investment dealers or directly through the issuers. Individual investor
participation in the commercial paper market is very limited.

Open Market. "Open market" commercial paper refers to the commercial paper
of any industrial, commercial, or financial institution which is openly traded,
including directly issued paper. "Open market"

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<PAGE> 48

paper's 1933 Act exemption is under Section 3(a)(3) which limits the use of
proceeds to current transactions, limits maturities to 270 days and requires
that the paper contain no provision for automatic rollovers.

Privately Placed. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts transactions
by an issuer not involving any public offering. The commercial paper may only be
offered to a limited number of accredited investors. "Privately placed"
commercial paper has no maturity restriction.

Letter of Credit. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for repayment
of the notes. Unlike "open market" and "privately placed" commercial paper,
"letter of credit" paper has no limitations on purchases.

VARIABLE RATE AND FLOATING RATE SECURITIES. The Underlying Diversified
Portfolios may purchase floating and variable rate demand notes and bonds, which
are obligations ordinarily having stated maturities in excess of 397 days, but
which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding 397 days, in each case upon not more than 30
days' notice. Variable rate demand notes include master demand notes which are
obligations that permit a Portfolio to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
collateralized by letters of credit or other credit support arrangements
provided by banks. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, an Underlying Diversified Portfolio's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies and
an Underlying Diversified Portfolio may invest in obligations which are not so
rated only if the Advisers determine that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Advisers, on behalf of an Underlying Diversified
Portfolio, will consider on an ongoing basis the creditworthiness of the issuers
of the floating and variable rate demand obligations held by the Portfolio. The
Underlying Diversified Portfolios will not invest more than 15% (10% in the case
of the Money Market Portfolio) of the value of their net assets in floating or
variable rate demand obligations as to which they cannot exercise the demand
feature on not more than seven days' notice if there is no secondary market
available for these obligations, and in other securities that are not readily
marketable. See "Investment Restrictions" below.

PARTICIPATION INTERESTS. An Underlying Diversified Portfolio may purchase
from financial institutions participation interests in securities in which such
Portfolio may invest. A participation interest gives a Portfolio an undivided
interest in the security in the proportion that the Portfolio's participation
interest bears to the total principal amount of the security. These instruments
may have fixed, floating or variable rates of interest, with remaining
maturities of 13 months or less. If the participation interest is unrated, or
has been given a rating below that which is permissible for purchase by the
Underlying Diversified Portfolio, the participation interest will be backed by
an irrevocable letter of credit or guarantee of a bank, or the payment
obligation otherwise will be collateralized by U.S. Government securities, or,
in the case of unrated participation interests, the Advisers must have
determined that the instrument is of comparable quality to those instruments in
which an Underlying Diversified Portfolio may invest. For certain participation
interests, an Underlying Diversified Portfolio will have the right to demand
payment, on not more than seven days' notice, for all or any part of the
Portfolio's participation interest in the security, plus accrued interest. As to
these instruments, an Underlying Diversified Portfolio intends to exercise its
right to demand payment only upon a default under the terms of the security, as
needed to provide liquidity to meet redemptions, or to maintain or improve the
quality

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<PAGE> 49

of its investment portfolio. An Underlying Diversified Portfolio will not invest
more than 15% (10% in the case of the Money Market Portfolio) of its net assets
in participation interests that do not have this demand feature, and in other
securities that are not readily marketable. See "Investment Restrictions" below.

ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities which are otherwise not
readily marketable and repurchase agreements having a maturity of longer than
seven days. Securities which have not been registered under the 1933 Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them which, if possible at all, would result in additional expense
and delay. Adverse market conditions could impede such a public offering of
securities.

In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.

The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers.

The Advisers will monitor the liquidity of Rule 144A securities for each
Portfolio under the supervision of the Board of Trustees of the Underlying
Diversified Portfolios. In reaching liquidity decisions, the Advisers will
consider, among other things, the following factors: (1) the frequency of trades
and quotes for the security, (2) the number of dealers and other potential
purchasers wishing to purchase or sell the security, (3) dealer undertakings to
make a market in the security and (4) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).

UNSECURED PROMISSORY NOTES. An Underlying Diversified Portfolio also may
purchase unsecured promissory notes ("Notes") which are not readily marketable
and have not been registered under the 1933 Act, provided such investments are
consistent with the Portfolio's investment objective. The Notes purchased by the
Portfolio will have remaining maturities of 13 months or less and will be deemed
by the Board of Trustees of the Portfolio to present minimal credit risks and
will meet the quality criteria set forth above under "Investment Policies." The
Portfolio will invest no more than 15% (10% in the case of the Money Market
Portfolio) of its net assets in such Notes and in other securities that are not
readily marketable (which securities would include floating and variable rate
demand obligations as to which the Portfolio cannot exercise the demand feature
described above and as to which there is no secondary market). See "Investment
Restrictions" below.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements are agreements by which a person purchases a security and
simultaneously commits to resell that security to the seller (which is usually a
member bank of the Federal Reserve System or a member firm of the New York Stock
Exchange (or a subsidiary thereof)) at an agreed-upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed-upon price,
which obligation is in effect secured by the value of the underlying security,
usually U.S. Government or government agency issues. Under the Investment

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<PAGE> 50

Company Act of 1940, as amended (the "1940 Act"), repurchase agreements may be
considered to be loans by the buyer. An Underlying Diversified Portfolio's risk
is limited to the ability of the seller to pay the agreed upon amount on the
delivery date. If the seller defaults, the underlying security constitutes
collateral for the seller's obligation to pay although an Underlying Diversified
Portfolio may incur certain costs in liquidating this collateral and in certain
cases may not be permitted to liquidate this collateral. All repurchase
agreements entered into by the Underlying Diversified Portfolios are fully
collateralized, with such collateral being marked to market daily.

The Underlying Diversified Portfolios may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage. One means of borrowing is by agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time a Portfolio enters into a reverse repurchase agreement
it will place in a segregated custodial account cash, U.S. Government securities
or high-grade debt obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve the risk that
the market value of the securities sold by the Underlying Diversified Portfolio
may decline below the repurchase price of those securities.

FOREIGN SECURITIES -- ALL PORTFOLIOS. The Underlying Diversified
Portfolios may invest their assets in securities of foreign issuers. Investing
in securities issued by companies whose principal business activities are
outside the United States may involve significant risks not present in domestic
investments. For example, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing and financial reporting
requirements comparable to those applicable to domestic issuers. Investments in
foreign securities also involve the risk of possible adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, brokerage or other taxation, limitation on the removal of funds or
other assets of an Underlying Diversified Portfolio, political or financial
instability or diplomatic and other developments which would affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States.

It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in over-the-counter markets located outside
the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
United States companies. Foreign security trading practices, including those
involving securities settlement where an Underlying Diversified Portfolio's
assets may be released prior to receipt of payment, may expose a Portfolio to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the United States and may be
non-negotiable. In general, there is less overall governmental supervision and
regulation of foreign securities exchanges, brokers and listed companies than in
the United States.

FOREIGN SECURITIES -- MONEY MARKET PORTFOLIO. The Money Market Portfolio
may invest in the following foreign securities: (i) U.S. dollar-denominated
obligations of foreign branches and subsidiaries of domestic banks and foreign
banks (such as Eurodollar CDs, which are U.S. dollar-denominated CDs issued by
branches of foreign and domestic banks located outside the United States;
Eurodollar TDs ("ETDs"), which are U.S. dollar-denominated deposits in a foreign
branch of a foreign or domestic bank; and Canadian TDs, which are essentially
the same as ETDs except they are issued by branches of major Canadian banks),
(ii) high quality, U.S. dollar-denominated short-term bonds and notes (including
variable amount master demand notes) issued by foreign corporations, (including
Canadian commercial paper, which is commercial paper issued by a Canadian
corporation or a Canadian counterpart of a U.S. corporation, and Europaper,
which is U.S. dollar-denominated commercial paper of a foreign issuer) and (iii)
U.S. dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Advisers to be of comparable
quality to the other obligations in which the Money Market Portfolio may invest.
Such securities also include debt obligations of

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supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.

FOREIGN SECURITIES -- PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO. Not
more than 5% of an Underlying Diversified Portfolio's assets may be invested in
closed-end investment companies which primarily hold foreign securities.
Investments in such companies may entail the risk that the market value of such
investments may be substantially less than their net asset value and that there
would be duplication of investment management and other fees and expenses.

Securities of foreign issuers include investments in sponsored American
Depository Receipts ("ADRs"). ADRs are depository receipts for securities of
foreign issuers and provide an alternative method for a Portfolio to make
foreign investments. These securities will not be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities.

The Underlying Diversified Portfolios may invest in foreign securities that
impose restrictions on transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because some Underlying
Diversified Portfolios may buy and sell securities denominated in currencies
other than the U.S. dollar and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Underlying Diversified Portfolios
from time to time may enter into foreign currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Underlying Diversified Portfolios
either enter into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or use forward contracts
to purchase or sell foreign currencies.

A forward foreign currency exchange contract is 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. Forward foreign currency exchange contracts
establish an exchange rate at a future date. These contracts are transferable in
the interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward foreign currency exchange
contract generally has no deposit requirement and is traded at a net price
without commission. An Underlying Diversified Portfolio maintains with its
custodian a segregated account of high grade liquid assets in an amount at least
equal to its obligations under each forward foreign currency exchange contract.
Neither spot transactions nor forward foreign currency exchange contracts
eliminate fluctuations in the prices of foreign securities or in foreign
exchange rates, or prevent loss if the prices of these securities should
decline.

The Underlying Diversified Portfolios may enter into foreign currency
hedging transactions in an attempt to protect against changes in foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or changes in foreign currency exchange rates that would
adversely affect a portfolio position or an anticipated investment position.
With respect to Underlying Diversified Portfolios other than the International
Equity Portfolio consideration of the prospect for currency parities will be
incorporated into the Advisers' long-term investment decisions. Therefore these
Underlying Diversified Portfolios will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however, the
Advisers believe that it is important to have the flexibility to enter into
foreign currency hedging transactions when they determine that the transactions
would be in an Underlying Diversified Portfolio's best interest. Although these
transactions 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 that
might be realized should the value of the hedged currency increase. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such

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securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.

While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event, the ability to utilize forward
contracts in the manner set forth in the Prospectus may be restricted. Forward
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for a
Underlying Diversified Portfolio than if it had not entered into such contracts.
The use of foreign currency forward contracts may not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the prices of or rates of return
on a Underlying Diversified Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject the Underlying
Diversified Portfolio to certain risks.

The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition, a
Underlying Diversified Portfolio may not always be able to enter into foreign
currency forward contracts at attractive prices and this will limit a Underlying
Diversified Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to a Underlying Diversified Portfolio's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying a Underlying Diversified
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Underlying Diversified Portfolio's assets that are the
subject of such cross-hedges are denominated.

GUARANTEED INVESTMENT CONTRACTS. The Underlying Diversified Portfolios may
invest in guaranteed investment contracts ("GICs") issued by insurance
companies. Pursuant to such contracts, a Portfolio makes cash contributions to a
deposit fund of the insurance company's general account. The insurance company
then credits to the fund guaranteed interest. The GICs provide that this
guaranteed interest will not be less than a certain minimum rate. The insurance
company may assess periodic charges against a GIC for expenses and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. Because a Portfolio may not receive the principal amount of a GIC from the
insurance company on seven days' notice or less, the GIC is considered an
illiquid investment and, together with other instruments in a Portfolio which
are not readily marketable, will not exceed 15% (10% in the case of the Money
Market Portfolio) of the Portfolio's net assets. The term of a GIC will be 13
months or less. In determining average weighted portfolio maturity, a GIC will
be deemed to have a maturity equal to the longer of the period of time remaining
until the next readjustment of the guaranteed interest rate or the period of
time remaining until the principal amount can be recovered from the issuer
through demand.

WHEN-ISSUED SECURITIES. The Underlying Diversified Portfolios may purchase
securities on a "when-issued" or on a "forward delivery" basis. It is expected
that, under normal circumstances, the Portfolios would take delivery of such
securities. When a Portfolio commits to purchase a security on a "when-issued"
or on a "forward delivery" basis, the Portfolio establishes procedures
consistent with the relevant policies of the SEC. Since those policies currently
recommend that an amount of a Portfolio's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Portfolio expects always to have cash, cash equivalents, or high quality debt
securities sufficient to cover any commitments or to limit any potential risk.
However, although a Portfolio does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of SEC policies,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, a Portfolio may have to sell assets which have been set
aside in order to meet redemptions. Also, if a Portfolio determines it is
advisable as a matter of investment strategy to sell the "when-issued" or
"forward delivery" securities, a Portfolio would be required to meet its
obligations from the then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the
"when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Portfolio's payment obligation).

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ZERO COUPON OBLIGATIONS. An Underlying Diversified Portfolio may acquire
zero coupon obligations when consistent with its investment objective and
policies. Such obligations have greater price volatility than coupon obligations
and will not result in payment of interest until maturity. Since dividend income
is accrued throughout the term of the zero coupon obligation but is not actually
received until maturity, a Portfolio may have to sell other securities to pay
said accrued dividends prior to maturity of the zero coupon obligation.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- UNDERLYING
DIVERSIFIED PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO. The successful use of
such instruments draws upon the Advisers' skill and experience with respect to
such instruments. Should interest or exchange rates move in an unexpected
manner, an Underlying Diversified Portfolio may not achieve the anticipated
benefits of futures contracts or options on futures contracts or may realize
losses and thus will be in a worse position than if such strategies had not been
used. In addition, the correlation between movements in the price of futures
contracts or options on futures contracts and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.

An Underlying Diversified Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities or foreign
currencies, or contracts based on financial indices including any index of U.S.
Government securities, foreign government securities or corporate debt
securities. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange. A
Portfolio may enter into futures contracts which are based on debt securities
that are backed by the full faith and credit of the U.S. Government, such as
long-term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage
Association modified pass-through mortgage-backed securities and three-month
U.S. Treasury Bills. A Portfolio may also enter into futures contracts which are
based on bonds issued by entities other than the U.S. Government.

Purchases or sales of stock index futures contracts are used to attempt to
protect the Underlying Diversified Portfolio's current or intended stock
investments from broad fluctuations in stock prices. For example, the Portfolio
may sell stock index futures contracts in anticipation of or during a decline in
the market value of the Portfolio's securities. If such decline occurs, the loss
in value of portfolio securities may be offset, in whole or part, by gains on
the futures position. When a Portfolio is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock index
futures contracts in order to gain rapid market exposure that may, in part or
entirely, offset increases in the cost of securities that the Portfolio intends
to purchase. As such purchases are made, the corresponding positions in stock
index futures contracts will be closed out. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position, but under unusual market conditions, a long futures
position may be terminated without a related purchase of securities.

At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.

At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.

Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to

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make or take delivery of the securities. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, a Portfolio will incur brokerage
fees when it purchases or sells futures contracts.

The purpose of the acquisition or sale of a futures contract, in the case
of an Underlying Diversified Portfolio which holds or intends to acquire
fixed-income securities, is to attempt to protect the Portfolio from
fluctuations in interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currencies. For example, if interest
rates were expected to increase, a Portfolio might enter into futures contracts
for the sale of debt securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the Portfolio. If
interest rates did increase, the value of the debt security in a Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows a Portfolio to maintain a defensive
position without having to sell its portfolio securities.

Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash, cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures contracts.

The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Advisers may still not
result in a successful transaction.

In addition, futures contracts entail risks. Although the Advisers believe
that use of such contracts will benefit the Underlying Diversified Portfolios,
if the Advisers' investment judgment about the general direction of interest
rates is incorrect, a Portfolio's overall performance would be poorer than if it
had not entered into any such contract. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of debt securities held by it and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. An
Underlying Diversified Portfolio may have to sell securities at a time when it
may be disadvantageous to do so.

The Underlying Diversified Portfolios intend to purchase and write options
on futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or

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<PAGE> 55

may not be less risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when a Portfolio is not
fully invested it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates.

The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.

The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.

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

The Board of Trustees of the Underlying Diversified Portfolios has adopted
the requirement that futures contracts and options on futures contracts be used
either (i) as a hedge without regard to any quantitative limitation, or (ii) for
other purposes to the extent that immediately thereafter the aggregate amount of
margin deposits on all (non-hedge) futures contracts of the Portfolio and
premiums paid on outstanding (non-hedge) options on futures contracts owned by
the Portfolio does not exceed 5% of the market value of the total assets of the
Portfolio. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Portfolio may not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions will be changed
by the Underlying Diversified Portfolio's Board of Trustees without considering
the policies and concerns of the various applicable federal and state regulatory
agencies.

An Underlying Diversified Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.

Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.

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An Underlying Diversified Portfolio may write options on foreign currencies
for the same types of hedging purposes. For example, where a Portfolio
anticipates a decline in the dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the options will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of the
premium received.

Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.

The Underlying Diversified Portfolios intend to write covered call options
on foreign currencies. A call option written on a foreign currency by a
Portfolio is "covered" if the Portfolio owns the underlying foreign currency
covered by the call or has an absolute and immediate right to acquire that
foreign currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other foreign currency held in its portfolio. A call option is also
covered if the Portfolio has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, U.S. Government securities and other high
quality liquid debt securities in a segregated account with its custodian.

The Underlying Diversified Portfolios also intend to write call options on
foreign currencies that are not covered for cross-hedging purposes. A call
option on a foreign currency is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in the U.S. dollar value of
a security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change in
the exchange rate. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with its custodian, cash or U.S.
Government securities or other high quality liquid debt securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.

Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.

Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options

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<PAGE> 57

Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.

The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.

As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-traded currency options. A Portfolio's
ability to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, each Portfolio
will treat purchased over-the-counter options and assets used to cover written
over-the-counter options as illiquid securities. With respect to options written
with primary dealers in U.S. Government securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to the repurchase formula.

In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.

OPTIONS ON SECURITIES -- UNDERLYING DIVERSIFIED PORTFOLIOS OTHER THAN MONEY
MARKET PORTFOLIO. The Underlying Diversified Portfolios may write (sell)
covered call and put options to a limited extent on its portfolio securities
("covered options"). However, a Portfolio may forego the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.

When an Underlying Diversified Portfolio writes a covered call option, it
gives the purchaser of the option the right to buy the underlying security at
the price specified in the option (the "exercise price") by exercising the
option at any time during the option period. If the option expires unexercised,
the Portfolio will realize income in an amount equal to the premium received for
writing the option. If the option is exercised, a decision over which a
Portfolio has no control, the Portfolio must sell the underlying security to the
option holder at the exercise price. By writing a covered call option, a
Portfolio forgoes, in exchange for the premium less the commission ("net
premium"), the opportunity to profit during the option period from an increase
in the market value of the underlying security above the exercise price.

When an Underlying Diversified Portfolio writes a covered put option, it
gives the purchaser of the option the right to sell the underlying security to
the Portfolio at the specified exercise price at any time during the option
period. If the option expires unexercised, the Portfolio will realize income in
the amount of the premium received for writing the option. If the put option is
exercised, a decision over which a Portfolio has no control, the Portfolio must
purchase the underlying security from the option holder at the exercise price.
By

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writing a covered put option, a Portfolio, in exchange for the net premium
received, accepts the risk of a decline in the market value of the underlying
security below the exercise price. A Portfolio will only write put options
involving securities for which a determination is made at the time the option is
written that the Portfolio wishes to acquire the securities at the exercise
price.

An Underlying Diversified Portfolio may terminate its obligation as the
writer of a call or put option by purchasing an option with the same exercise
price and expiration date as the option previously written. This transaction is
called a "closing purchase transaction." Where a Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.

When an Underlying Diversified Portfolio writes an option, an amount equal
to the net premium received by the Portfolio is included in the liability
section of the Portfolio's Statement of Assets and Liabilities as a deferred
credit. The amount of the deferred credit will be subsequently marked to market
to reflect the current market value of the option written. The current market
value of a traded option is the last sale price or, in the absence of a sale,
the mean between the closing bid and asked price. If an option expires on its
stipulated expiration date or if the Portfolio enters into a closing purchase
transaction, the Portfolio will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was sold), and
the deferred credit related to such option will be eliminated. If a call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.

An Underlying Diversified Portfolio may purchase call and put options on
any securities in which it may invest. A Portfolio would normally purchase a
call option in anticipation of an increase in the market value of such
securities. The purchase of a call option would entitle the Portfolio, in
exchange for the premium paid, to purchase a security at a specified price
during the option period. A Portfolio would ordinarily have a gain if the value
of the securities increased above the exercise price sufficiently to cover the
premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.

An Underlying Diversified Portfolio would normally purchase put options in
anticipation of a decline in the market value of securities in its portfolio
("protective puts") or securities of the type in which it is permitted to
invest. The purchase of a put option would entitle a Portfolio, in exchange for
the premium paid, to sell a security, which may or may not be held in the
Portfolio's portfolio, at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the Portfolio's portfolio securities. Put options
also may be purchased by a Portfolio for the purpose of affirmatively benefiting
from a decline in the price of securities which the Portfolio does not own. A
Portfolio would ordinarily recognize a gain if the value of the securities
decreased below the exercise price sufficiently to cover the premium and would
recognize a loss if the value of the securities remained at or above the
exercise price. Gains and losses on the purchase of protective put options would
tend to be offset by countervailing changes in the value of underlying portfolio
securities.

The Underlying Diversified Portfolios have adopted certain other
nonfundamental policies concerning option transactions which are discussed
below. A Portfolio's activities in options may also be restricted by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.

The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.

The Underlying Diversified Portfolios may engage in over-the-counter
options transactions with broker-dealers who make markets in these options. At
present, approximately ten broker-dealers, including several of

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<PAGE> 59

the largest primary dealers in U.S. Government securities, make these markets.
The ability to terminate over-the-counter option positions is more limited than
with exchange-traded option positions because the predominant market is the
issuing broker rather than an exchange, and may involve the risk that broker-
dealers participating in such transactions will not fulfill their obligations.
To reduce this risk, the Portfolios will purchase such options only from
broker-dealers who are primary government securities dealers recognized by the
Federal Reserve Bank of New York and who agree to (and are expected to be
capable of) entering into closing transactions, although there can be no
guarantee that any such option will be liquidated at a favorable price prior to
expiration. The Advisers will monitor the creditworthiness of dealers with whom
a Portfolio enters into such options transactions under the general supervision
of the Underlying Diversified Portfolios' Trustees.

OPTIONS ON SECURITIES INDICES -- UNDERLYING DIVERSIFIED PORTFOLIOS OTHER
THAN MONEY MARKET PORTFOLIO. In addition to options on securities, the
Underlying Diversified Portfolios may also purchase and write (sell) call and
put options on securities indices. Such options give the holder the right to
receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index. Such options
will be used for the purposes described above under "Options on Securities."

Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolios generally will only purchase or write such an option if the Advisers
believe the option can be closed out.

Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolios will not purchase such options unless the
Advisers believe the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.

Price movements in the Underlying Diversified Portfolios' securities may
not correlate precisely with movements in the level of an index and, therefore,
the use of options on indices cannot serve as a complete hedge. Because options
on securities indices require settlement in cash, the Advisers may be forced to
liquidate portfolio securities to meet settlement obligations.

SHORT SALES "AGAINST THE BOX" -- UNDERLYING DIVERSIFIED PORTFOLIOS OTHER
THAN MONEY MARKET PORTFOLIO. In a short sale, a fund sells a borrowed security
and has a corresponding obligation to the lender to return the identical
security. An Underlying Diversified Portfolio may engage in short sales only if
at the time of the short sale it owns or has the right to obtain, at no
additional cost, an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box".

In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Portfolio engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Portfolio maintains in a segregated account an amount
of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position.

The Underlying Diversified Portfolios will not engage in short sales
against the box for investment purposes. A Portfolio may, however, make a short
sale as a hedge, when it believes that the price of a security may decline,
causing a decline in the value of a security (or a security convertible or
exchangeable for such security), or when a Portfolio wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain or
loss for federal income tax purposes or for purposes of satisfying certain tests
applicable to regulated investment companies under the Code. In such case, any
future losses in a Portfolio's long position should be reduced by a gain in the
short position. Conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which such gains or losses are reduced
depends upon the amount of the security sold short relative to the amount a
Portfolio owns. There are certain additional transaction costs associated with
short sales against the box, but the Portfolios endeavor to offset these costs
with the income from the investment of the cash proceeds of short sales.

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As a nonfundamental operating policy, the Advisers do not expect that more
than 40% of a Portfolio's total assets would be involved in short sales against
the box. The Advisers do not currently intend to engage in such sales.

INVESTMENT RESTRICTIONS

Fundamental policies of the Subaccounts may not be changed without the
approval of the lesser of (1) 67% of the beneficial holders of units present at
a meeting if the holders of more than 50% are present in person or by proxy or
(2) more than 50% of the beneficial holders of units. Other restrictions, in the
form of operating policies are subject to change by the Managing Board of
Diversified Investors Strategic Variable Funds without unitholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, a Subaccount.

FUNDAMENTAL POLICIES

As a matter of fundamental policy, each Subaccount may not:

(1) Borrowing. Borrow money, except each Subaccount may borrow as a
temporary measure for extraordinary or emergency purposes, and then
only in amounts not exceeding 30% of its total assets valued at market.
Each Subaccount will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might
otherwise require untimely investment liquidations;

(2) Loans. Make loans, although the Underlying Diversified Portfolios may
purchase money market securities and enter into repurchase agreements;

(3) Margin. Purchase securities on margin;

(4) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Subaccounts as security for indebtedness
except as may be necessary in connection with permissible borrowings,
in which event such mortgaging, pledging, or hypothecating may not
exceed 30% of each Subaccount's total assets, valued at market;

(5) Real Estate. Purchase or sell real estate;

(6) Senior Securities. Issue senior securities (except permitted
borrowings);

(7) Short Sales. Effect short sales of securities; or

(8) Underwriting. Underwrite securities issued by other persons, except to
the extent the Subaccounts may be deemed to be underwriters within the
meaning of the Securities Act of 1933 in connection with the purchase
and sale of their portfolio securities in the ordinary course of
pursuing their investment programs.

In addition, as a matter of fundamental policy, each Subaccount may engage
in futures and options transactions through investments in the Underlying
Diversified Portfolios.

OPERATING POLICIES

As a matter of operating policy, each Subaccount may not:

(1) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control;

(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of each Subaccount's net assets
would be invested in illiquid securities or other securities that are
not readily marketable;

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<PAGE> 61

(3) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to, oil, gas, other mineral
exploration or development programs;

(4) Options. Invest in options;

(5) Ownership of Portfolio Securities by Officers and Directors. Purchase
or retain the securities of any issuer if, to the knowledge of the
Managing Board of Diversified Investors Strategic Variable Fund, those
officers and directors of AUSA and Diversified, who each owns
beneficially more than .5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities;

(6) Unseasoned Issuers. Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government or any foreign
government, their agencies or instrumentalities) if, as a result, more
than 5% of the value of each Subaccount's total assets would be
invested in the securities of issuers which at the time of purchase had
been in operation for less than three years, including predecessors and
unconditional guarantors; or

(7) Warrants. Invest in warrants.

Each Subaccount may invest more than 5% of its assets in any one Underlying
Diversified Subaccount, and each Subaccount may invest substantially all of its
assets, collectively, in Underlying Diversified Subaccounts.

Because of their investment objectives and policies, the Subaccounts will
each concentrate more than 25% of their assets in the investment company
industry. In accordance with the Subaccounts' investment programs set forth in
the Prospectus, each of the Subaccounts may invest more than 25% of its assets
in certain of the Underlying Diversified Subaccounts. However, each of the
Underlying Diversified Portfolios in which each Underlying Diversified
Subaccount will invest will not concentrate more than 25% of its total assets in
any one industry.

STANDARD PERFORMANCE INFORMATION

From time to time, quotations of a Subaccount's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner for each Subaccount:

TOTAL RETURN: The Subaccount's total return will be calculated for certain
periods by determining the average annual compounded rates of return over those
periods that would cause an investment of $1,000 to reach the value of that
investment at the end of the periods. The Subaccount may also calculate (i) a
total return assuming an initial account value of $1,000 and/or (ii) total rates
of return which represent aggregate performance over a period of year-by-year
performance.

YIELD: The Subaccount's yield quotation will be based on the annualized
net investment income per unit of the Subaccount over a 30-day period. The
current yield for the Subaccount is calculated by dividing the net investment
income per unit of the Subaccount earned during the period by the net asset
value per share of the Subaccount on the last day of that period. The resulting
figure is then annualized. Net investment income per share is determined by
dividing (i) the dividends and interest earned during the period, minus accrued
expenses for the period, by (ii) the average number of units entitled to receive
dividends during the period multiplied by the unit value on the last day of the
period.

COMPARISON OF SUBACCOUNT PERFORMANCE

Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of a Subaccount with performance quoted with respect to other
investment companies or types of investments.

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<PAGE> 62

In connection with communicating its performance to current or prospective
investors, a Subaccount also may compare these figures to the performance of
other funds tracked by fund rating services or to unmanaged indices which may
assume reinvestment of dividends but generally do not reflect deductions for
administrative and management costs. An Underlying Diversified Portfolio may
invest in some instruments not eligible for inclusion in such an index, and may
be prohibited from investing in some instruments included in this index.
Evaluations of a Subaccount's performance made by independent sources may also
be used in advertisements concerning a Subaccount. Sources for a Subaccount's
performance information may include, but are not limited to, the following:

Asian Wall Street Journal, a weekly Asian newspaper that often reviews
U.S. mutual funds investing internationally.

Barron's, a Dow Jones and Company, Inc. business and financial weekly
that periodically reviews mutual fund performance data.

Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds investing
abroad.

Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.

Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.

Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the
performance of the nation's money market funds, summarizing money market
fund activity, and including certain averages as performance benchmarks,
specifically "Donoghue's Money Fund Average" and "Donoghue's Government
Money Fund Average."

Financial Times, Europe's business newspaper, which features from time
to time articles on international or countryspecific funds.

Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.

Forbes, a national business publication that from time to time reports
the performance of specific investment companies in the mutual fund
industry.

Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.

Investor's Daily, a daily newspaper that features financial, economic
and business news.

Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.

Money, a monthly magazine that from time to time features both
specific funds and the mutual fund industry as a whole.

New York Times, a nationally distributed newspaper which regularly
covers financial news.

Personal Investing News, a monthly news publication that often reports
on investment opportunities and market conditions.

Personal Investor, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.

Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.

U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.

18
<PAGE> 63

Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.

Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.

Working Women, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.

World Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.

DETERMINATION OF UNIT VALUE; VALUATION OF SECURITIES

AUSA determines the unit value of each Subaccount each day that the Adviser
is open for business. (As a result, a Subaccount will normally determine its net
asset value every weekday except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas.) This daily determination of unit value is made
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m., New York time unless the Exchange closes earlier, by dividing the
total assets of a Fund less all of its liabilities, by the total number of units
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of unit value next following the
receipt of any purchase or redemption order deemed to be in good order.

Units of the Underlying Diversified Subaccounts held by each Subaccount are
valued at the unit value of each Underlying Diversified Subaccount. This unit
value reflects the valuation of securities held by the Underlying Diversified
Portfolios. Therefore, the following discussion reflects valuation policies of
the Underlying Diversified Portfolios.

Trading in securities on most non-U.S. exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of non-U.S.
securities occur between the time when the exchange on which they are traded
closes and the time when net asset value is calculated, such securities will be
valued at fair value in accordance with procedures established by and under the
general supervision of the Board of Trustees of the Underlying Diversified
Portfolios.

Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. Bonds and other fixed income securities (other
than short-term obligations, but including listed issues) are valued on the
basis of valuations furnished by a pricing service, the use of which has been
approved by the Board of Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Short-term obligations which mature in 60 days or less are valued at
amortized cost, which approximates fair value as determined by the Board of
Trustees of the Underlying Diversified Portfolios. Futures and option contracts
that are traded on commodities or securities exchanges are normally valued at
the settlement price on the exchange on which they are traded. Portfolio
securities (other than short-term obligations) for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Board of Trustees of the Underlying Diversified
Portfolios.

Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income

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<PAGE> 64

on short-term obligations is determined on the basis of interest and discount
accrued less amortization of premium.

Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board of Trustees of the Underlying Diversified Portfolios, in good faith, will
establish a conversion rate for such currency.

A determination of value used in calculating net asset value must be a fair
value determination made in good faith utilizing procedures approved by the
Board of Trustees of the Underlying Diversified Portfolios. While no single
standard for determining fair value exists, as a general rule, the current fair
value of a security would appear to be the amount which an Underlying
Diversified Portfolio could expect to receive upon its current sale. Some, but
not necessarily all, of the general factors which may be considered in
determining fair value include: (i) the fundamental analytical data relating to
the investment; (ii) the nature and duration of restrictions on disposition of
the securities; and (iii) an evaluation of the forces which influence the market
in which these securities are purchased and sold. Without limiting or including
all of the specific factors which may be considered in determining fair value,
some of the specific factors include: type of security, financial statements of
the issuer, cost at date of purchase, size of holding, discount from market
value, value of unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.

Each investor in each Underlying Diversified Portfolio, including the
corresponding Underlying Diversified Subaccount, may add to or reduce its
investment in the Underlying Diversified Portfolio on each day that the Adviser
and the Subadviser of the Portfolio are open for business. As of 4:00 p.m. (New
York time) on each such day, the value of each investor's interest in an
Underlying Diversified Portfolio will be determined by multiplying the net asset
value of the Underlying Diversified Portfolio by the percentage representing
that investor's share of the aggregate beneficial interests in the Underlying
Diversified Portfolio. Any additions or reductions which are to be effected on
that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Underlying Diversified Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Underlying Diversified Portfolio
as of 4:00 p.m. on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Underlying
Diversified Portfolio effected on such day, and (ii) the denominator of which is
the aggregate net asset value of the Underlying Diversified Portfolio as of 4:00
p.m. on such day plus or minus, as the case may be, the amount of the net
additions to or reductions in the aggregate investments in the Underlying
Diversified Portfolio by all investors in the Underlying Diversified Portfolio.
The percentage so determined will then be applied to determine the value of the
investor's interest in an Underlying Diversified Portfolio as of 4:00 p.m. on
the following day the New York Stock Exchange is open for trading.

MANAGEMENT

The members of the Managing Board of Diversified Investors Strategic
Variable Funds and officers of AUSA directly involved in activities related to
Diversified Investors Strategic Variable Funds, and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those members of the Managing Board who
are "interested persons" (as defined in the 1940 Act) of Diversified Investors
Strategic Variable Funds. Unless otherwise indicated, the address of each member
and officer of AUSA is Four Manhattanville Road, Purchase, New York 10577.

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<PAGE> 65

<TABLE>
<CAPTION>
AGE
(AS OF PRINCIPAL OCCUPATION(S) DURING
NAME AND ADDRESS 11/15/96) PAST 5 YEARS
- ---------------------------------------- ----------------------------------------------------
<S> <C> <C>
Tom A. Schlossberg*.............. 46 10/92 to present -- President, Chief Executive
(Managing Board Member) Officer and Chairman of the Managing Board,
Diversified Investment Advisors, Inc.; 3/1995 to
present -- President and Director, AUSA Life
Insurance Company, Inc.; 1/93 to 12/93 -- Executive
Vice President, 1/91 to 12/93 -- Senior Vice Presi-
dent, The Mutual Life Insurance Company of New York.
Donald E. Flynn*................. 56 1988 to present -- Vice President, AEGON, USA, Inc.,
(Managing Board Member) 1988 to present -- Executive Vice President, AEGON
USA Investment Management, Inc.; 1988 to
present -- Vice President, AEGON USA Managed
Portfolios, Inc.
Neal M. Jewell................... 61 1/1995 to present -- Consultant; 11/1991 to
(Managing Board Member) 1/1995 -- Executive Vice President, 12/1990 to
355 Thornridge Drive 10/1991 -- Director of Overseas Pensions, American
Stamford, CT 06903 International Group Asset Management.
Eugene M. Mannella............... 42 8/1993 to present -- Vice President, Investment
(Managing Board Member) Management Services Inc.; 5/1986 to 5/1993 -- Senior
2 Orchard Neck Road Vice President, Lehman Brothers, Inc.
Center Moriches, New York 19934
Patricia L. Sawyer............... 46 1/1995 to present -- Partner, Smith & Sawyer; 7/1990
(Managing Board Member) to 1/1995 -- Executive Vice President and Director,
256 East 10th Street Robert L. Smith & Co.; 9/1988 to 7/1990 -- Vice
New York, New York 10014 President, American Express.
Robert F. Colby.................. 41 1/1993 to present -- Vice President and General
Counsel, Diversified Investment Advisors Inc.;
3/1995 to present -- Vice President and Assistant
Secretary, AUSA Life Insurance Company, Inc.;
11/1993 to present -- Vice President, Diversified
Investors Securities Corp.; 4/1990 to
12/1993 -- Secretary, Vice President and Chief
Corporate Counsel, The Mutual Life Insurance Company
of New York.
Alfred C. Sylvain................ 45 11/1993 to present -- Vice President, Treasurer and
Assistant Secretary, Diversified Investment
Advisors, Inc.; 11/1993 to present -- Treasurer,
Diversified Investors Securities Corp.; 1/1991 to
12/1993 -- Vice President, The Mutual Life Insur-
ance Company of New York.
John F. Hughes................... 55 12/1993 to present -- Vice President and Senior
Counsel, Diversified Investment Advisors, Inc.;
8/1995 to present -- Vice President and Assistant
Secretary, AUSA Life Insurance Company, Inc.;
11/1993 to present -- Assistant Secretary,
Diversified Investors Securities Corp.; 1/1988 to
11/1993 -- Assistant Secretary, Senior Counsel, The
Mutual Life Insurance Company of New York.
Catherine A. Mohr................ 75 11/1993 to present -- Vice President, Diversified
Investment Advisors, Inc.; 8/1995 to
present -- Assistant Secretary, AUSA Life Insurance
Company, Inc.; 1/1993 to present -- Assistant
Secretary, Diversified Investors Securities Corp.;
1/1992 to present -- Assistant Vice President, The
Mutual Life Insurance Company of New York.
</TABLE>

The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under "Description of the Trust; Fund
Shares."

COMPENSATION

For the first fiscal year of Diversified Investors Strategic Variable
Funds, the following compensation is estimated to be paid to members of the
Managing Board.

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<PAGE> 66

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
FROM AS PART OF BENEFITS UPON COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT* FUND EXPENSES RETIREMENT TO TRUSTEES
- ------------------------------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Tom A. Schlossberg................... -0- None N/A -0-
Managing Board Member
Donald E. Flynn...................... -0- None N/A -0-
Managing Board Member
Neal M. Jewell....................... $ 6,500 None N/A $13,000
Managing Board Member
Eugene M. Mannella................... $ 6,500 None N/A $13,000
Managing Board Member
Patricia L. Sawyer................... $ 6,500 None N/A $13,000
Managing Board Member
</TABLE>

- ---------------
* These amounts are estimated for the 12-months ending September 30, 1997.

INVESTMENT ADVISORY SERVICES

The Adviser manages the assets of each Subaccount pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") with AUSA with respect to such
Subaccount and the investment policies described herein and in the Prospectus.
AUSA will bear any expenses of the Subaccounts other than the 0.20% advisory
fee. Of course, the Subaccounts will still indirectly bear their proportionate
share of the cost of operating the Underlying Diversified Subaccounts in which
the Subaccounts invest because the Subaccounts, as shareholders of the
Underlying Diversified Subaccounts, will bear their proportionate share of any
fees and expenses paid by the Underlying Diversified Subaccounts.

Under the Advisory Agreement with each Subaccount, Diversified provides
each Subaccount with discretionary investment services. Specifically,
Diversified is responsible for supervising and directing the investments of each
Subaccount in accordance with each Subaccount's investment objectives, program,
and restrictions as provided in the prospectus and this Statement of Additional
Information. Diversified is also responsible for effecting all security
transactions on behalf of each Subaccount. The Subaccounts will invest their
assets in units of the Underlying Diversified Subaccounts and such investments
will be made without the payment of any commission or other sales charges. In
addition to these services, Diversified provides each Subaccount with certain
administrative services, including: maintaining trust records, and registering
and qualifying each Subaccount's shares under federal and state laws; monitoring
the financial, accounting, and administrative functions of each Subaccount;
maintaining liaison with the agents employed by each Subaccount such as the
custodian; assisting each Subaccount in the coordination of such agents'
activities; and permitting Diversified's employees to serve as officers,
directors, and committee members of each Subaccount without cost to the
Subaccount.

Each Subaccount's Advisory Agreement also provides that Diversified, its
directors, officers, employees, and certain other persons performing specific
functions for the Subaccounts will only be liable to the Subaccount for losses
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.

Diversified Investment Advisors, Inc. is a wholly-owned subsidiary of AUSA
Holding Company, which is a wholly-owned subsidiary of AEGON USA, Inc. which is
a wholly-owned subsidiary of AEGON U.S. Holding Corporation which is a
wholly-owned subsidiary of AEGON International N.V. (a Netherlands Corporation)
which is a wholly-owned subsidiary of AEGON N.V., a Netherlands Corporation
which is a publicly traded international insurance group.

Diversified is an investment firm dedicated to meeting the complete needs
of retirement plan sponsors and participants from pre- through post-retirement.
Diversified provides flexible, high-quality services coupled with the employment
of independent investment managers in an innovative investment structure.

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<PAGE> 67

Diversified services over $9 billion in retirement plan assets and has
offices in Boston, Charlotte, Chicago, Cincinnati, Dallas, Houston, New Orleans,
New York, Philadelphia, Portland and San Francisco. It maintains recordkeeping
for 300,000 participants and has 490 employees dedicated to retirement plan
investment and administration. Its employees average more than seven years of
retirement plan experience.

As experts in customizing retirement solutions, Diversified offers
comprehensive programs of high-quality investments and administrative services
to defined benefit, defined contribution and not- for-profit pension plan
sponsors. Diversified forms a partnership with its clients to provide
exceptional plan design, participant communication programs, recordkeeping
services and technical guidance.

Diversified's investment structure provides access to an array of
complementary investment alternatives representing the major asset classes along
the risk/reward spectrum. Subadvisers for Underlying Diversified Portfolios are
selected from more than 2,000 highly accomplished independent firms. Each
subadviser's performance is carefully monitored by Diversified taking into
consideration fund performance in light of investment objectives and policies
and level of risk.

Through a rigorous portfolio manager selection process which includes
researching each subadviser's asset class, track record, organizational
structure, management team, consistency of performance and assets under
management, five to ten subadvisers are chosen. Out of that group, Diversified
then carefully chooses the three most qualified subadvisers based on performance
evaluation, ownership structure, personnel and philosophy to return for an
on-site visit and a quantitative and qualitative analysis by the investment
committee. Out of those three subadvisers, Diversified then hires the most
qualified, independent subadviser for each Portfolio, subject to approval by the
Board of Trustees for Underlying Diversified Portfolios including a majority of
the Trustees who are not "interested persons".

Diversified brings comprehensive monitoring and control to the investment
management process. It seeks superior portfolio management and moves
purposefully in replacing managers when warranted. From a plan sponsor's
perspective, replacing a manager, and not the investment fund, is a key
advantage in avoiding the expense and difficulty of re-enrolling participants or
disrupting established plan administration. Replacing a Subadviser, however,
will necessitate a shareholder proxy solicitation which involves other expenses
to a Fund.

Highly disciplined manager evaluation on both a quantitative and
qualitative basis, is an ongoing process. Diversified's Manager Monitoring Group
gathers and analyzes performance and Diversified's Investment Committee reviews
it. Performance attribution, risk/return ratios and purchase/sale assessments
are prepared monthly and, each quarter, a more comprehensive review is completed
which consists of manager visits, fundamental analysis and statistical analysis.
Extensive quarterly analysis is conducted to ensure that the investment fund is
being managed in line with the stated objectives. Semiannually, the Investment
Committee reviews the back-up manager selection, regression analysis and
universe comparisons.

A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objective, changes in subadviser leadership, ownership or portfolio managers,
large changes in assets under management and changes in philosophy or
discipline. The immediate response to any red flag is to assess the potential
impact on the manager's ability to meet investment objectives. Diversified
monitors "back-up" additional independent managers for each investment so that,
should a manager change be warranted, the transition can be effected on a timely
basis.

CUSTODIAN

Pursuant to a Custodian Agreement, Investors Bank & Trust Company acts as
the custodian of each Subaccount's assets, i.e., each Subaccount's interest in
Underlying Diversified Subaccounts (the "Custodian"). For its services, the
Custodian will receive such compensation as may from time to time be agreed upon
by it and AUSA. AUSA has agreed to pay all such fees.

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<PAGE> 68

BROKERAGE ALLOCATION

The Adviser invests all assets of the Subaccounts in units of Underlying
Diversified Subaccounts and incurs no brokerage costs in connection therewith.

Allocations of transactions by Underlying Diversified Portfolios, including
their frequency, to various dealers is determined by the Subadvisers in their
best judgement and in a manner deemed to be in the best interest of the
investors in an Underlying Diversified Portfolio rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. Purchases and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Underlying
Diversified Portfolios do not anticipate paying brokerage commissions in such
transactions. Any transactions for which Underlying Diversified Portfolios pays
a brokerage commission will be effected at the best price and execution
available. Purchases from underwriters of securities include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and the asked price.

FINANCIAL STATEMENTS OF AUSA

The financial statements of AUSA that are included in this Statement of
Additional Information are different from the financial statements of
Diversified Investors Strategic Variable Funds. The financial statements of AUSA
should be considered only as bearing upon the ability of AUSA to meet its
obligations under the Contracts and should not be considered as bearing on the
investment performance of the assets held in the Diversified Investors Strategic
Variable Funds.

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<PAGE> 69

APPENDIX

BOND AND COMMERCIAL PAPER RATINGS

STANDARD & POOR'S BOND RATINGS

A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree.

The rating "AA" may be modified by the addition of a plus or minus sign to
show relative standing within such category.

MOODY'S BOND RATINGS

Excerpts from Moody's description of its corporate bond ratings:
Aaa -- judged to be the best quality, carry the smallest degree of investment
risk; Aa -- judged to be of high quality by all standards.

FITCH INVESTORS SERVICE BOND RATINGS

AAA. Securities of this rating are regarded as strictly high-grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions, an liable to but slight market fluctuation other than through
changes in the money rate. The factor last named is of importance varying with
the length of maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public utility fields,
though some industrial obligations have this rating. The prime feature of an AAA
rating is showing of earnings several times or many times interest requirements
with such stability of applicable earnings that safety is beyond reasonable
question whatever changes occur in conditions. Other features may enter in, such
as a wide margin of protection through collateral security or direct lien on
specific property as in the case of high class equipment certificates or bonds
that are first mortgages on valuable real estate. Sinking funds or voluntary
reduction of the debt by call or purchase are often factors, while guarantee or
assumption by parties other than the original debtor may also influence the
rating.

AA. Securities in this group are of safety virtually beyond question, and
as a class are readily salable while many are highly active. Their merits are
not greatly unlike those of the AAA class, but a security so rated may be of
junior though strong lien -- in many cases directly following an AAA
security -- or the margin of safety is less strikingly broad. The issue may be
the obligation of a small company, strongly secured but influenced as to ratings
by the lesser financial power of the enterprise and more local type of market.

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.

MOODY'S COMMERCIAL PAPER RATINGS

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.

A-1
<PAGE> 70

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.

FITCH-1, FITCH-2, DUFF 1 AND DUFF 2 COMMERCIAL PAPER RATINGS

Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for timely
payment. "Fitch-2" is considered very good grade paper and reflects an assurance
of timely payment only slightly less in degree than the strongest issue.

Commercial paper issues rate "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment, excellent
liquidity factors supported by strong fundamental protection factors, and risk
factors which are very small. Issues rated "Duff 2" have a good certainty of
timely payment, sound liquidity factors and company fundamentals, small risk
factors, and good access to capital markets.

A-2
<PAGE> 71

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
AUSA Life Insurance Company, Inc.

We have audited the accompanying statutory-basis balance sheets of AUSA
Life Insurance Company, Inc. as of December 31, 1995 and 1994, and the
statutory-basis statements of operations, changes in capital and surplus and
cash flows for the years then ended. Our audits also included the
statutory-basis financial statement schedules required by Regulation S-X,
Article 7. These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

The Company presents its financial statements in conformity with accounting
practices prescribed or permitted by the Department of Insurance of the State of
New York. The variances between such practices and generally accepted accounting
principles are described in Note 1. The effects of these variances have not been
determined but we believe they are material.

In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of AUSA Life
Insurance Company, Inc. at December 31, 1995 and 1994, or the results of its
operations or its cash flows for the years then ended.

Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AUSA Life Insurance
Company, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
practices prescribed or permitted by the Department of Insurance of the State of
New York. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic statutory-basis financial statements taken
as a whole, present fairly in all material respects information set forth
therein.

ERNST & YOUNG LLP

Des Moines, Iowa
February 23, 1996

F-1
<PAGE> 72

AUSA LIFE INSURANCE COMPANY, INC.

BALANCE SHEETS--STATUTORY BASIS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments................................... $ 112,379 $ 89,532
Bonds............................................................. 2,523,719 2,099,349
Stocks:
Preferred...................................................... 236 236
Common, at market (cost: $141 in 1995 and 1994)................ 346 274
Mortgage loans on real estate..................................... 768,424 862,352
Real estate acquired in satisfaction of debt...................... 29,333 10,485
Policy loans...................................................... 25 24
Other invested assets............................................. 723 --
---------- ----------
Total cash and invested assets...................................... 3,435,185 3,062,252
Accrued investment income........................................... 51,281 47,156
Federal income taxes recoverable.................................... 12 12
Receivable from affiliates.......................................... 1,932 --
Other assets........................................................ 6,189 1,690
Separate account assets............................................. 4,249,345 2,907,674
---------- ----------
Total admitted assets............................................... $7,743,944 $6,018,785
========== ==========
</TABLE>

See accompanying notes.

F-2
<PAGE> 73

AUSA LIFE INSURANCE COMPANY, INC.

BALANCE SHEETS--STATUTORY BASIS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life........................................................... $ 356 $ 199
Annuity........................................................ 122,145 7,572
Accident and health............................................ 4,354 --
Policy and contract claim reserves:
Life........................................................... 3 3
Accident and health............................................ 152 --
Other policyholders' funds........................................ 2,991,630 2,761,658
Remittances and items not allocated............................... 24,147 16,763
Asset valuation reserve........................................... 35,160 25,552
Interest maintenance reserve...................................... 3,399 1,314
Payable to affiliates............................................. -- 7,858
Short-term note payable to affiliate.............................. 15,200 5,200
Deferred income................................................... 19,182 26,592
Payable under assumption reinsurance agreement.................... 73,546 85,612
Other liabilities................................................. 21,559 4,656
Separate account liabilities...................................... 4,230,472 2,891,976
---------- ----------
Total liabilities................................................... 7,541,305 5,834,955
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20 shares authorized, issued and
outstanding.................................................... 2,500 2,500
Paid-in surplus................................................... 251,150 210,150
Unassigned surplus (deficit)...................................... (51,011) (28,820)
---------- ----------
Total capital and surplus........................................... 202,639 183,830
---------- ----------
Total liabilities and capital and surplus........................... $7,743,944 $6,018,785
========== ==========
</TABLE>

See accompanying notes.

F-3
<PAGE> 74

AUSA LIFE INSURANCE COMPANY, INC.

STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life......................................................... $ 180 $ 10
Annuity...................................................... 1,107,020 426,329
Accident and health.......................................... 213 --
Net investment income........................................... 268,678 254,539
Amortization of interest maintenance reserve.................... 1,987 158
Commissions and expense allowances on reinsurance ceded......... 8,793 11,191
---------- ----------
1,386,871 692,957
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits........................ 221 8
Surrender benefits........................................... 764,290 453,799
Other benefits............................................... 1,931 870
Increase (decrease) in aggregate reserves for policies and
contracts:
Life....................................................... 157 (1)
Annuity.................................................... 114,209 2,722
Accident and health........................................ 175 --
Increase in liability for premium and other deposit type
funds....................................................... 229,962 34,294
---------- ----------
1,110,945 491,692
Insurance expenses:
Commissions.................................................. 83,579 91,312
General insurance expenses................................... 63,316 57,207
Taxes, licenses and fees..................................... 421 131
Transfers to separate accounts............................... 139,912 63,209
Other expenses............................................... 11 --
---------- ----------
287,239 211,859
---------- ----------
1,398,184 703,551
---------- ----------
Loss from operations before federal income taxes and net realized
capital losses on investments................................... (11,313) (10,594)
Federal income tax expense........................................ -- --
---------- ----------
Loss from operations before net realized capital losses on
investments..................................................... (11,313) (10,594)
Net realized capital losses on investments (net of amounts
transferred to interest maintenance reserve).................... (3,432) (928)
---------- ----------
Net loss.......................................................... $ (14,745) $ (11,522)
========== ==========
</TABLE>

See accompanying notes.

F-4
<PAGE> 75

AUSA LIFE INSURANCE COMPANY, INC.

STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
ADDITIONAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS CAPITAL AND
STOCK CAPITAL (DEFICIT) SURPLUS
------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994...................... $2,500 $210,150 $ (4,297) $ 208,353
Net loss for 1994............................. -- -- (11,522) (11,522)
Net unrealized capital losses................. -- -- (35) (35)
Increase in non-admitted assets............... -- -- (855) (855)
Increase in asset valuation reserve........... -- -- (12,809) (12,809)
Seed money contributed to separate account.... -- -- (15,000) (15,000)
Increase in surplus in separate account....... -- -- 15,698 15,698
------ -------- --------- ---------
Balance at December 31, 1994.................... 2,500 210,150 (28,820) 183,830
Capital contribution.......................... -- 41,000 -- 41,000
Net loss for 1995............................. -- -- (14,745) (14,745)
Net unrealized capital gains.................. -- -- 172 172
Increase in non-admitted assets............... -- -- (61) (61)
Increase in asset valuation reserve........... -- -- (9,608) (9,608)
Surplus effect of reinsurance................. -- -- (70) (70)
Redemption of separate account seed money..... -- -- (1,000) (1,000)
Increase in surplus in separate account....... -- -- 3,121 3,121
------ -------- --------- ---------
Balance at December 31, 1995.................... $2,500 $251,150 $ (51,011) $ 202,639
====== ======== ========= =========
</TABLE>

See accompanying notes.

F-5
<PAGE> 76

AUSA LIFE INSURANCE COMPANY, INC.

STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of reinsurance............. $1,116,102 $ 438,260
Net investment income............................................. 265,966 246,801
---------- ----------
1,382,068 685,061
Life and accident and health claims............................... (215) (10)
Surrender benefits and other fund withdrawals..................... (764,290) (453,799)
Other benefits to policyholders................................... (1,931) (868)
Commissions, other expenses and other taxes....................... (160,462) (63,919)
Net transfers to separate accounts................................ (139,912) (63,209)
Federal income taxes, excluding tax on capital gains.............. -- (62)
Net increase in policy loans...................................... (1) (6)
Increase in remittances and items not allocated................... 7,384 10,340
---------- ----------
Net cash provided by operations................................... 322,641 113,528
Proceeds from investments sold, matured or repaid:
Bonds........................................................... 432,605 421,275
Common stocks................................................... -- 2,022
Mortgage loans.................................................. 138,243 189,421
Real estate..................................................... 4,952 32
Other, net...................................................... 5 (48)
---------- ----------
Total cash from investments....................................... 575,805 612,702
Capital contribution.............................................. 41,000 --
Cash received in connection with a reinsurance transaction........ 38 --
Issuance of intercompany notes payable, net....................... 10,000 5,200
Other sources..................................................... 22,224 14,695
---------- ----------
Total sources of cash............................................. 971,708 746,125
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds........................................................... 878,082 1,038,312
Common stocks................................................... -- 27
Mortgage loans.................................................. 54,140 1,544
Other invested assets........................................... 725 --
---------- ----------
Total investments acquired........................................ 932,947 1,039,883
Seed money contributed to separate accounts....................... 1,000 15,000
Other applications................................................ 14,914 4,229
---------- ----------
Total applications of cash........................................ 948,861 1,059,112
---------- ----------
Net change in cash and short-term investments..................... 22,847 (312,987)
Cash and short-term investments at beginning of year.............. 89,532 402,519
---------- ----------
Cash and short-term investments at end of year.................... $ 112,379 $ 89,532
========== ==========
</TABLE>

See accompanying notes.

F-6
<PAGE> 77

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)

DECEMBER 31, 1995

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance
company and is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA") which, in turn, is a wholly-owned subsidiary of AEGON USA
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. Effective September 24, 1993, First
AUSA purchased from The Dreyfus Corporation ("Dreyfus"), its entire interest in
Dreyfus Life Insurance Company, a stock life insurance company. At the time of
purchase, the Company had total assets and capital and surplus of approximately
$17 million and $11 million, respectively. Effective September 27, 1993, Dreyfus
Life Insurance Company changed its name to AUSA Life Insurance Company, Inc. On
December 31, 1993, the Company entered into an assumption reinsurance agreement
with Mutual of New York ("MONY") to transfer certain group pension business of
MONY to the Company.

During 1995, the Board of Directors adopted a resolution calling for the
merger of all the assets and liabilities of International Life Investors
Insurance Company, an affiliate, into the Company. This merger is expected to
occur in 1996.

FINANCIAL STATEMENTS

The accompanying financial statements present the condition of the Company
at December 31, 1995 and 1994 and the results of its operations for the year
ended December 31, 1995 and 1994. Results of operations for 1993 are not
included, as the Company believes such data would not provide a meaningful
comparison with respect to financial results after the date of the acquisition.

NATURE OF BUSINESS

The Company primarily sells group fixed and variable annuities. The Company
is licensed in 47 states and the District of Columbia and is actively in the
process of becoming licensed in all 50 states. Sales of the Company's products
are primarily through brokers.

BASIS OF PRESENTATION

The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.

Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract reserves, guarantee fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.

The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York, which practices differ in some respects from generally
accepted accounting principles. The more significant of these differences are as
follows: (a) bonds are generally carried at amortized cost rather than
segregating the portfolio into held-to-maturity (carried at amortized cost),
available-for-sale (carried at fair value), and trading (reported at fair value)
classifications; (b) acquisition costs of acquiring new business are charged to
current operations as incurred rather than deferred and amortized over the life
of the policies; (c) policy reserves on traditional life products are based on
statutory mortality rates and interest which may differ from reserves based on

F-7
<PAGE> 78

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

reasonable assumptions of expected mortality, interest, and withdrawals which
include a provision for possible unfavorable deviation from such assumptions;
(d) policy reserves on certain investment products use discounting methodologies
utilizing statutory interest rates rather than full account values; (e)
reinsurance amounts are netted against the corresponding receivable or payable
rather than shown as gross amounts on the balance sheet; (f) deferred income
taxes are not provided for the difference between the financial statement and
income tax bases of assets and liabilities; (g) net realized gains or losses
attributed to changes in the level of interest rates in the market are deferred
and amortized over the remaining life of the bond or mortgage loan, rather than
recognized as gains or losses in the statement of operations when the sale is
completed; (h) declines in the estimated realizable value of investments are
provided for through the establishment of a formula-determined statutory
investment reserve (carried as a liability) changes to which are charged
directly to surplus, rather than through recognition in the statement of
operations for declines in value, when such declines are judged to be other than
temporary; (i) certain assets designated as "nonadmitted assets" have been
charged to surplus rather than being reported as assets; (j) revenues for
universal life and investment products consist of premiums received rather than
policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid; (l) adjustments to federal
income taxes of prior years are charged or credited directly to unassigned
surplus, rather than reported as a component of expense in the statement of
operations; and (m) gains or losses on dispositions of business are charged or
credited directly to unassigned surplus rather than being reported in the
statement of operations. The effects of these variances have not been determined
by the Company.

The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1996,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.

INVESTMENTS

Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortized costs for bonds and mortgage loans on real
estate that were acquired through the reinsurance agreement, described earlier,
were initially recorded at market value, consistent with the aforementioned
agreement and as prescribed by the Department of Insurance of the State of New
York. Amortization is computed using methods which result in a level yield over
the expected life of the security. The Company reviews its prepayment
assumptions on mortgage and other asset backed securities at regular intervals
and adjusts amortization rates retrospectively when such assumptions are changed
due to experience and/or expected future patterns. Investments in preferred
stocks in good standing are reported at cost. Investments in preferred stocks
not in good standing are reported at the lower of cost or market. Common stocks,
which may include shares of mutual funds (money market and other), are carried
at market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of

F-8
<PAGE> 79

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as required
or permitted by New York Insurance Laws.

Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses, net of amounts attributed to changes in the
general level of interest rates. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.

Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 1, 1995 and 1994, the
Company excluded investment income due and accrued of $183 and $774,
respectively, with respect to such practices.

MONY entered into foreign exchange interest rate swap agreements to modify
the interest characteristics of certain of its outstanding fixed maturity
securities from a fixed rate in a foreign currency to a fixed rate in U.S.
Dollars prior to the reinsurance assumption agreement. These agreements were
assigned to the Company in connection with the reinsurance assumption agreement.
The interest rate swap agreements involve the exchange of a fixed rate in a
foreign currency for fixed rate interest payments in U. S. Dollars over the life
of the agreement without an exchange of the underlying principal amount of
$32,500 at December 31, 1995 and 1994. The differential to be paid or received
is accrued as incurred and recognized as an adjustment to interest related to
the underlying fixed maturity. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. The fair values of
the swap agreements are not recognized in the financial statements.

Deferred income for unrealized gains and losses on the securities valued at
market at the time of the assumption reinsurance agreement (described in Note 4)
are returned to Mutual of New York at the time of realization pursuant to the
agreement.

AGGREGATE POLICY RESERVES

Life and annuity benefit reserves are developed by actuarial methods and
are determined based on published tables using statutorily specified interest
rates and valuation methods that will provide, in the aggregate, reserves that
are greater than or equal to the minimum required by law.

The aggregate policy reserves for life insurance policies are based
principally upon the 1941 and 1958 Commissioners' Standard Ordinary Mortality
and American Experience Mortality Tables. The reserves are calculated using
interest rates ranging from 2.50 to 4.00 percent and are computed principally on
the Net Level Premium Valuation and the Commissioners' Reserve Valuation
Methods.

Deferred annuity and other policyholders' funds reserves are calculated
according to the Commissioners' Annuity Reserve Valuation Method including
excess interest reserves to cover situations where the future interest
guarantees plus the decrease in surrender charges are in excess of the maximum
valuation rates of interest. Reserves for immediate annuities and supplementary
contracts with and without life contingencies

F-9
<PAGE> 80

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

are equal to the present value of future payments assuming interest rates
ranging from 5.50 to 7.50 percent and mortality rates, where appropriate, from a
variety of tables.

Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.

POLICY AND CONTRACT CLAIM RESERVES

Claim reserves represent the estimated accrued liability for claims
reported to the Company and claims incurred but not yet reported through the
statement date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.

SEPARATE ACCOUNT

Assets held in trust for purchases of separate account contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. Income and gains and losses with respect to these assets
accrue to the benefit of the policyholders. The Company received separate
account premiums of $536,128 and $180,789 in 1995 and 1994, respectively. The
assets in the separate accounts for the variable annuities and participating
annuities are held at a market value of $3,650,091 and $2,398,125 for the years
ended December 31, 1995 and 1994, respectively. The separate account assets in
the fixed government accounts and stable fund accounts are carried at an
amortized cost of $599,254 and $509,549 for the years ended December 31, 1995
and 1994, respectively.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation.

2. FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments, requires additional disclosures about
derivatives. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 and No. 119 exclude certain financial instruments and
all nonfinancial instruments from their disclosure requirements and allows
companies to forego the disclosures when those estimates can only be made at
excessive cost. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

F-10
<PAGE> 81

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

2. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

Cash and cash equivalents, short-term investments: The carrying amounts
reported in the statutory-basis balance sheet for these instruments
approximate their fair values.

Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services or,
in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield,
credit quality, and maturity of the investments. The fair values for equity
securities are based on quoted market prices and are recognized in the
statutory-basis balance sheet.

Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.

Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.

Interest rate swap: Estimated fair value of the foreign currency interest
rate swap is based upon the pricing differential for similar swap
agreements. The fair value of the interest rate swap has been included with
the fair value of the underlying fixed maturities.

Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.

The following sets forth a comparison of the fair values and carrying
values of the Company's financial instruments subject to the provisions of SFAS
No. 107 and No. 119:

<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------------------- -----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds........................................... $2,523,719 $2,605,786 $2,099,349 $1,976,667
Preferred stocks................................ 236 180 236 162
Common stock.................................... 346 346 274 274
Mortgage loans on real estate................... 768,424 806,395 862,352 851,352
Policy loans.................................... 25 25 24 24
Cash and short-term investments................. 112,379 112,379 89,532 89,532
Separate account assets......................... 4,249,345 4,261,843 2,907,674 2,876,170
LIABILITIES
Investment contract liabilities................. 3,113,766 3,077,557 2,771,701 2,685,570
Separate account annuities...................... 4,237,983 4,219,281 2,886,836 2,841,006
</TABLE>

F-11
<PAGE> 82

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

3. INVESTMENTS

The carrying value and estimated market value of investments in debt
securities were as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Bonds:
United States Government and agencies........ $ 81,460 $ 1,010 $ 21 $ 82,449
State, municipal and other government........ 20,584 871 14 21,441
Public utilities............................. 169,422 3,105 498 172,029
Industrial and miscellaneous................. 1,482,600 51,205 7,727 1,526,078
Mortgage-backed securities................... 769,653 36,675 2,539 803,789
---------- -------- --------- ----------
2,523,719 92,866 10,799 2,605,786
Preferred stocks............................... 236 -- 56 180
---------- -------- --------- ----------
$2,523,955 $ 92,866 $ 10,855 $2,605,966
========== ======== ========= ==========
DECEMBER 31, 1994
Bonds:
United States Government and agencies........ $ 101,024 $ 247 $ 7,604 $ 93,667
State, municipal and other government........ 23,270 -- 1,903 21,367
Public utilities............................. 162,527 15 14,017 148,525
Industrial and miscellaneous................. 1,448,647 3,569 82,144 1,370,072
Mortgage-backed securities................... 363,881 377 21,222 343,036
---------- -------- --------- ----------
2,099,349 4,208 126,890 1,976,667
Preferred stocks............................... 236 -- 74 162
---------- -------- --------- ----------
$2,099,585 $ 4,208 $ 126,964 $1,976,829
========== ======== ========= ==========
</TABLE>

The carrying value and estimated market value of bonds at December 31,
1995, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less.............................................. $ 62,034 $ 62,250
Due after one year through five years................................ 795,601 808,309
Due after five years through ten years............................... 773,886 809,464
Due after ten years.................................................. 122,545 121,974
---------- -----------
1,754,066 1,801,997
Mortgage-backed securities........................................... 769,653 803,789
---------- -----------
$2,523,719 $ 2,605,786
========== ===========
</TABLE>

F-12
<PAGE> 83

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

3. INVESTMENTS--(CONTINUED)

A detail of net investment income is presented below:

<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------- --------
<S> <C> <C>
Interest on bonds and notes...................................... $180,500 $145,612
Mortgage loans................................................... 98,653 117,859
Real estate...................................................... 2,400 322
Dividends on equity investments.................................. 19 51
Interest on policy loans......................................... 1 1
Other investment loss............................................ (3,927) (2,458)
-------- --------
Gross investment income.......................................... 277,646 261,387
Investment expenses.............................................. 8,968 6,848
-------- --------
Net investment income............................................ $268,678 $254,539
======== ========
</TABLE>

Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------- --------
<S> <C> <C>
Proceeds......................................................... $432,605 $421,275
======== ========
Gross realized gains............................................. $ 7,214 $ 7,643
Gross realized losses............................................ 13,407 13,681
-------- --------
Net realized losses.............................................. $ (6,193) $ (6,038)
======== ========
</TABLE>

At December 31, 1995, investments with an aggregate carrying value of
$2,089 were on deposit with regulatory authorities or were restrictively held in
bank custodial accounts for the benefit of such regulatory authorities as
required by statute.

Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:

<TABLE>
<CAPTION>
REALIZED
----------------------
YEAR ENDED DECEMBER 31
1995 1994
-------- -------
<S> <C> <C>
Debt securities................................................... $ (6,193) $(6,038)
Short-term investments............................................ 2 (48)
Mortgage loans on real estate..................................... (3,650) 1,067
Real estate....................................................... (628) --
Other invested assets............................................. 11,109 5,412
-------- -------
640 393
Tax effect........................................................ -- --
Transfer to interest maintenance reserve.......................... (4,072) (1,321)
-------- -------
Total realized losses............................................. $ (3,432) $ (928)
======== =======
</TABLE>

F-13
<PAGE> 84

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

3. INVESTMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CHANGE IN
UNREALIZED
----------------
YEAR ENDED
DECEMBER 31
1995 1994
----- ----
<S> <C> <C>
Debt securities........................................................ $(750) $ --
Equity securities...................................................... 72 (35)
----- ----
Change in unrealized depreciation...................................... $(678) $(35)
===== ====
</TABLE>

Gross unrealized gains and gross unrealized losses on equity securities at
December 31, 1995 were as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
<S> <C> <C>
Unrealized gains........................................................ $205 $133
Unrealized losses....................................................... -- --
---- ----
Net unrealized gains.................................................... $205 $133
==== ====
</TABLE>

During 1995, the Company issued mortgage loans with interest rates ranging
from 7.41% to 9.86%. The maximum percentage of any one loan to the value of the
underlying real estate at origination was 86%. Mortgage loans with a carrying
value of $13,780 were non-income producing for the previous twelve months.
Accrued interest of $150 related to these mortgage loans was excluded from
investment income. The Company refinanced the mortgage loans of two properties
with an aggregate carrying value of $23,378 to reduce the interest rates, as a
result of the current interest rate environment. The Company requires all
mortgage loans to carry fire insurance equal to the value of the underlying
property.

During 1995 and 1994, there were $14,264 and $10,587, respectively, in
foreclosed mortgage loans that were transferred to real estate. At December 31,
1995 and 1994, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $9,921 and $9,061, respectively.

At December 31, 1995, the mortgage loan portfolio is diversified by
geographic region and specific collateral property type as follows:

<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- --------------------------------------------- ---------------------------------------------
<S> <C> <C> <C>
South Atlantic......................... 31.1% Retail................................. 36.7%
E. North Central....................... 20.7 Office................................. 33.2
Mountain............................... 15.6 Apartment.............................. 17.2
New England............................ 11.5 Other.................................. 10.4
W. North Central....................... 9.8 Industrial............................. 2.5
W. South Central....................... 8.3
Pacific................................ 3.0
</TABLE>

F-14
<PAGE> 85

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

3. INVESTMENTS--(CONTINUED)

At December 31, 1995, the Company had the following investments, excluding
U. S. Government guaranteed or insured issues, which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:

<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY VALUE
- ---------------------------------------------------------------------------------- --------
<S> <C>
Bonds:
Falcon Telecable................................................................ $44,370
Connecticut National Bank....................................................... 36,220
Green Tree Financial Corporation................................................ 35,831
Standard Credit Card............................................................ 32,629
PSEG Capital.................................................................... 28,783
Chemical Banking................................................................ 26,166
Triax Association............................................................... 25,000
</TABLE>

4. REINSURANCE

The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.

Premiums earned reflect the following reinsurance assumed and ceded amounts
for the year ended December 31:

<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Direct premiums.................................................... $1,105,029 $295,678
Reinsurance assumed................................................ 35,847 130,665
Reinsurance ceded.................................................. (33,463) (4)
---------- --------
Net premiums earned................................................ $1,107,413 $426,339
========== ========
</TABLE>

The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1995 and 1994 of $32,948 and $0,
respectively.

On December 31, 1993, the Company and MONY entered into an assumption
reinsurance agreement whereby, all of the general account liabilities were
novated to the Company from MONY as state approvals were received.

In accordance with the agreement, MONY will receive payments relating to
the performance of the assets and liabilities that exist at the date of closing
for a period of nine years. These payments will be reduced for certain
administrative expenses as defined in the agreement. The Company will recognize
operating gains and losses on renewal premiums received after December 31, 1993
of the business in-force at December 31, 1993, and on all new business written
after that date. At the end of nine years, the Company will purchase from MONY
the remaining transferred business inforce based upon a formula described in the
agreement. At December 31, 1995 and 1994, the Company owed MONY $73,546 and
$85,612, respectively, which represents the amount earned by MONY under the gain
sharing calculation and certain fees for investment management services for the
respective years.

F-15
<PAGE> 86

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

4. REINSURANCE--(CONTINUED)

In connection with the transaction, MONY purchased $150,000 and $50,000 in
Series A and Series B notes, respectively, of AEGON. The proceeds were used to
enhance the surplus of the Company. Both the Series A and Series B notes bear a
market rate of interest and mature in nine years.

AEGON provides general and administrative services for the transferred
business under a related agreement with MONY. The agreement specifies prescribed
rates for expenses to administer the business up to certain levels. In addition,
AEGON also provides investment management services on the assets underlying the
new pension business written by the Company while MONY continues to provide
investment management services for assets supporting the remaining policy
liabilities which were transferred at December 31, 1993.

On October 1, 1995, the Company entered into a reinsurance agreement with a
non-affiliate. As a result, the Company received $4,242 of assets, including $38
of cash and $4,312 of liabilities. The difference between the assets and the
liabilities of $70 was charged directly to unassigned surplus.

5. INCOME TAXES

Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to loss from operations before taxes and
realized capital losses for the following reasons:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
------- -------
<S> <C> <C>
Computed tax benefit at federal statutory rate (35%)................... $(3,959) $(3,708)
Tax reserve adjustment................................................. 184 121
Deferred acquisition cost--tax basis................................... 596 6
Carryforward of current year operating loss............................ 3,351 3,460
Other items--net....................................................... (172) 121
------- -------
Federal income tax expense............................................. $ -- $ --
======= =======
</TABLE>

Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($800 at December 31, 1995). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $280.

At December 31, 1995, the Company had net operating loss carryforwards of
approximately $19,400 which expire through 2010.

6. POLICY AND CONTRACT ATTRIBUTES

A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products that
are not subject to significant mortality or morbidity risk; however,

F-16
<PAGE> 87

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)

there may be certain restrictions placed upon the amount of funds that can be
withdrawn without penalty. The amount of reserves on these products, by
withdrawal characteristics, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
PERCENT
AMOUNT OF TOTAL
---------- ----------
<S> <C> <C>
Subject to discretionary withdrawal with market value adjustment.... $ 506,683 16.1%
Subject to discretionary withdrawal at book value less surrender
charge............................................................ 1,892,739 60.1%
Subject to discretionary withdrawal at market value................. 2 0.0%
Subject to discretionary withdrawal at book value (minimal or no
charges
or adjustments)................................................... 523,843 16.7%
Not subject to discretionary withdrawal provision................... 223,617 7.1%
---------- -----
3,146,884 100.0%
Less reinsurance ceded.............................................. 32,948
----------
Total policy reserves on annuities and deposit fund liabilities..... $3,113,936
==========
</TABLE>

Separate and variable account assets held by the Company represent
contracts where the benefit is determined by the performance of the investments
held in the separate account. There may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of separate
account liabilities on these products, by withdrawal characteristics, are
summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
---------- -------------- ----------
<S> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment................................ $ 290,684 $ -- $ 290,684
Subject to discretionary withdrawal at book value less
surrender charge....................................... 280,770 -- 280,770
Subject to discretionary withdrawal at market value...... 97,049 1,492,670 1,589,719
Not subject to discretionary withdrawal.................. 2,076,810 -- 2,076,810
---------- ---------- ----------
$2,745,313 $1,492,670 $4,237,983
========== ========== ==========
</TABLE>

At December 31, 1995 and 1994, the Company had insurance in force
aggregating $52 and $65, respectively, in which the gross premiums are less than
the net premiums required by the valuation standards established by the
Insurance Division, Department of Commerce, of the State of Iowa.

7. DIVIDEND RESTRICTIONS

Generally, an insurance company's ability to pay dividends is limited to
the amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities. The Company is not entitled to pay out any dividends in 1996
without prior approval.

8. RETIREMENT AND COMPENSATION PLANS

The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
87

F-17
<PAGE> 88

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)

expense as a percent of salaries. The benefits are based on years of service and
the employee's compensation during the highest five consecutive years of
employment. The Company was allocated no pension expense for the years ended
December 31, 1995 and 1994. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement Income Security Act of 1974.

The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k) of
the Internal Revenue Service Code. Employees of the Company who customarily work
at least 1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement Income Security Act of 1974. The Company
was allocated no expense for the years ended December 31, 1995 and 1994.

AEGON sponsors supplemental retirement plans to provide the Company's
senior management with benefits in excess of normal pension benefits. The plans
are noncontributory and benefits are based on years of service and the
employee's compensation level. The plans are unfunded and nonqualified under the
Internal Revenue Service Code. In addition, AEGON has established incentive
deferred compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been accrued
or funded as deemed appropriate by management of AEGON and the Company.

In addition to pension benefits, the Company participates in plans
sponsored by AEGON that provide postretirement medical, dental and life
insurance benefits to employees meeting certain eligibility requirements.
Portions of the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company was allocated no expense for the years ended December 31, 1995 and 1994.

9. RELATED PARTY TRANSACTIONS

In accordance with an agreement between AEGON and the Company, AEGON will
ensure the maintenance of certain minimum tangible net worth, operating leverage
and liquidity levels of the Company, as defined in the agreement, through the
contribution of additional capital by the Company's parent as needed.

The Company is allocated administrative and benefit expenses from the
parent for employee related costs, as all employees are considered employees of
the parent, not employees of the Company.

The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1995 and
1994, the Company paid $2,212 and $0, respectively, for these services, which
approximates their costs to the affiliates.

Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rates ranging from 5.00% to 5.85% at December 31,
1995. During 1995 and 1994, the Company paid interest of $193 and $43,
respectively, to affiliates.

F-18
<PAGE> 89

AUSA LIFE INSURANCE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)

10. COMMITMENTS AND CONTINGENCIES

The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for compensatory
and punitive damages, in addition to contract liability, it is management's
opinion, after consultation with counsel and a review of available facts, that
damages arising from such demands will not be material to the Company's
financial position.

The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. In accordance with the purchase agreement,
assessments related to periods prior to the purchase of the Company will be paid
by Dreyfus. Assessments attributable to business reinsured from MONY for
premiums received prior to the date of the transaction will be paid by MONY. The
Company will be responsible for assessments, if any, attributable to premium
income after the date of purchase. The guaranty fund expense was $15 and $0 for
the years ended December 31, 1995 and 1994, respectively.

F-19
<PAGE> 90

AUSA LIFE INSURANCE COMPANY, INC.

SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES--STATUTORY
BASIS

(DOLLARS IN THOUSANDS)

DECEMBER 31, 1995

SCHEDULE I

AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET (2)
- ---------------------------------------------------- ----------- ---------- ------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government agencies
and authorities................................ $ 499,932 $ 517,318 $ 499,232
States, municipalities and political
subdivisions................................... 5,068 5,444 5,062
Foreign governments............................... 15,980 15,996 15,522
Public utilities.................................. 172,286 172,029 169,422
All other corporate bonds......................... 1,853,621 1,894,999 1,834,481
Redeemable preferred stock.......................... 236 180 236
----------- ---------- -----------
Total fixed maturities.............................. 2,547,123 2,605,966 2,523,955
EQUITY SECURITIES
Common stocks--industrial, miscellaneous and all
other............................................. 141 346 346
----------- ---------- -----------
Total equity securities............................. 141 346 346
Mortgage loans on real estate....................... 768,424 768,424
Real estate......................................... 29,333 29,333
Policy loans........................................ 25 25
Cash and short-term investments..................... 112,379 112,379
----------- -----------
Total investments................................... $ 3,457,425 $ 3,434,462
=========== ===========
</TABLE>

- ---------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.

(2) Amounts differ from cost as certain bonds have been adjusted to reflect
other than temporary declines in value charged to surplus, as prescribed by
the NAIC.

F-20
<PAGE> 91

AUSA LIFE INSURANCE COMPANY, INC.

SUPPLEMENTARY INSURANCE INFORMATION--STATUTORY BASIS

(DOLLARS IN THOUSANDS)

SCHEDULE III

<TABLE>
<CAPTION>
FUTURE BENEFITS,
POLICY CLAIMS
BENEFITS POLICY AND NET LOSSES AND OTHER
AND UNEARNED CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING PREMIUMS
EXPENSES PREMIUMS LIABILITIES REVENUE INCOME EXPENSES EXPENSES WRITTEN
-------- -------- ---------- ---------- ---------- ------------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1995
Individual life...... $ 354 $ -- $ 3 $ 180 $ 47 $ 4 $ 4 $ --
Individual health.... 4,021 333 152 213 85 386 62 --
Group life and
health............. 2 -- -- -- -- -- -- 195
Annuity.............. 122,145 -- -- 1,107,020 268,546 1,110,555 287,173 1,606,197
-------- ------ ---- ---------- --------- ----------- --------- ----------
$126,522 $ 333 $155 $1,107,413 $ 268,678 $ 1,110,945 $ 287,239 $1,606,392
======== ====== ==== ========== ========= =========== ========= ==========
DECEMBER 31, 1994
Individual life...... $ 197 $ -- $ 3 $ 10 $ 19 $ 5 $ 2 $ --
Individual health.... -- -- -- -- -- -- -- --
Group life and
health............. 2 -- -- -- -- -- -- --
Annuity.............. 7,572 -- -- 426,329 254,520 491,686 211,857 426,329
-------- ------ ---- ---------- --------- ----------- --------- ----------
$ 7,771 $ -- $ 3 $ 426,339 $ 254,539 $ 491,691 $ 211,859 $ 426,329
======== ====== ==== ========== ========= =========== ========= ==========
</TABLE>

F-21
<PAGE> 92

AUSA LIFE INSURANCE COMPANY, INC.

REINSURANCE--STATUTORY BASIS

(DOLLARS IN THOUSANDS)

SCHEDULE IV

<TABLE>
<CAPTION>
ASSUMED PERCENTAGE OF
CEDED TO FROM AMOUNT
GROSS OTHER OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Life insurance in force........ $ 629 $ 150 $ -- $ 479 --%
========== ======= ======== ========== =======
Premiums:
Individual life.............. $ 184 $ 4 $ -- $ 180 --%
Individual health............ -- -- -- -- --
Group life and health........ -- -- -- -- --
Annuity...................... 1,105,029 33,459 35,847 1,107,233 3
--
---------- ------- -------- ----------
--------
$1,104,845 $33,463 $ 35,847 $1,107,413 3%
========== ======= ======== ========== =======
YEAR ENDED DECEMBER 31, 1994
Life insurance in force........ $ 681 $ 150 $ -- $ 531 --%
========== ======= ======== ========== =======
Premiums:
Individual life.............. $ 14 $ 4 $ -- $ 10 --%
Individual health............ -- -- -- -- --
Group life and health........ -- -- -- -- --
Annuity...................... 295,664 -- 130,665 426,329 31
--
---------- ------- -------- ----------
--------
$ 295,678 $ 4 $130,665 $ 426,339 31%
========== ======= ======== ========== =======
</TABLE>

F-22
<PAGE> 93

PART C

OTHER INFORMATION

ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS

The following Financial Statements

<TABLE>
<S> <C>
(1) With respect to Diversified Investors Strategic Variable Funds: These funds will
not commence operations until after the effective date of this registration
statement...........................................................................
(2) With respect to AUSA Life Insurance Company, Inc. ("AUSA")
Report of Independent Auditors........................................................ F-1
Balance Sheets -- Statutory Basis at December 31, 1995 and 1994....................... F-2
Statements of Operations -- Statutory Basis for the year ended December 31, 1995 and
1994................................................................................ F-4
Statements of Changes in Capital and Surplus -- Statutory Basis for the year ended
December 31, 1995 and 1994.......................................................... F-5
Statements of Cash Flows -- Statutory Basis for the year ended December 31, 1995 and
1994................................................................................ F-6
Notes to Financial Statements -- Statutory Basis...................................... F-7
Financial Statement Schedules......................................................... F-20
</TABLE>

(b) Exhibits

(1) Any form of Form N-3 Exhibits (1), (3), (5) through (8) and (16)
previously filed with the Commission as part of Pre-Effective
Amendment No. 1 dated July 1, 1994 to the Diversified Investors
Variable Fund Registration Statement filed on Form N-4, Registration
No. 33-73734 under the Securities Act of 1933 are incorporated herein
by reference.

(2) Not Applicable.

(4) Investment Advisory Contract.

(9) Not applicable.

(10) Not applicable.

(11) Not applicable.

(12) Opinion and Consent of counsel as to the legality of the securities
being registered.

(13) Opinion and Consent of Independent Public Accountants.

(14) Not applicable.

(15) Not applicable.

(17) Not applicable.

(18) Powers of Attorney previously filed with the Commission as part of
initial Registration Statement dated July 22, 1996 to Diversified
Investors Strategic Variable Funds filed on Form N-3, Registration No.
333-08543.

ITEM 29. DIRECTORS AND OFFICERS OF AUSA

The Directors and officers of AUSA are set forth below.

DIRECTORS

Andrew R. Baer............. KEKST & COMPANY, 437 Madison Ave., New York, New
York 10022.

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<PAGE> 94

William L. Busler.......... AEGON USA, Inc., 4333 Edgewood Road, N.E., Cedar
Rapids, Iowa 52499.

Jack R. Dykhouse........... AEGON USA, Inc., 9151 Grapevine Highway, North
Richland Hills, Texas 76180.

Peter P. Post.............. EMMERLING POST, Inc., 135 East 55th Street, New
York, New York 10022.

Cor H. Verhagen............ AEGON INSURANCE GROUP, 51 JFK Parkway, Short Hills,
New Jersey 07078.

Professor E. Kirby
Warren..................... COLUMBIA UNIVERSITY SCHOOL OF BUSINESS, 725 Uris
Hall, 116th Street & Broadway, New York, New York
10027.

Steven E. Frushtick........ WIENER, FRUSHTICK & STRAUB, 500 Fifth Avenue, New
York, New York 10110.

Vice Admiral Thor Hanson... National Multiple Sclerosis Society, 900 Birdseye
Road, P.O. Box 112, Orient, New York 11957-0112.

B. Larry Jenkins........... Monumental Life Insurance Company, 2 East Chase
Street, Baltimore, Maryland 21202.

DIRECTOR-OFFICERS

Larry G. Brown............. Chairman of the Board and Secretary, AEGON USA,
Inc., 111 North Charles Street, Baltimore, Maryland
21201.

Vera F. Mihaic............. Vice President, INTERNATIONAL LIFE INVESTORS
INSURANCE Company, 666 Fifth Avenue,
New York, New York 10103-0001.

Tom Schlossberg............ President, DIVERSIFIED INVESTMENT ADVISORS, Inc.,
4 Manhattanville Road, Purchase, New York 10577.

Douglas C. Kolsrud......... Chief Actuary, AEGON USA, Inc., 4333 Edgewood Road,
N.E., Cedar Rapids, Iowa 52499.

ITEM 30. PERSONS CONTROLLED BY OR UNDER CONTROL WITH THE INSURANCE COMPANY

No person is directly or indirectly controlled by the Registrant. The
Registrant is a separate account of the Insurance Company.

The diagram on the next page shows all corporations directly or indirectly
controlled or under common control with the Insurance Company, showing the state
or other sovereign power under the laws of which each is organized and the
percentage ownership of voting securities giving rise to the control
relationship. (See diagram on following page.)

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<PAGE> 95

BRIEF DESCRIPTION OF CHART

The following is a listing of all subsidiaries/affiliates of AEGON N.V.
arranged by state/country of incorporation:

ALABAMA

ZCI, Inc. -- 100%

ARIZONA

Bankers Financial Life Insurance Company (Footnote 6)

Iowa Fidelity Life Insurance Company -- (Footnote 2)

Southwest Equity Life Insurance Company -- 100%

CALIFORNIA

ISI Insurance Agency, Inc. and its subsidiaries -- 100% (Footnote 9)

Zahorik Company, Inc. -- 100%

DELAWARE

AEGON U.S. Holding Corporation -- 100%

Diversified Investors Securities Corp. -- 100%

Diversified Investment Advisors, Inc. -- 100%

Idex Management, Inc. -- 50% (Footnote 7)

Intersecurities Inc. -- 100%

Landauer Associates, Inc. -- 100%

Zuantra Corporation -- 100%

Zuantra Software Corporation -- 100%

Money Services, Inc. -- 100%

RCC North America, Inc. Voting Trust -- 100% (Footnote 8)

FLORIDA

Idex Investor Services, Inc. -- 100%

INDIANA

AEGON Management Company

IOWA

AEGON USA Investment Management -- 100%

AEGON USA Realty Advisors, Inc. -- 100% (Footnote 12)

AEGON USA Realty Management, Inc. -- 100%

AEGON USA, Inc. -- 100% (Footnote 1)

AEGON USA Securities, Inc. -- 100%

American Forum For Fiscal Fitness -- 100%

C-3
<PAGE> 96

AUSA Financial Markets, Inc. -- 100%

Bankers United Life Assurance Company -- 100%

Cadet Holding Corp. -- 100%

Cedar Income Fund, Ltd. (Footnote 5)

Investors Warranty of America Inc. -- 100%

Landauer Realty Advisors, Inc. -- 100%

Life Investors Insurance Company of America -- 100%

Massachusetts Fidelity Trust Company -- 100%

PFL Life Insurance Company -- 100%

Realty Information Systems, Inc. -- 100% (Footnote 11)

Transunion Casualty Company -- 100%

Universal Benefits Corporation -- 100%

USP Real Estate Investment Trust (Footnote 4)

MARYLAND

AEGON USA Managed Portfolios, Inc. (Footnote 3)

AUSA Holding Company -- 100%

Executive Management and Consultant Services, Inc. -- 100%

First USA Life Insurance Company -- 100%

Monumental General Administrators, Inc. -- 100%

Monumental General Casualty Company -- 100%

Monumental General Insurance Group, Inc. -- 100%

Monumental General Mass Marketing, Inc. -- 100%

Monumental Life Insurance Company -- 100%

The Whitestone Corporation -- 100%

United Financial Services, Inc. -- 100%

WRL Series Fund Inc. -- 100% (Footnote 3)

MASSACHUSETTS

Idex Fund (Footnote 3)

Idex II Series Fund (Footnote 3)

Idex Fund 3 (Footnote 3)

MICHIGAN

Associated Mariner Agency, Inc. and its subsidiaries -- 100% (Footnote 10)

Associated Mariner Financial Group Inc. -- 100%

Mariner Financial Services, Inc. -- 100%

C-4
<PAGE> 97

Mariner Mortgage Corp. -- 100%

Mariner/ISI Planning Corporation -- 100%

MINNESOTA

AUSA Institutional Marketing Group, Inc. -- 100%

Colorado Annuity Agency, Inc. -- 100%

NEW JERSEY

Short Hills Management Company -- 100%

NEW YORK

AUSA Life Insurance Company, Inc. -- 100%

Corpa Reinsurance Company -- 100%

OHIO

Western Reserve Life Assurance Co. of Ohio -- 100%

TENNESSEE

Supplemental Insurance Division, Inc. -- 100%

CANADA

CRC Creditor Resource Canadian Dealer Network Inc. -- 100%

Note: In addition to the foregoing United States and Canadian entities,
these are the following foreign based corporations/association:

Vereniging AEGON Netherlands Membership Association which has a
53.83% interest in AEGON N.V. Netherlands Corporation which
corporation owns 100% of AEGON Nederland N.V. (Netherlands
Corporation), AEGON International N.V. (Netherlands Corporation),
AEGON Nevak Holding B.V. (Netherlands Corporation) and Groninger
Financieringen B.V. (Netherlands Corporation)

FOOTNOTES

(1) 150,000 shares of Class B Non-Voting Common Stock owned by Ennia
Reinsurance Antilles N.V.

(2) Ordinary common stock is allowed 60% of total cumulative vote.
Participating common stock is allowed 40% total cumulative vote.

(3) Denotes relationships as advisor, administrator, sponsor, underwriter or
general partner.

(4) First AUSA Life Insurance Company owns 12.89%. PFL Life Insurance Company
owns 13.11%. Bankers United Life Assurance Company owns 4.86%.

(5) PFL Life Insurance Company owns 16.73%. Bankers United Life Assurance
Company owns 3.77%. Life Investors Insurance Company of America owns 3.38%.
AEGON USA Realty Advisors, Inc. owns 1.97%. First AUSA Life Insurance
Company owns .18%.

(6) Class B Common Stock is allocated 75% of total cumulative vote. Class A
Common Stock is allocated 25% of total cumulative vote.

(7) 50% of Idex Management, Inc. is owned by Janus Capital Corporation, a
Colorado corporation.

C-5
<PAGE> 98

(8) RCC Group: FGH Realty Credit Corp., FGH USA, Inc., RCC North America, Inc.,
FGH USA Realty, Inc., FGH Eastern Region, Inc., FGH Appraisal Services,
Inc., FGH Western Region, Inc., ALH Properties, Inc., First FGP, Inc.,
Second FGP, Inc., Third FGP, Inc., Fourth FGP, Inc. Fifth FGP, Inc., Sixth
FGP, Inc., Seventh FGP, Inc., FGP Midwood, Inc., FGP Parsippany, Inc., ALH
Properties Two, Inc., ALH Properties Three, Inc., ALH Properties Four,
Inc., ALH Properties Five, Inc., ALH Properties Six, Inc., ALH Properties
Seven, Inc., ALH Properties Eight, Inc., ALH Properties Nine, Inc., ALH
Properties Ten, Inc., ALH Properties Eleven, Inc., ALH Properties Twelve,
Inc., ALH Properties Thirteen, Inc., ALH Properties Fourteen, Inc., ALH
Properties Fifteen, Inc., ALH Properties Sixteen, Inc., ALH Properties
Seventeen, Inc., FGP Keene, Inc., FGP Broadway, Inc., FGP West Street,
Inc., FGP West Street Two, Inc., FGP 90 West Street, Inc., FGP Branford,
Inc., FGP Franklin, Inc., FGP Bala, Inc., FGP Twenty-One, Inc., FGP
Twenty-Two, Inc., FGP Twenty-Three, Inc., FGP Twenty-Four, Inc., FGP
Twenty-Five, Inc., FGP Schenectady, Inc., FGP Country Estates, Inc., FGP
Eleventh Street, Inc., FGP 109th Street, Inc., FGP Seventy-Second Street,
Inc., FGP Gaithersburg, Inc., FGP West 32nd Street, Inc., FGP Beekman,
Inc., Dutch Hotel Management, Inc., FGP Landmark, Inc., FGP Islandia, Inc.,
FGP Bridgeport, Inc., FGP Varick, Inc., FGP Real Property Management, Inc.,
FGP Union Gardens, Inc., FGP Burkewood, Inc., FGP Stamford, Inc., FGP
Meadow Lane, Inc., FGP Main Street, Inc., FGP Property Services, Inc., FGP
Merrick, Inc., FGP West 14th Street, Inc., FGP 106 Fulton, Inc., FGP Bush
Terminal, Inc., FGP Northern Boulevard, Inc., FGP Seventh Avenue, Inc., FGP
Parsons, Inc., FGP City Hall, Inc., FGP West 88th Street, Inc., FGP
Lincoln, Inc., FGP Emerson, Inc., FGP Brooke, Inc., FGP 86th Street, Inc.,
FGP Edison, Inc., FGP Rider Avenue, Inc., FGP Remson, Inc., and FGP
Rockbeach, Inc.

(9) Subsidiaries of ISI Insurance Agency, Inc. are: ISI Insurance Agency of
Ohio, Inc., ISI Insurance Agency of Massachusetts, Inc., and ISI Insurance
Agency of Texas, Inc.

(10) Subsidiaries of Associated Mariner Agency, Inc. are Associated Mariner
Agency of Hawaii, Inc., Associated Mariner Insurance Agency of
Massachusetts, Inc., Associated Mariner Agency Ohio, Inc., Associated
Mariner Agency Texas, Inc., and Associated Mariner Agency New Mexico, Inc.

(11) Owns 50% interest in DJA Partners, a Delaware general partnership.

(12) Owns 49% of Melson Technologies Consulting, Inc., a Delaware corporation.

* Includes qualifying shares for Directors.

ITEM 31. AS OF NOVEMBER 1, 1996 THERE WERE NO CONTRACTHOLDERS.

ITEM 32. INDEMNIFICATION

Any person made a party to any action, suit, or proceeding by reason of the
fact that he, his testator or intestate, is or was a director, officer, or
employee of the Company or of any Company which he served as such at the request
of the Company, shall be indemnified by the Company against the reasonable
expenses, including attorney's fees, actually and necessarily incurred by him in
connection with the defense of such action, suit or proceeding, or in connection
with appeal therein, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such officer, Director, or
employee is liable for negligence or misconduct in the performance of his
duties. The Company may also reimburse to any Director, officer, or employee the
reasonable costs of settlement of any such action, suit, or proceeding, if it
shall be found by a majority of a committee composed of the Directors not
involved in the matter in controversy (whether or not a quorum) that it was in
the interest of the Company that such settlement be made and that such Director,
officer or employee was not guilty of negligence or misconduct. The amount to be
paid by way of indemnity shall be determined and paid, in each instance,
pursuant to action of the Board of Directors, and the stockholders shall be
given notice thereof in accordance with applicable provisions of law. Such right
of indemnification shall not be deemed exclusive of any other rights to which
such Director, officer, or employee may be entitled.

ITEM 33. BUSINESS AND OTHER CONNECTION OF INVESTMENT ADVISOR

None.

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<PAGE> 99

ITEM 34. PRINCIPAL UNDERWRITERS

(a) Diversified Investors Securities Corp. ("DISC") is the principal
underwriter of the Registrant. The names, titles and principal business
addresses of the officers and directors of "DISC" are as stated on Forms U-4 of
Form BD (File No. 8-45671) as declared effective May 18, 1993, as amended, the
text of which is herein incorporated by reference. Diversified Investment
Advisors, Inc. an affiliate of AUSA, acts as investment advisor and
administrator to each series of Diversified Investors Portfolios. With respect
to each series of Diversified Investors Portfolios, Diversified has contracted
for certain investment advisory services with one or more subadvisors.

(b) The names, titles and principal business addresses of the officers of
DISC are listed on Schedule A of Form BD for DISC (Registration No. 8-45691) and
Form U-4 filed by each individual officer, the text of which is hereby
incorporated by reference.

(c) Refer to Prospectus pages 7 and 23, "Charges" and Part B, Statement of
Additional Information, page 2, "Sale of Contracts/Principal Underwriter" for
information regarding compensation.

ITEM 35. LOCATION OF ACCOUNTS AND RECORDS

Accounts, books, and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are primarily maintained by AUSA Insurance Company, Inc. in whole or in part, at
its principal offices at 4 Manhattanville Road, Purchase, NY 10577.

ITEM 36. MANAGEMENT SERVICES

Not applicable.

ITEM 37. UNDERTAKINGS

(a) An undertaking to file a post-effective amendment, using financial
statements of the Registrant which need not be certified, within four to six
months from the effective date of the Registrant's 1933 Act registration
statement;

(b) Registrant hereby undertakes to file post-effective amendments to the
Registration Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16 months
old for so long as payments under the group variable annuity contract may be
accepted;

(c) Registrant hereby undertakes to include either (1) as part of any
application to purchase a Contract offered by the prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement of Additional
Information;

(d) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request.

(e) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.

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

(g) Registrant hereby represents that the fees and charges deducted under
the Contracts, in the aggregate, are reasonable in relation to the services
rendered; the expenses expected to be incurred and the risks assumed by the
insurance company.

C-7
<PAGE> 100

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this Registration Statement to be signed on its
behalf, in the County of Westchester and the State of New York, on this 19th day
of November, 1996.

DIVERSIFIED INVESTORS STRATEGIC

VARIABLE FUNDS
(Registrant)

By: /s/ TOM A. SCHLOSSBERG

------------------------------------
Tom A. Schlossberg

AUSA LIFE INSURANCE COMPANY, INC.
(Insurance Company)

By: /s/ TOM A. SCHLOSSBERG

------------------------------------
Tom A. Schlossberg
(Director and President)

Pursuant to the requirement of the Securities Act of 1933 this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------- ------------------
<C> <S> <C>
/s/ TOM A. SCHLOSSBERG Director and President November 19, 1996
- -------------------------------------
(Tom A. Schlossberg)
*/s/ ANDREW R. BAER Director November 19>, 1996
- -------------------------------------
(Andrew R. Baer)
*/s/ LARRY G. BROWN Director November 19>, 1996
- -------------------------------------
(Larry G. Brown)
*/s/ WILLIAM L. BUSLER Director November 19>, 1996
- -------------------------------------
(William L. Busler)
*/s/ JACK R. DYKHOUSE Director November 19>, 1996
- -------------------------------------
(Jack R. Dykhouse)
*/s/ STEVEN E. FRUSHTICK Director November 19>, 1996
- -------------------------------------
(Steven E. Frushtick)
*/s/ CARL T. Director November 19>, 1996
HANSON
- -------------------------------------
(Carl T. Hanson)
*By: /s/ TOM A. SCHLOSSBERG November 19>, 1996
- -------------------------------------
Tom A. Schlossberg
Attorney-in-Fact
*/s/ B. LARRY Director November 19>, 1996
JENKINS
- -------------------------------------
(B. Larry Jenkins)
</TABLE>

C-8
<PAGE> 101

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------- ------------------
<C> <S> <C>
*/s/ DOUGLAS C. KOLSRUD Director November 19, 1996
- -------------------------------------
(Douglas C. Kolsrud)

*/s/ VERA F. MIHAIC Director November 19, 1996
- -------------------------------------
(Vera F. Mihaic)

*/s/ PETER P. POST Director November 19, 1996
- -------------------------------------
(Peter P. Post)
</TABLE>

C-9
<PAGE> 102

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------- -------------
<C> <S> <C>
99. (4) Investment Advisory Contract.
99. (12) Opinion and Consent of Counsel as to the legality of the securities
being registered.
99. (13) Opinion and Consent of Independent Public Accountants.
</TABLE>

C-10

<PAGE> 1
INVESTMENT ADVISORY AGREEMENT

AGREEMENT made as of November __, 1996 by and between AUSA Life
Insurance Company, Inc. ("AUSA Life"), on behalf of The Diversified Investors
Strategic Variable Funds, a separate account of AUSA Life registered as a
management investment company under the Investment Company Act of 1940 (the
"1940 Act") (herein called the "Funds"), and Diversified Investment Advisors,
Inc. a Delaware corporation (herein called "Diversified").

WHEREAS, there are three distinct series, each of which is a subaccount
of the Funds, issuing its own units: Diversified Investors Conservative
Strategic Variable Fund, Diversified Investors Moderate Strategic Variable Fund
and Diversified Investors Aggressive Strategic Variable Fund (herein called
"Fund(s)"); and

WHEREAS, each Fund will purchase units of existing subaccounts of
Diversified Investors Variable Funds, a separate account of AUSA Life and a unit
investment trust under the 1940 Act (herein called "Underlying Diversified
Funds");

WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940; and

WHEREAS, AUSA Life desires to retain Diversified to render investment
advisory services to each of the Funds, and Diversified is willing to so render
such services on the terms hereinafter set forth;

NOW, THEREFORE, this Agreement

WITNESSETH:

In consideration of the promises and mutual covenants herein contained,
it is agreed between the parties hereto as follows:

1. AUSA Life hereby appoints Diversified to act as investment advisor
to each Fund for the period and on the terms set forth in this Agreement.
Diversified accepts such appointment and agrees to render the services herein
set forth for the compensation herein provided.

<PAGE> 2

(a) Subject to the general supervision of the Board of
Directors of AUSA Life and the Managing Board of the Funds, Diversified shall
provide each Fund with discretionary investment services. Specifically,
Diversified is responsible for supervising and directing the investments of each
Fund in accordance with each Fund's investment objectives, program, and
restrictions as provided in the then current Prospectus and the Statement of
Additional Information. Diversified is also responsible for effecting all
security transactions on behalf of each Fund. The Funds will invest their assets
in the shares of the Underlying Diversified Funds, and such investment will be
made without the payment of any commission or other sales charges.

As manager of the assets of the Funds, Diversified shall make
investments for the account of the Fund in accordance with Diversified's best
judgment and within the Funds' investment objectives, guidelines, and
restrictions, the 1940 Act, New York Insurance Law and applicable provisions of
the Internal Revenue Code of 1986 subject to policy decisions adopted by the
Managing Board.

(b) Diversified shall furnish to the Managing Board periodic
reports on the investment performance of the Funds and on the performance of its
obligations under this Agreement and shall supply such additional reports and
information as AUSA Life officers or the Managing Board shall reasonably
request.

(c) Diversified shall at its expense provide each Fund with all
services, equipment and facilities as may be required to perform its obligations
under this Agreement including, but not limited to:

(i) providing each Fund with certain administrative
services, including: maintaining records,
monitoring the financial, accounting, and
administrative functions of each Fund; maintaining
liaison with the agents employed by each Fund such
as the custodian; assisting each Fund in the
coordination of such agents' activities;

(ii) providing office space, equipment and clerical
personnel necessary for maintaining the
organization of the Funds and for performing
administrative and management functions;

(iii) supervising the overall administration of the
Funds, including negotiation of contracts and fees
with and the monitoring of performance and billings
of the Funds' independent contractors or agents;

<PAGE> 3

(iv) preparing and, if applicable, filing all documents
required for compliance by the Funds with
applicable laws and regulations, including
registration statements, registration fee filings,
semi-annual and annual reports to investors and
proxy statements and tax returns;

(v) preparation of agendas and supporting documents for
and minutes of meeting of Managing Board,
committees and investors; and

(vi) maintaining books and records of the Funds.

(d) Diversified shall have no discretion with respect to the
exercise of voting rights; and, whenever an Underlying Diversified Fund shall
hold a meeting of unit holders and request the Fund to vote on a matter, AUSA
Life will cast all of its votes in the same proportion as the votes of the
shareholders. Diversified shall give the Funds the benefit of Diversified's best
judgment and efforts in rendering services under this Agreement. As an
inducement to Diversified's undertaking to render these services, AUSA Life
agrees that Diversified shall not be liable under this Agreement for any mistake
in judgment or in any other event whatsoever PROVIDED that nothing in this
Agreement shall be deemed to protect or purport to protect Diversified against
any liability to the Funds or its investors to which Diversified would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of its advisory duties under this Agreement or by reason of its
reckless disregard of its obligations and duties hereunder.

2. In consideration of the services to be rendered by Diversified under
this Agreement, each Fund shall pay Diversified a fee accrued daily and paid
monthly at an annual rate equal to 0.20% of each Fund's average daily net
assets. If the fees payable to Diversified pursuant to this paragraph 2 begin to
accrue before the end of any month, or, if this Agreement terminates before the
end of any month, the fees for the period from that date to the end of that
month or from the beginning of that month to the date of termination, as the
case may be, shall be prorated according to the proportion which the period
bears to the full month in which the effectiveness or termination occurs. For
purposes of calculating the monthly fees, the value of the net assets of each
Fund shall be computed in the manner specified in its Regulation Statement on
Form N-3 for the computation of net asset value. For purposes of this Agreement,
a "business day" is any day the New York Stock Exchange is open for trading.

3
<PAGE> 4

In compliance with the requirements of Rule 31a-3 under the
1940 Act, Diversified hereby agrees that all records which it maintains for the
Funds are property of the Funds and further agrees to surrender promptly to the
Funds any such records upon the Funds' request. Diversified further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such
records required to be maintained by Rule 31a- 1 under the 1940 Act.

3. This Agreement shall be effective as to the Funds as of the date the
Funds commence investment operations after this Agreement and shall have been
approved by the Managing Board and the investor(s) in the Funds in the manner
contemplated by Section 15 of the 1940 Act and, unless sooner terminated as
provided herein, shall continue until the second anniversary of the date hereof.
Thereafter, if not terminated, this Agreement shall continue in effect as to
each Fund for successive periods of 12 months each, provided such continuance is
specifically approved at least annually by the vote of a majority of those
members of the Managing Board who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval; and either (a) by the vote of a majority of
the full Managing Board or (b) by vote of a majority of the outstanding voting
securities of the Funds; provided, however, that this Agreement may be
terminated by any or all of the three Funds at any time, without the payment of
any penalty, by the Managing Board or by vote of a majority of the outstanding
voting securities of the Funds on 60 days' written notice to Diversified, or by
Diversified as to any or all of the three Funds at any time, without payment of
any penalty, on 90 days' written notice to the Funds. This Agreement will
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities",
"interested person" and "assignment" shall have the same meanings as such terms
have in the 1940 Act and the rule and regulatory constructions thereunder.) This
Agreement may be terminated with respect to any Fund and remain in full force
and effect for those Funds which were not specifically terminated.

4. Except to the extent necessary to perform Diversified's obligations
under this Agreement, nothing herein shall be deemed to limit or restrict the
right of Diversified, or any affiliate of Diversified, or any employee of
Diversified, to engage in any other business or devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other trust,
corporation, firm, individual or association.

4
<PAGE> 5

5. The investment management services of Diversified to the Funds under
this Agreement are not to be deemed exclusive as to Diversified and Diversified
will be free to render similar services to others.

Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.

No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge, or
termination is sought and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the outstanding
voting securities of the Funds.

This Agreement embodies the entire agreement and understanding
between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law.

6. This Agreement shall be construed in accordance with the laws of the
State of New York provided that nothing herein shall be construed in a manner
inconsistent with the requirements of 1940 Act.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.

Attest: The Diversified Investors
Strategic Variable Funds

By:
- -------------------------- -------------------------------------

Attest: Diversified Investment Advisors, Inc.
By:
- -------------------------- -------------------------------------

<PAGE> 1
AUSA LIFE INSURANCE COMPANY, INC.
_____________________________________________________________________________
_____________________________________________________________________________

4 Manhattanville Road Purchase, New York 10577

November 18, 1996

AUSA Life Insurance Company, Inc.
4 Manhattanville Road
Purchase, NY 10677

Dear Sir or Madam:

In my capacity as Vice President of AUSA Life Insurance Company, Inc.
("AUSA"), I have acted as counsel to AUSA in connection with the establishment
of Diversified Investors Strategic Variable Funds ("DISVF") on April 15, 1996 by
the Board of Directors of AUSA as a separate account for assets applicable to
certain group variable annuity contracts) ("Contract(s)"), pursuant to the
provisions of Section 4240 of the New York Insurance Laws. I have participated
in the preparation and review of the Registration Statement on Form N-3 which
was filed by AUSA with the Securities and Exchange Commission under the
Securities Act of 1933 on July 22, 1996 (Registration No. 333-8543) for the
registration of a Contract(s).

I am of the following opinion:

(1) AUSA has been duly organized under the laws of New York and
is a validly existing corporation, and has been duly authorized to
issue the Contract(s).

(2) DISVF has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New York law.

(3) The portion of the assets to be held in DISVF equal to the
reserve and other liabilities for variable benefits under the
Contract(s) is not chargeable with liabilities arising out of any other
business AUSA may conduct.

(4) The Contract(s), when issued as contemplated by the
Registration Statement, will be legal, validly issued, and a binding
obligation of AUSA in accordance with its terms.

In arriving at the foregoing opinon, I have made such examination of
law and examined such records and other documents as I judged to be necessary
or appropriate.

I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.

Very truly yours,

Robert F. Colby
Vice President & Assistant Secretary

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[LOGO] Suite 3400 Phone 515.243.2727
801 Grand Avenue
Des Moines, Iowa 50309-2764

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Independent
Accountants" in both the Prospectus and the Statement of Additional
Information, and to the use of our report dated February 23, 1996 with
respect to the statutory-basis financial statements and Schedules of AUSA Life
Insurance Company, Inc., included in Registration Statement (Form N-3 Nos.
333-08543 and 811-07717) and related Prospectus of Diversified Investors
Strategic Variable Funds.

/s/ Ernst & Young LLP

Des Moines, Iowa
November 11, 1996

Ernst & Young LLP is a member of Ernst & Young International, Ltd.