DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS, N-3 EL, 1996-07-22

DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
N-3 EL, 1996-07-22

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<PAGE> 1

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

REGISTRATION NOS. 333-
811-07717
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

FORM N-3
------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. / /

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/

AMENDMENT NO. / /
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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........................................ Management-Investment Advisory
Services
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, 457(F), 72 (FLEXIBLE ANNUITIES)
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 , 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 , 1996
<PAGE> 4

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................ 3
Synopsis................................... 5
Table of Fees............................ 5
The Contracts............................ 6
Diversified Investors Variable Funds..... 7
Charges.................................. 7
Credit And Allocation Of Purchase
Payments............................... 7
Redemption............................... 7
Transfers................................ 8
Payment Options.......................... 8
Voting Rights............................ 8
Death Benefit............................ 8
Distribution Of The Contracts............ 8
Financial Information.................... 8
AUSA....................................... 8
Diversified Investors Strategic Variable
Funds.................................... 8
Investment Objectives of the
Subaccounts............................ 9
Description of the Underlying Diversified
Subaccounts/Portfolios................. 12
Underlying Diversified Subaccounts
Available to all Subaccounts........... 12
Underlying Diversified Subaccounts Also
Available to the Moderate and
Aggressive Funds....................... 15
Special Risks and Considerations......... 17
Investment Policies of the Underlying
Diversified Subaccounts/Portfolios..... 17
Hub and Spoke Structure.................. 19
Management............................... 19
Charges.................................... 23
Charges for Mortality and Expense
Risks.................................. 23
Annual Contract Charge................... 24
Investment Management Fee................ 24
Summary Of The Contracts................... 24
Eligible Purchasers...................... 24
Ownership................................ 25
Purchase Payments........................ 25
Employer Sponsored Plan Requirements..... 25
Rights Of The Participant Under The
Contract............................... 25
Rights Upon Suspension Of Contract or
Termination Of Plan.................... 26
403(b) Contract.......................... 26
401(a) Contract/401(k) Contract and
NQDC................................... 26
457, 457(f), Flexible Annuity, and 408
(IRA).................................. 26
Failure Of Qualification................. 26
Transfers................................ 26

<CAPTION>
PAGE
----
<S> <C>
Rights Reserved By AUSA.................... 27
Credit Of Purchase Payments................ 27
Allocation Of Purchase Payments.......... 27
Determination Of Unit Values............. 28
Death Benefit.............................. 28
Redemption During The Accumulation
Period................................... 29
Restrictions Under The Texas Optional
Retirement Program....................... 29
Payment Options............................ 29
Annuity Purchase Date.................... 30
Fixed Annuity............................ 30
Fixed Annuity Options.................... 30
Payments To A Beneficiary Following The
Annuitant's Death...................... 31
Voting Rights............................ 32
Distribution Of The Contracts............ 33
Federal Tax Status....................... 33
Tax Treatment of AUSA.................. 33
Taxation of Diversified Investors
Portfolios........................... 33
Section 403(b) Annuities............... 34
Section 401(a) Plans................... 35
Section 408 (IRA) Contracts............ 35
Minimum Distribution Requirements...... 35
Section 457 Plans...................... 36
Section 457(f) Plans................... 36
Section 72 Flexible Annuities.......... 36
Non-Qualified Deferred Compensation
Contracts............................ 36
Income Tax Withholding................. 36
Performance Data......................... 37
Independent Accountants.................. 38
Legal Proceedings........................ 38
Financial Statements..................... 38
Additional Information................... 38
Table of Contents of Statement of
Additional Information................. 39
Request For Diversified Investors
Strategic Variable Funds Statement of
Additional Information................. 40
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

TABLE OF FEES(1)

ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management Fees.............................................. 0.20%
Mortality and Expense Risk Fees.............................. None
Other Expenses............................................... None
-----
0.20%
=====
</TABLE>

ALTHOUGH AUSA WILL NOT ASSESS DIRECTLY MORTALITY AND EXPENSE RISK FEES
AGAINST ASSETS INVESTED IN DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS, EACH
SUBACCOUNT WILL BE SUBJECT TO THE MORTALITY AND EXPENSE RISK FEES ASSESSED BY
AUSA AGAINST ASSETS INVESTED IN UNDERLYING DIVERSIFIED SUBACCOUNTS. CURRENTLY,
SUCH FEES ARE CHARGED AT THE RATE OF 0.90%; HOWEVER, AUSA RESERVES THE RIGHT TO
CHARGE MAXIMUM MORTALITY AND EXPENSE RISK FEES OF UP TO 1.25% UPON NOTICE.
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 24.
In addition, each Subaccount will indirectly bear its pro rata share of
fees and expenses (including investment management fees) incurred by the series
of Underlying Diversified Portfolios and the investment returns of each
Subaccount will be net of such expenses. The following chart provides the
expense ratios (net of waivers and reimbursements) for each series of the
Underlying Diversified Portfolios in which a Subaccount will, indirectly,
invest.
<TABLE>
<CAPTION>
SERIES
CONSERVATIVE STRATEGIC VARIABLE FUND EXPENSES
----------------------------------------------------------- --------
<S> <C>
Money Market Series........................................ .10%
High Quality Bond Series................................... .40%
Intermed. Government Bond Series........................... .40%
Government/Corporate Bond Series........................... .40%
High Yield Bond Series..................................... .60%
Equity Income Series....................................... .46%
Equity Value Series........................................ .60%
Growth & Income Series..................................... .65%

<CAPTION>
SERIES
MODERATE AND AGGRESSIVE STRATEGIC VARIABLE FUNDS EXPENSES
----------------------------------------------------------- --------
<S> <C>
Money Market Series........................................ .10%
High Quality Bond Series................................... .40%
Intermed. Government Bond Series........................... .40%
Government/Corporate Bond Series........................... .40%
High Yield Bond Series..................................... .60%
Equity Income Series....................................... .46%
Equity Value Series........................................ .60%
Growth & Income Series..................................... .65%
Equity Growth Series....................................... .50%
Special Equity Series...................................... .85%
Aggressive Equity Series................................... 1.0%
International Equity Series................................ .90%
</TABLE>

Based on the foregoing, the range of the average weighted expense ratio for
the Conservative Strategic Variable Fund is expected to be % to %, for
the Moderate Strategic Variable Fund % to %

5
<PAGE> 8

and for the Aggressive Strategic Variable Fund % to %. A range is
provided since the average assets of the Subaccounts invested in each of the
Underlying Diversified Subaccounts will fluctuate.

The purpose of this table is to assist you in understanding the various
costs and expenses that you will bear directly and indirectly and reflects
expenses of the separate account as well as the Underlying Diversified
Subaccounts. (See Charges, below, for a more complete description of applicable
costs and expenses.)

Example

If you surrender your contract at the end of the applicable time period,
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........... $ $
Moderate Strategic Variable Fund...............
Aggressive Strategic Variable Fund.............
</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 and the Section 457(f) Contract will provide deferred compensation
which is not eligible for deferred tax treatment to these same organizations.
The Section 72 (flexible annuity) Contract will fund after-tax benefits. 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), Section
457 and Section 457(f) 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. As to the
Section 72 flexible annuities Contract, the employer will make Purchase Payments
for each participating employee pursuant to a salary deduction agreement. 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 deduction agreement or by the Participant.

6
<PAGE> 9

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 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. (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.

7
<PAGE> 10

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.

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).

FINANCIAL INFORMATION

Information about the performance of Diversified Investors Strategic
Variable Funds is contained in the Annual Report of Diversified Investors
Strategic Variable Funds which is available, free of charge, by contacting AUSA
at the address or telephone number set forth on the cover of this Prospectus.

AUSA

AUSA Life Insurance Company, Inc. is a stock life insurance company which
was organized under the laws of the State of New York. 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. Its principal place of business is 4 Manhattanville Road, Purchase, N.Y.
10577; (914) 697-8000.

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

8
<PAGE> 11

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 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 "Hub and Spoke(R) 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

9
<PAGE> 12

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 Jundt Associates, 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 & 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>

10
<PAGE> 13

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

11
<PAGE> 14

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 "Hub & Spoke(R) 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

12
<PAGE> 15

instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations 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

13
<PAGE> 16

average maturity (or dollar-weighted average life in the case of mortgage-backed
securities) may be longer 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

14
<PAGE> 17

obligations, meet projected goals, or obtain additional financing may be
impaired. The Portfolio may choose, 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

15
<PAGE> 18

Equity Growth Portfolio seeks to achieve its investment objective by investing
primarily in a diversified 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

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<PAGE> 19

the World Bank, and those listed in World Bank publications as developing. While
the Advisers believe that 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

17
<PAGE> 20

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.

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.

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<PAGE> 21

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 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).

Hub & Spoke(R) Structure

AUSA and the Underlying Diversified Portfolios have licensed certain
proprietary rights, know-how and financial services referred to as Hub and
Spoke(R) from Signature Financial Group, Inc. ("Signature"). The Underlying
Diversified Subaccounts invest in the Underlying Diversified Portfolios through
Signature's Hub and Spoke(R) mutual fund method. Hub and Spoke(R) employs a
two-tier, master/feeder fund structure. Hub and Spoke(R) is a registered service
mark of Signature.

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.

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.

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.

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<PAGE> 22

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.

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> 23

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 Portfolio Merganser Capital 0.35 (2)
Intermediate Government Bond Management Corporation Capital 0.35 0.15
Portfolio Management Group
Government/Corporate Bond Capital Management Group 0.35 0.15
Portfolio
High-Yield Bond Portfolio Delaware Investment 0.55 (3)
Equity Income Portfolio Advisers Asset Management Group 0.45 0.25
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (4)
Growth & Income Portfolio Putnam Advisory Company, Inc. 0.60 (5)
Equity Growth Portfolio Jundt Associates, Inc. 0.70 0.625
Special Equity Portfolio (6) 0.80 0.50
Aggressive Equity Portfolio McKinley Capital Management 0.97 (7)
International Equity Portfolio Capital Guardian Trust Company 0.75 (8)
</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) 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.

(7) 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.

(8) 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-today 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.

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

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<PAGE> 24

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 Jundt Associates, Inc. ("Jundt"). Jundt was formed
in December 1972 and is owned by certain of its employees. Total assets under
management for all core equity clients at December 31, 1995 were approximately
$2.4 billion, $363 million of which were assets of registered investment
companies. The principal business address of Jundt is 1550 Utica Avenue South,
Suite 950, St. Louis Park, MN 55416. Investment management decisions of Jundt
are made by committee and not by managers individually.

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.

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<PAGE> 25

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 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%).

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<PAGE> 26

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. 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.

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).

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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. As to the
Section 72 flexible annuities Contract, the employer will make Purchase Payments
for each participating employee pursuant to a salary deduction agreement. 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 deduction 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, Section 457 and Section 457(b) 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 23) 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 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.

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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, 457(f), Flexible Annuity, 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, 457(f), Flexible Annuity, 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 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

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<PAGE> 29

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.

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 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

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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.

DEATH BENEFIT

Under Section 403(b), Section 457, Section 457(f), flexible annuity and
408(IRA) Contract, if a Participant dies before the Annuity Purchase Date (See
"Annuity Purchase Date" on page 23), 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 27). 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
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.

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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, Section 457(f), flexible annuity 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.

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, Section 457(f), flexible
annuity 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 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

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<PAGE> 32

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
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

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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 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 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.

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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 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.

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<PAGE> 35

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 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 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.

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<PAGE> 36

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, (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.

34
<PAGE> 37

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 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.

35
<PAGE> 38

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.

SECTION 457(f) PLANS

In the case of a Plan for an eligible employer providing for the deferral
of compensation for an employee but which is not eligible for deferred tax
treatment, the compensation shall be included in the gross income of the
Participant or beneficiary for the first taxable year in which there is no
substantial risk of forfeiture of the rights to such compensation and taxed in
accordance with Section 72 of the Code.

SECTION 72 FLEXIBLE ANNUITIES

The term annuity includes all periodic payments resulting from the
systematic liquidation of a principal sum. Section 72 determines what portion of
each payment is excludable from gross income as a return of the purchaser's
investment and what portion is taxed as interest earned on that investment.

Section 72 of the Code places a penalty on premature distributions but
generally exempts qualified distributions from a qualified retirement plan.

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> 39

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

37
<PAGE> 40

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:

<TABLE>
<CAPTION>
3
1 YEAR YEARS SINCE INCEPTION
------ ------ ---------------
<S> <C> <C> <C>
Conservative Fund..........................
Moderate Fund..............................
Aggressive Fund............................
</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. The financial statements of Diversified Investors Strategic
Variable Funds included in the Statement of Additional Information have been
audited by Coopers & Lybrand L.L.P., independent accountants, New York, New
York.

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.

38
<PAGE> 41

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
Financial Statements of AUSA.......................................................... 23
Appendix.............................................................................. A-1
Index to Financial Statements......................................................... F-1
</TABLE>

39
<PAGE> 42

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

- --------------------------------------------------------------------------------
40
<PAGE> 43

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>

41
<PAGE> 44

STATEMENT OF ADDITIONAL INFORMATION

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 , 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>
<CAPTION>
ITEM PAGE
- -------------------------------------------------------------------------------------- ----
<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
Financial Statements of AUSA.......................................................... 23
Appendix.............................................................................. A-1
Index To Financial Statements......................................................... F-1
</TABLE>
<PAGE> 45

INDEPENDENT ACCOUNTANTS

The financial statements of Diversified Investors Strategic Variable Funds
appearing on the following pages have been audited by Coopers & Lybrand L.L.P.,
independent accountants, New York, New York. 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

2
<PAGE> 46

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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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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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> 49

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> 54

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> 56

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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<PAGE> 57

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> 58

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> 60

(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.

Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission (Investment Company Act Release No. IC , ): 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.

17
<PAGE> 61

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> 62

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

19
<PAGE> 63

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.

20
<PAGE> 64

<TABLE>
<S> <C>
Tom A. Schlossberg*.......... President, Chief Executive Officer and Chairman of the
Managing Board; President, Diversified, 10/92 to present;
Executive Vice President and Head of Pension Operations, The
Mutual Life Insurance Company of New York, 1/93 to 12/93.
Donald E. Flynn*............. Vice President, AEGON USA, Inc., 1988 to present; Executive
(Managing Board Member) Vice President, AEGON USA Investment Management, Inc., 1988 to
present; Vice President, AEGON USA Managed Portfolios, Inc.,
1988 to present.
Neal M. Jewell............... Consultant, January 1995; former Executive Vice President,
(Managing Board Member) American International Group Asset Management (since November
1991); Director of Overseas Pensions, American International
Group Asset Management (December 1990 to October 1991);
Executive Vice President Pensions, Mutual of New York (prior
to June 1989). His address is 355 Thornridge Drive, Stamford,
Connecticut 06903.
Eugene M. Mannella........... Vice President, Investment Management Services, Inc. (since
(Managing Board Member) August 1993); Senior Vice President Lehman Brothers Inc. (May
1986 to August 1993). His address is Two Orchard Neck Road,
Center Moriches, New York 11934.
Patricia L. Sawyer........... Executive Vice President and Director, Robert L. Smith & Co.
(Managing Board Member) (since July 1990); Vice President, American Express (September
1988 to July 1990). Her address is 256 East 10th Street, New
York, New York 10014.
Robert F. Colby.............. Secretary; Vice President and Chief Corporate Counsel, Mutual
Life Insurance Company of New York, 4/90 to 12/93; Vice
President and General Counsel, Diversified, 1/93 to present;
Vice President of DISC, 11/93 to present.
Alfred C. Sylvain............ Treasurer and Assistant Secretary; Vice President and
Treasurer of Diversified, 11/93 to present; Treasurer of DISC,
11/93 to present; Vice President, Mutual Life Insurance
Company of New York, 1/91 to 12/93.
John F. Hughes............... Assistant Secretary; Senior Counsel, Mutual Life Insurance
Company of New York, 1/88 to 12/93; Vice President and Senior
Counsel, Diversified, 11/93 to present; Assistant Secretary,
DISC 11/93 to present.
Catherine A. Mohr............ Assistant Secretary; Assistant Vice President, The Mutual Life
Insurance Company of New York, 1/91-12/93; Vice President,
Diversified, 1/93 to present.
</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.

21
<PAGE> 65

<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 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.

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.

22
<PAGE> 66

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.

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.

23
<PAGE> 67

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> 68

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> 69

FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

(TO BE FILED BY AMENDMENT)

F-1
<PAGE> 70

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........................................................................... F-
(2) With respect to AUSA Life Insurance Company, Inc. ("AUSA")
Report of Independent Auditors........................................................ F-
Balance Sheets -- Statutory Basis at December 31, 1995 and 1994....................... F-
Statements of Operations -- Statutory Basis for the year ended December 31, 1995 and
1994................................................................................ F-
Statements of Changes in Capital and Surplus -- Statutory Basis for the year ended
December 31, 1995 and 1994.......................................................... F-
Statements of Cash Flows -- Statutory Basis for the year ended December 31, 1995 and
1994................................................................................ F-
Notes to Financial Statements -- Statutory Basis...................................... F-
Financial Statement Schedules......................................................... F-
</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 Contracts.

(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.
- ---------------
* To be filed by amendment

C-1
<PAGE> 71

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.

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.)

C-2
<PAGE> 72

ITEM 31. AS OF THERE WERE 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.

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.

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<PAGE> 73

[CHART]

C-4
<PAGE> 74

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.

(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.

(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-5
<PAGE> 75

(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.

C-6
<PAGE> 76

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets the
requirements of Securities Act Rule 485(a) for the effectiveness of this
registration statement has duly caused this Registration Statement to be signed
on its behalf, by the undersigned thereunto duly authorized, in the County of
Westchester and the State of New York, on this 19th day of July, 1996.

DIVERSIFIED INVESTORS STRATETIC
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 July 19, 1996
- -------------------------------------
(Tom A. Schlossberg)
*/s/ ANDREW R. BAER Director July 19, 1996
- -------------------------------------
(Andrew R. Baer)
*/s/ LARRY G. BROWN Director July 19, 1996
- -------------------------------------
(Larry G. Brown)
*/s/ WILLIAM L. BUSLER Director July 19, 1996
- -------------------------------------
(William L. Busler)
*/s/ JACK R. DYKHOUSE Director July 19, 1996
- -------------------------------------
(Jack R. Dykhouse)
*/s/ STEVEN E. FRUSCHTICK Director July 19, 1996
- -------------------------------------
(Steven E. Fruschtick)
*/s/ CARL T. Director July 19, 1996
HANSON
- -------------------------------------
(Carl T. Hanson)
*By: /s/ TOM A. SCHLOSSBERG July 19, 1996
- -------------------------------------
Tom A. Schlossberg
Attorney-in-Fact
</TABLE>

C-7
<PAGE> 77

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------------ --------------
<C> <S> <C>
*/s/ B. LARRY Director July 19, 1996
JENKINS
- -------------------------------------
(B. Larry Jenkins)
*/s/ DOUGLAS C. KOLSRUD Director July 19, 1996
- -------------------------------------
(Douglas C. Kolsrud)
*/s/ VERA F. Director July 19, 1996
MIHAIC
- -------------------------------------
(Vera F. Mihaic)
*/s/ PETER P. Director July 19, 1996
POST
- -------------------------------------
(Peter P. Post)
</TABLE>

C-8
<PAGE> 78

EXHIBIT INDEX

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

- ---------------
* To be filed by amendment

C-9

<PAGE> 1
POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Tom A. Schlossberg, K.
Rone Baldwin, Robert F. Colby and John F. Hughes, and each of them, with full
powers of substitution as his true and lawful attorneys and agents to execute
in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by The Diversified
Investors Variable Funds (the "Company") with the Securities and Exchange
Commission under the Investment Company Act of 1940 and the Securities Act of
1933 and any and all instruments which such attorneys and agents, or any of
them, deem necessary or advisable to enable the Company to comply with such
Acts, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
30th day of November, 1993.

/s/ ALFRED J. SYLVAIN
-------------------------
Alfred J. Sylvain
<PAGE> 2
POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Tom A. Schlossberg, K.
Rone Baldwin, Robert F. Colby, Alfred J. Sylvain and John F. Hughes, and each
of them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by The
Diversified Investors Variable Funds (the "Company") with the Securities and
Exchange Commission under the Investment Company Act of 1940 and the Securities
Act of 1933 and any and all instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Company to comply with
such Acts, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
30th day of November, 1993.

/s/ EUGENE M. MANNELLA
---------------------------
Eugene M. Mannella
<PAGE> 3
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
30th day of November, 1993.

/s/ NEAL M. JEWELL
-------------------------
Neal M. Jewell
<PAGE> 4
POWER OF ATTORNEY

The undersigned hereby constitutes and appoints K. Rone Baldwin,
Robert F. Colby, Alfred J. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by The
Diversified Investors Variable Funds (the "Company") with the Securities and
Exchange Commission under the Investment Company Act of 1940 and the Securities
Act of 1933 and any and all instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Company to comply with
such Acts, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
30th day of November, 1993.

/s/ TOM A. SCHLOSSBERG
---------------------------
TOM A. SCHLOSSBERG

<PAGE> 5
POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each director of AUSA Life Insurance
Company, Inc. whose signature appears below constitutes and appoints Tom A.
Schlossberg and Craig D. Vermie and each of them, with full and several power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign one or more Registration Statements on Form N-4 under the
Investment Company Act of 1940 and Securities Act of 1933 (or such other form
or forms as the Securities and Exchange Commission may prescribe) relating to
certain group variable annuity contracts funded by the Diversified Investors
Variable Funds, a separate account of AUSA Life Insurance Company, Inc. which
will be registered as a unit investment trust under the Investment Company Act
of 1940, any or all amendments, including post-effective amendments, and
supplements to any such Registration Statements, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they or he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.

/s/ Harry W. Albright /s/ E. Kirby Warren
- --------------------------- ---------------------------
Harry W. Albright E. Kirby Warren

/s/ Larry G. Brown /s/ Andrew R. Baer
- --------------------------- ---------------------------
Larry G. Brown Andrew R. Baer

/s/ Tom A. Schlossberg /s/ William L. Busler
- --------------------------- ---------------------------
Tom A. Schlossberg William L. Busler

/s/ Patrick E. Falconio /s/ Jack R. Dykhouse
- --------------------------- ---------------------------
Patrick E. Falconio Jack R. Dykhouse

/s/ Carl T. Hanson /s/ Steven E. Frushtick
- --------------------------- ---------------------------
Carl T. Hanson Steven E. Frushtick

/s/ Vera F. Mihaic /s/ Douglas C. Kolsrud
- --------------------------- ---------------------------
Vera F. Mihaic Douglas C. Kolsrud

/s/ B. Larry Jenkins /s/ Peter P. Post
- --------------------------- ---------------------------
B. Larry Jenkins Peter P. Post

/s/ Cor H. Verhagen
- ---------------------------
Cor H. Verhagen