HOTCHKIS & WILEY VARIABLE TRUST, 497, 1999-04-30

HOTCHKIS & WILEY VARIABLE TRUST
497, 1999-04-30

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As Filed Pursuant To Rule 497
Registration No. 333-24349

PROSPECTUS
APRIL 30, 1999

HOTCHKIS AND WILEY VARIABLE TRUST

The following Funds are portfolios of the Hotchkis and Wiley Variable Trust.
They are investments for variable annuity contracts and variable life insurance
contracts issued by insurance companies that have contracts with the Funds.

EQUITY INCOME VIP PORTFOLIO

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests primarily in U.S. stocks.

INTERNATIONAL VIP PORTFOLIO

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.

TOTAL RETURN BOND VIP PORTFOLIO

Seeks to maximize long-term total return. The Fund invests in bonds of varying
maturities with a portfolio duration of two to eight years.

LOW DURATION VIP PORTFOLIO

Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in bonds of varying maturities with a portfolio duration of one to
three years.

The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
KEY FACTS.............................................. 3
INVESTMENT OBJECTIVES AND POLICIES..................... 5
INVESTMENT RISKS....................................... 10
THE ADVISOR AND PORTFOLIO MANAGERS..................... 15
HOW TO BUY AND REDEEM SHARES........................... 17
DIVIDENDS AND TAXES.................................... 18
FINANCIAL HIGHLIGHTS................................... 19
INFORMATION ABOUT THE FUNDS........................back cover
</TABLE>

Hotchkis & Wiley logo
<PAGE> 3

KEY FACTS
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INVESTMENT OBJECTIVES AND MAIN STRATEGIES

This section highlights important information about each Fund. Use this summary
to compare the Funds to other mutual funds that fund a portion of a variable
annuity or insurance contract. More detailed information follows the summary.

STOCK FUNDS

VALUE INVESTING

In investing the Stock Funds, Hotchkis and Wiley (the "Advisor") follows a value
style. This means that the Advisor buys stocks that it believes are currently
undervalued by the market and thus have a lower price than their true worth.
Typical value characteristics include:

- - low price-to-earnings ratio relative to the market
- - high dividend yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength

Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries.

This value discipline can sometimes prevent the Funds from investing in stocks
that are in well-known indexes, like the S&P 500 or similar large foreign
indexes.

<TABLE>
<CAPTION>
EQUITY INCOME VIP PORTFOLIO INTERNATIONAL VIP PORTFOLIO
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OBJECTIVE - current income - current income
- long-term growth of income - long-term growth of income
- growth of capital - growth of capital

MAIN INVESTMENTS - stocks of large U.S. companies - international stocks
</TABLE>

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BOND FUNDS

Each Bond Fund invests in a diversified portfolio of bonds of different
maturities, including U.S. Government securities, corporate bonds, asset-backed
securities and mortgage-backed securities. They differ in their objectives, the
credit quality of their portfolios and their volatility, as measured by their
"duration." Duration is a measure of how much the price of a bond would change
compared to a change in market interest rates. Duration is discussed further on
page 6.

<TABLE>
<CAPTION>
TOTAL RETURN BOND VIP PORTFOLIO LOW DURATION VIP PORTFOLIO
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OBJECTIVE - maximize long-term total - maximize total return
return - preserve capital

MAIN STRATEGIES
CREDIT QUALITY - at least 85% investment grade; - at least 70% in A rated or
up to 15% rated below investment better; up to 30% rated BBB/Baa;
grade, none below B up to 10% rated below
investment grade, none below B
DURATION 2-8 years 1-3 years
MORE VOLATILE LESS VOLATILE
</TABLE>

MAIN RISKS

As with any mutual fund, the value of a Fund's investments, and therefore the
value of Fund shares, may go up or down. For the Stock Funds, these changes may
occur because the stock market is rising or falling. At other times, there are
specific factors that may affect the value of a particular investment. For the
Bond Funds, these changes may occur in response to interest rate changes or
other factors that may affect a particular issuer or obligation. Generally, when
interest rates go up, the value of bonds goes down. The value of the Bond Funds'
shares also may be affected by market conditions and economic or political
developments. The longer the duration of a Bond Fund, the more the Fund's price
will go down if interest rates go up. If the value of the Funds' investments
goes down, you may lose money.

- - The International VIP Portfolio invests significantly in foreign securities,
which have additional risks. For example, the securities may go up or down in
value depending on foreign exchange rates, foreign political and economic
developments and U.S. and foreign laws relating to foreign investment. Foreign
securities may also be less liquid, more volatile and harder to value than
U.S. securities. These risks are heightened when the issuer of the securities
is a country or is in a country with an emerging capital market.

- - The Bond Funds invest in mortgage-backed and asset-backed securities. In
addition to normal bond risks, these securities are subject to prepayment
risk.

- - The Bond Funds invest in "junk" bonds, which have more credit risk and tend to
be less liquid than higher-rated securities.

See "Investment Risks" for more information about the risks associated with the
Funds.

The Funds are investments for variable annuity contracts and variable life
insurance contracts offered by separate accounts of insurance companies that
have contracts with the Funds ("Participating Insurance Companies"). The Funds
intend to operate in compliance with current state insurance laws and
regulations regarding such things as

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their concentration of investments and purchase and sale of futures contracts,
and this may impose limits on portfolio management.

INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

STOCK FUNDS

EQUITY INCOME VIP PORTFOLIO

The Equity Income VIP Portfolio's investment objective is to provide CURRENT
INCOME and LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The Equity Income VIP Portfolio invests mostly in common stocks of large U.S.
companies. Normally, the Fund invests at least 80% of its total assets in stocks
that pay dividends. It also may invest in stocks that don't pay dividends or
interest, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential.

The Equity Income VIP Portfolio can invest up to 10% of its total assets in
foreign securities.

INTERNATIONAL VIP PORTFOLIO

The International VIP Portfolio's investment objective is to provide CURRENT
INCOME and LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The International VIP Portfolio invests at least 65% of its total assets in
stocks in at least ten foreign markets. Ordinarily, the Fund invests in stocks
of companies located in the developed foreign markets and invests at least 80%
of its total assets in stocks that pay dividends. It also may invest in stocks
that don't pay dividends or interest, but have growth potential unrecognized by
the market or changes in business or management that indicate growth potential.

BOND FUNDS

TOTAL RETURN BOND VIP PORTFOLIO

The Total Return Bond VIP Portfolio's investment objective is to MAXIMIZE
LONG-TERM TOTAL RETURN. The Fund invests in bonds with a portfolio duration of
two to eight years. Investments are concentrated in areas of the bond market
(based on quality, sector, coupon or maturity) that the Advisor believes are
relatively undervalued.

LOW DURATION VIP PORTFOLIO

The Low Duration VIP Portfolio's investment objective is to MAXIMIZE TOTAL
RETURN, consistent with CAPITAL PRESERVATION. The Fund invests in bonds with a
portfolio duration of one to three years. The total rate of return for this Fund
is expected to rise and fall less than a longer duration bond fund like the
Total Return Bond VIP Portfolio.

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TYPES OF BOND FUND INVESTMENTS

The Bond Funds seek to achieve their objectives by investing mainly in
investment grade, interest-bearing securities of varying maturities. These
include:

- - U.S. Government securities
- - preferred stocks
- - mortgage-backed and other asset-backed securities
- - corporate bonds
- - bonds that are convertible into stocks
- - bank certificates of deposit, fixed time deposits and bankers' acceptances
- - repurchase agreements, reverse repurchase agreements and dollar rolls
- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities
- - obligations of international agencies or supra-national entities
- - municipal bonds

RATINGS LIMITATIONS

Total Return Bond VIP Portfolio

- - at least 85% of total assets rated at least investment grade or, if
short-term, the second highest quality grade, by a major rating agency such as
Moody's Investors Service ("Moody's") or Standard & Poor's ("S&P")
- - up to 15% of total assets rated below investment grade (below Baa by Moody's
or below BBB by S&P), but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality

Low Duration VIP Portfolio

- - at least 70% of total assets rated at least A or, if short-term, the second
highest quality grade, by a major rating agency
- - up to 30% of total assets rated Baa by Moody's or BBB by S&P
- - up to 10% of total assets rated below investment grade, but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality

After a Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security.

MATURITY AND DURATION REQUIREMENTS

Maturity. The EFFECTIVE MATURITY of a bond is the weighted average period over
which principal is expected to be repaid. STATED MATURITY is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.

Duration. The Bond Funds have different portfolio "durations." Duration
measures the potential volatility of the price of a bond or a portfolio of bonds
prior to maturity. Duration is the magnitude of the change in price of a bond
relative to a given change in the market interest rate. Duration incorporates a
bond's yield, coupon interest payments, final maturity, call and put features
and prepayment exposure into one measure.

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For any bond with interest payments occurring before principal is repaid,
duration is ordinarily less than maturity. Generally, the lower the stated or
coupon rate of interest of a bond, the longer the duration. The higher the
stated or coupon rate of interest of a bond, the shorter the duration. The
calculation of duration is based on estimates.

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the durations shown below, each Bond Fund's price would
change as follows:

<TABLE>
<CAPTION>
FUND DURATION CHANGE IN INTEREST RATES
---- -------- ------------------------
<S> <C> <C>
Total Return Bond VIP 4.5 yrs. 1% decline --> 4.5% gain in Fund price
1% rise --> 4.5% decline in Fund price
Low Duration VIP 2 yrs. 1% decline --> 2% gain in Fund price
1% rise --> 2% decline in Fund price
</TABLE>

Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the price of the Bond Funds and may correlate
with changes in interest rates. These factors can increase swings in the Funds'
share prices during periods of volatile interest rate changes.

FOREIGN BONDS

Each Bond Fund may invest in foreign bonds as follows:
- - up to 25% of total assets in foreign bonds that are denominated in U.S.
dollars
- - up to 15% of total assets in foreign bonds that are not denominated in U.S.
dollars
- - up to 15% of total assets in emerging market foreign bonds

MONEY MARKET INVESTMENTS

To meet redemptions and when waiting to invest cash receipts, the Funds may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Funds temporarily can invest up to 100% of their assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. The Funds may not achieve their
objectives using this type of investing.

PORTFOLIO TURNOVER

As a result of the strategies described above, the Bond Funds may have an annual
portfolio turnover rate above 100%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases or sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher brokerage commissions and other transaction costs and can
affect these Funds' performance. It also can result in a greater amount of
distributions as ordinary income rather than long-term capital gains.

TYPES OF SECURITIES USED IN PRINCIPAL STRATEGIES

U.S. GOVERNMENT SECURITIES

The Bond Funds can invest in U.S. Government securities. U.S. Government
securities include direct obligations issued by the United States Treasury, like
Treasury bills, certificates of indebtedness, notes, bonds and parts of notes or
bonds. U.S. Government agencies and instrumentalities that issue or guarantee
securities include the Federal National Mortgage Association ("Fannie Mae"),
Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan
Mortgage Association ("Freddie Mac"), Federal Financing Bank, and Student Loan
Marketing Association ("Sallie Mae").

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Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the agency to borrow from the Treasury. Others are
supported only by the credit of the agency and not by the Treasury. If the
securities are not backed by the full faith and credit of the United States, the
owner must look mainly to the agency issuing the obligation for repayment.

CORPORATE BONDS

The Bond Funds can invest in corporate bonds. These include variable and
floating rate bonds and corporate commercial paper.

The Bond Funds can invest in structured debentures and structured notes, which
are hybrid instruments with characteristics of both bonds and swap agreements.
The prices of structured debentures and structured notes can be more volatile
than and are often not correlated to other bonds.

The Bond Funds can invest in inverse floaters and tiered index bonds. In
general, the interest rates on tiered index bonds and inverse floaters move in
the opposite direction of prevailing interest rates.

ASSET-BACKED SECURITIES

The Bond Funds can invest in securities whose principal and interest payments
are backed by various types of assets, including automobile loans, credit card
loans, and home equity loans.

MORTGAGE-BACKED SECURITIES

The Bond Funds can invest in mortgage-backed securities, including mortgage
pass-through securities and collateralized mortgage obligations ("CMOs").

OTHER STRATEGIES

The Funds use certain other investment strategies:

- - BOND INVESTMENTS IN STOCK FUNDS: the Stock Funds buy common stocks and
securities with common stock characteristics, like convertible preferred
stocks, convertible bonds or warrants. They also may buy bonds. Convertible
securities and bonds will be rated investment grade (the four highest grades)
by a major rating agency like Moody's or S&P or, if unrated, be of comparable
quality in the Advisor's opinion. After a Stock Fund buys a bond or
convertible security, it may be given a lower rating or stop being rated. This
would not require the Fund to sell the security, but the Advisor will consider
the change in rating in deciding whether the Fund should keep the security.

- - REPURCHASE AGREEMENTS: the Funds can enter into repurchase agreements
involving U.S. Government securities with commercial banks or broker-dealers.
This is a method of short-term investment of cash where the Fund would buy
securities from a bank or broker-dealer and sell them back a short time later
(usually overnight) for a slightly higher price. Each Fund intends to be fully
"collateralized" as to such agreements, and the collateral will be
marked-to-market daily. But if the person obligated to repurchase from the
Fund defaults, there may be possible delays and expenses in liquidating the
securities, a decline in their value and loss of interest income.

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- - MUNICIPAL BONDS: the Bond Funds can invest in municipal bonds issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their agencies and instrumentalities.
These include general obligation bonds, revenue bonds and private activity
bonds.

- - REAL ESTATE INVESTMENT TRUSTS: the Funds can invest in securities of real
estate investment trusts or REITs.

- - DERIVATIVES: the Funds may use "derivatives," whose performance is derived
from the performance of an underlying asset. The Funds may use derivatives to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices; for liquidity; or as part of their overall investment
strategies. Types of derivatives that the Funds may use include futures
contracts (Bond Funds only), forward contracts and options. Derivatives allow
a Fund to increase or decrease the level of risk to which a Fund is exposed
more quickly and efficiently than transactions in other types of instruments.
Derivatives, however, are volatile and involve significant risks, including
credit risk, currency risk, leverage risk, liquidity risk and index risk. Each
Fund will mark liquid assets as segregated or enter offsetting positions to
cover its obligations, if any, under options, futures contracts and swap
agreements to avoid leveraging the Fund.

- - BORROW MONEY: each Fund can borrow up to 10% of the value of its total assets.
The Bond Funds can enter into reverse repurchase agreements in which they sell
securities and agree to buy them back for a fixed price at a later date. They
also can use dollar rolls in which they sell securities for delivery in the
current month while agreeing to buy very similar securities at a later date
from the same party. Reverse repurchase agreements and dollar rolls involve
leverage and are treated as borrowings by the Funds.

- - LEND SECURITIES: each Bond Fund can lend up to 33 1/3% of the value of its
total assets.

- - SHORT SALES AGAINST-THE-BOX: each Fund can borrow and sell "short" securities
when it also owns an equal amount of those securities (or their equivalent).
No more than 25% of a Fund's total assets can be held as collateral for short
sales at any one time.

- - WHEN-ISSUED or DELAYED DELIVERY: the Funds can buy securities on a when-issued
or delayed delivery basis. The Funds will mark liquid assets as segregated in
an amount equal to the when-issued securities.

- - CORPORATE LOANS: the Funds can invest in corporate loans. Commercial banks and
other financial institutions make corporate loans to companies that need
capital to grow or restructure. Borrowers generally pay interest on corporate
loans at rates that change in response to changes in market interest rates
such as the London Interbank Offered Rate ("LIBOR") or the prime rates of U.S.
banks. As a result, the value of corporate loan investments is generally less
responsive to shifts in market interest rates. Because the trading market for
corporate loans is less developed than the secondary market for bonds and
notes, the Fund may experience difficulties from time to time in selling its
corporate loans. Borrowers frequently provide collateral to secure repayment
of these obligations. Leading financial institutions often act as agent for a
broader group of lenders, generally referred to as a "syndicate". The
syndicate's agent arranges the corporate loans, holds collateral and accepts
payments of principal and interest. If the agent developed financial problems,
a Fund may not recover its investment, or there might be a delay in the Fund's
recovery. By investing in a corporate loan, a Fund becomes a member of the
syndicate.

- - ILLIQUID INVESTMENTS: each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities, it may be unable to quickly resell them or may be able to
sell them only at a price below current value.

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- restricted securities: Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities
that a Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no
active trading market.

Restricted securities may be illiquid. A Fund may be unable to sell them
on short notice or may be able to sell them only at a price below current
value. A Fund may get only limited information about the issuer, so it
may be less able to predict a loss. In addition, if Fund management
receives material adverse non-public information about the issuer, the
Fund will not be able to sell the security.

- 144A: Rule 144A securities are restricted securities that can be resold
to qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are considered
liquid.

INVESTMENT RISKS
- --------------------------------------------------------------------------------

This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.

MARKET AND SELECTION RISK

Market risk is the risk that the stock or bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies. These risks apply to all of the
Funds.

FOREIGN MARKET RISK

Since the Funds, particularly the International VIP Portfolio, may invest in
foreign securities, they offer the potential for more diversification than an
investment only in the United States. This is because stocks traded on foreign
markets have often (though not always) performed differently than stocks in the
United States. However, such investments involve special risks not present in
U.S. investments that can increase the chances that a Fund will lose money. In
particular, investments in foreign securities involve the following risks, which
are generally greater for investments in emerging markets:

- - The economies of some foreign markets often do not compare favorably with that
of the United States in areas such as growth of gross national product,
reinvestment of capital, resources, and balance of payments. Some of these
economies may rely heavily on particular industries or foreign capital. They
may be more vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers and other protectionist or
retaliatory measures.

- - Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets or the imposition of punitive
taxes.

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impair a Fund's ability to purchase or sell foreign securities or transfer its
assets or income back into the United States, or otherwise adversely affect a
Fund's operations.

- - Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts and political and social
instability. Legal remedies available to investors in some foreign countries
may be less extensive than those available to investors in the United States.

- - Because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for a Fund to buy and
sell securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United States.

- - Foreign markets may have different clearance and settlement procedures. In
certain markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, settlement may be delayed and a
Fund's assets may be uninvested and not earning returns. A Fund also may miss
investment opportunities or be unable to sell an investment because of these
delays.

- - The value of a Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.

- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.

- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect a Fund's non-U.S. holdings.

- - If a Fund purchases a bond issued by a foreign government, the government may
be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

A number of European countries have agreed to enter into EMU in an effort to
reduce trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) will be redenominated in the
euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including the companies in which the Funds invest, a Fund could
be adversely affected:

- - If the euro, or EMU as a whole, does not take effect as planned.

- - If a participating country withdraws from EMU.

- - If the computing, accounting and trading systems used by a Fund's service
providers, or by other entities with which a Fund or its service providers do
business, are not capable of recognizing the euro as a distinct currency
beginning with euro conversion.

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RISKS OF CONVERTIBLE SECURITIES

Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.
These risks apply to all of the Funds.

ADDITIONAL BOND RISKS

- - MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed securities will
be paid off more quickly than originally anticipated. Prepayment reduces the
yield to maturity and average life of the mortgage-backed securities. In
addition, when a Fund reinvests the proceeds of a prepayment, it may receive a
lower interest rate than the rate on the security that was prepaid. This risk
is known as "prepayment risk." When interest rates rise, certain types of
mortgage-backed securities will be paid off more slowly than originally
anticipated and the value of these securities will fall. This risk is known as
extension risk.

Because of prepayment risk and extension risk, mortgage-backed securities
react differently to changes in interest rates than other bonds. Small
movements in interest rates (both up and down) may quickly and significantly
reduce the value of certain mortgage-backed securities.

Mortgage-backed securities are issued by Federal government agencies like
Ginnie Mae, Freddie Mac or Fannie Mae. Principal and interest payments on
mortgage-backed securities issued by Federal government agencies are
guaranteed by either the Federal government or the government agency. This
means that such securities have very little credit risk. Other mortgage-backed
securities are issued by private corporations rather than Federal agencies.
Private mortgage-backed securities have credit risk as well as prepayment risk
and extension risk.

Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations (CMOs). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing
costs). CMOs are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams (tranches) with
different priority rights to portions of the underlying mortgage payments.
Certain CMO tranches may represent a right to receive interest only (IOs),
principal only (POs) or an amount that remains after other floating-rate
tranches are paid (an inverse floater). These securities are frequently
referred to as "mortgage derivatives" and may be extremely sensitive to
changes in interest rates. If a Fund invests in CMO tranches (including CMO
tranches issued by government agencies) and interest rates move in a manner
not anticipated by Fund management, it is possible that the Fund could lose
all or substantially all of its investment.

- - ASSET-BACKED SECURITIES -- Like traditional bonds, the value of asset-backed
securities typically increases when interest rates fall and decreases when
interest rates rise. Certain asset-backed securities may also be subject to
the risk of prepayment. In a period of declining interest rates, borrowers may
pay what they owe on the underlying assets more quickly than anticipated.
Prepayment reduces the yield to maturity and the average life of the asset-
backed securities. In addition, when a Fund reinvests the proceeds of a
prepayment, it may receive a lower

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interest rate than the rate on the security that was prepaid. In a period of
rising interest rates, prepayments may occur at a slower rate than expected.
As a result, the average maturity of the Fund's portfolio will increase. The
value of long-term securities changes more widely in response to changes in
interest rates than shorter-term securities.

- - CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be unable
to pay the interest or principal when due. The degree of credit risk depends
on both the financial condition of the issuer and on the terms of the specific
bonds.

- - INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term securities.

- - CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If
there is an early call of a bond, a Fund may lose income and may have to
invest the proceeds of the redemption in bonds with lower yields than the
called bond.

- - JUNK BONDS -- Junk bonds are bonds that are rated below investment grade by
the major rating agencies or are unrated securities that the Funds' Advisor
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Fund. Junk bonds generally
are less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer's bankruptcy, claims of other creditors may have priority
over the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject to greater call and
redemption risk than higher rated debt securities.

- - WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, delayed-delivery securities and forward
commitments involve the risk that the security a Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will not meet its obligation, in
which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.

- - VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations are
floating rate securities that consist of an interest in a long-term bond and
the conditional right to demand payment prior to the bond's maturity from a
bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, a Fund may be adversely affected. In
addition, these securities are subject to credit risk.

- - INDEXED AND INVERSE FLOATING RATE SECURITIES -- A Bond Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. A Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, inverse floaters change in value in a manner
that is opposite to most bonds -- that is, interest rates on inverse floaters
will decrease when short-term rates increase and increase when short-term
rates decrease. Investments in indexed securities and inverse floaters may
subject a Fund to the risks of reduced or eliminated interest payments.
Investments in indexed securities also may subject a Fund to loss of
principal. In addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the underlying interest
rate, which effectively leverages a Fund's investment. As a result, the market
value of such

13
<PAGE> 14

securities will generally be more volatile than that of fixed rate securities.
Both indexed securities and inverse floaters can be derivative securities and
can be considered speculative.

- - SOVEREIGN DEBT -- The Bond Funds may invest in sovereign debt securities.
These securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt subject the Funds to the risk that a government
entity may delay or refuse to pay interest or repayment of principal on its
sovereign debt. Some of these reasons may include cash flow problems,
insufficient foreign currency reserves, political considerations, the relative
size of its debt position to its economy or its failure to put in place
economic reforms required by the International Monetary Fund or other
multilateral agencies. If a government entity defaults, it may ask for more
time in which to pay or for further loans. There is no legal process for
collecting sovereign debts that a government does not pay.

- - CORPORATE LOANS -- Corporate loans are subject to the risk of loss of
principal and income. Borrowers do not always provide collateral for corporate
loans and the value of the collateral may not completely cover the borrower's
obligations at the time of a default. If a borrower files for protection from
its creditors under the U.S. bankruptcy laws, these laws may limit a Fund's
rights to its collateral. In addition, the value of collateral may erode
during a bankruptcy case. In the event of a bankruptcy, the holder of a
corporate loan may not recover its principal, may experience a long delay in
recovering its investment and may not receive interest during the delay.

RISKS OF DERIVATIVES

Derivatives involve the following risks:

- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to a Fund.

- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.

- - LEVERAGE RISK -- Leverage risk is the risk associated with certain types of
investments or trading strategies that relatively small market movements may
result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.

- - LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.

- - INDEX RISK -- If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, a Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite
direction to the index), may create leverage, to the extent that they increase
or decrease in value at a rate that is a multiple of the changes in the
applicable index.

Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Funds and
the risks associated with these instruments.

14
<PAGE> 15

THE ADVISOR AND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------

THE ADVISOR

Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400, has been the Funds' investment advisor since 1998. The
Advisor is a division of Merrill Lynch Asset Management, L.P., a Delaware
limited partnership. The Advisor supervises and arranges the purchase and sale
of securities held in the Funds' portfolios and administers the Funds. The
Advisor also manages other mutual funds and separate investment advisory
accounts.

The table below shows the annualized fees paid to the Advisor for the Funds'
fiscal period ended December 31, 1998 as a percentage of average net assets.

<TABLE>
<CAPTION>
FUND %
---- ---
<S> <C>
Equity Income VIP Portfolio................................. .75
International VIP Portfolio................................. .75
Low Duration VIP Portfolio.................................. .46
</TABLE>

No fees were paid to the Advisor by the Total Return Bond VIP Portfolio, which
had not begun investment operations by December 31, 1998. Under its advisory
contract with the Total Return Bond VIP Portfolio, the Fund will pay the Advisor
an annual fee of .55% of the Fund's average net assets. The Advisor has agreed
to make reimbursements so that the regular annual operating expenses of each
Fund will be limited as follows:

<TABLE>
<CAPTION>
EXPENSE LIMITS
(AS A PERCENTAGE OF
FUND AVERAGE NET ASSETS)
---- -------------------
<S> <C>
Equity Income VIP Portfolio............................. 1.15
International VIP Portfolio............................. 1.35
Total Return Bond VIP Portfolio......................... .65
Low Duration VIP Portfolio.............................. .58
</TABLE>

The Advisor has agreed to these expense limits for one year, and will thereafter
give shareholders prior notice if this reimbursement policy will change. For the
fiscal period ended December 31, 1998, the Funds' annualized operating expenses
without taking into consideration the Advisor's expense reimbursements were
7.81% (Equity Income VIP Portfolio) and 5.56% (Total Return Bond VIP Portfolio),
as a percentage of each such Fund's average net assets. No reimbursement was
made to the International VIP Portfolio.

The Advisor may pay administrative service fees to Participating Insurance
Companies. The Advisor also is allowed to allocate brokerage based on sales of
shares of funds managed by the Advisor but has not done so.

SUBADVISORS

The Advisor has entered into a subadvisory agreement with Mercury Asset
Management International Limited, 33 King William Street, London, England EC4R
9AS, and Merrill Lynch Asset Management U.K. Limited, Ropemaker Place, 25
Ropemaker Street, London, England E2Y 9LY, affiliated investment advisors that
are indirect subsidiaries of Merrill Lynch & Co., Inc. The subadvisory
arrangements are for investment research, recommendations and other
investment-related services to be provided to the International VIP Portfolio.
There is no increase in the aggregate fees paid by the Fund for these services.

15
<PAGE> 16

PORTFOLIO MANAGERS

The portfolio managers who have responsibility for the day-to-day management of
the Funds' portfolios are listed below.

EQUITY INCOME VIP PORTFOLIO

The portfolio managers of the Equity Income VIP Portfolio are Gail Bardin and
Sheldon Lieberman. Ms. Bardin is a managing director of the Advisor and began
co-managing the Fund in March 1998, when it began operations. She has been a
portfolio manager of the Advisor since 1988. Mr. Lieberman joined the Advisor in
1994 and began co-managing the Fund in March 1998. Before joining the Advisor,
Mr. Lieberman was the Chief Investment Officer for the Los Angeles County
Employees Retirement Association.

INTERNATIONAL VIP PORTFOLIO

The portfolio managers of the International VIP Portfolio are Sarah Ketterer,
Harry Hartford and David Chambers. Ms. Ketterer is a managing director of the
Advisor and has served as portfolio manager of the Fund since it began
operations in June 1998. Before joining the Advisor, Ms. Ketterer was with
Bankers Trust Company as an Associate from 1987 to 1990 and a Financial Analyst
with Dean Witter Reynolds from 1983 to 1985. Mr. Hartford is a managing director
of the Advisor and has served as a portfolio manager of the Fund since June
1998. Before joining the Advisor, Mr. Hartford was with the Investment Bank of
Ireland (now Bank of Ireland Asset Management) as a Senior Manager,
International and Global Equities, from 1985 to 1994. Mr. Chambers is a managing
director of the Advisor and has served as a portfolio manager of the Fund since
June 1998. He has been associated with Mercury Asset Management International in
London since July 1998. Before joining the Advisor, Mr. Chambers was with Baring
Asset Management, Inc. as Senior Vice President, Global Equities from 1992 to
1995 and Baring Brothers, London, England as Assistant Director, Corporate
Finance from 1990 to 1991.

BOND FUNDS

The portfolio managers of the Bond Funds are Roger DeBard, Michael Sanchez and
John Queen. Each has served as portfolio manager for the Funds since their
inception. Mr. DeBard is a managing director of the Advisor where he has been a
portfolio manager for more than five years. Mr. Sanchez joined the Advisor in
August 1996. Before joining the Advisor, Mr. Sanchez was with Provident
Investment Counsel as a Senior Vice President and portfolio manager from 1991 to
1995 and with ARCO Investment Management Company as a Director of Fixed Income
Investments from 1988 to 1991. Mr. Queen joined the Advisor in 1997. Before
joining the Advisor, Mr. Queen was associated with The Capital Group as a member
of an analyst team responsible for $8 billion in fixed-income assets.

A NOTE ABOUT YEAR 2000

Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). A Fund could be adversely affected
if the computer systems used by the Fund's management or other Fund service
providers do not properly address this problem before January 1, 2000. The
Funds' management expects to have addressed this problem before then, and does
not anticipate that the services it provides will be adversely affected. The
Funds' other service providers have told the Funds' management that they also
expect to resolve the Year 2000 Problem, and the Funds' management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Funds could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Funds invest, and this could hurt the Funds' investment returns.

16
<PAGE> 17

HOW TO BUY AND REDEEM SHARES
- --------------------------------------------------------------------------------

Investors may not purchase or redeem shares of the Funds directly, but only
through variable annuity contracts and variable life insurance policies offered
through the separate accounts of Participating Insurance Companies. You should
refer to the prospectus of the Participating Insurance Company's separate
account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select specific Funds as investment
options for the applicable contract or policy and how to redeem monies from the
applicable contract or policy.

The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the Funds based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectus describing the variable annuity contracts
and variable life insurance policies issued by the Participating Insurance
Companies) to be effected on that day under variable annuity contracts and
variable life insurance policies. Orders received by the Funds are effected on
business days only. Orders for the purchase of shares of a Fund are effected at
the net asset value per share next calculated after an order is received in
proper form by the Fund or its designee so long as payment for the shares is
received by the end of the next business day. Redemptions are effected at the
net asset value per share next calculated after receipt in proper form of a
redemption request by a Fund or its designee. The separate account of a
Participating Insurance Company shall be a designee of the Fund for receipt of
requests for purchase and redemption, and receipt by this designee shall
constitute receipt by the Fund, so long as the Fund receives notice of such
requests in accordance with applicable requirements on the next following
business day. Separate accounts must transmit purchase and redemption orders
promptly. Payment for redemptions will be made by the Funds within seven days
after the request is received. The Funds may suspend the right of redemption
under certain extraordinary circumstances in accordance with the rules of the
Securities and Exchange Commission.

The Funds do not assess any sales charges or redemption fees. Mortality and
expense risk fees and other charges may be assessed by Participating Insurance
Companies under the variable annuity contracts or variable life insurance
policies. The Participating Insurance Companies are required to describe these
fees in the prospectuses for the contracts or policies.

Shares of the Funds may be sold to and held by separate accounts that fund
variable annuity and variable life insurance contracts issued by Participating
Insurance Companies. The Funds currently do not foresee any disadvantages to the
holders of variable annuity contracts and variable life insurance policies of
Participating Insurance Companies arising from the fact that interests of the
holders of variable annuity contracts and variable life insurance policies may
differ due to differences of tax treatment or other considerations or due to
conflicts between the Participating Insurance Companies. Nevertheless, the
Trustees will monitor events to seek to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. Should a material irreconcilable
conflict arise between the holders of variable annuity contracts and variable
life insurance policies of Participating Insurance Companies, the Participating
Insurance Companies may be required to withdraw the assets allocable to some or
all of the separate accounts from the Funds. Any such withdrawal could disrupt
orderly portfolio management to the potential detriment of such holders. The
variable annuity contracts and variable life insurance policies are described in
the separate prospectuses issued by the Participating Insurance Companies. The
Funds assume no responsibility for such prospectuses.

17
<PAGE> 18

DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS AND DISTRIBUTIONS

The Funds pay income dividends, if any, as follows:

<TABLE>
<S> <C>
Monthly Total Return Bond VIP Portfolio
Low Duration VIP Portfolio
Quarterly Equity Income VIP Portfolio
Yearly International VIP Portfolio
</TABLE>

The Funds pay distributions of any net realized short-term gains and any net
capital gains every year. See the prospectuses for variable annuity contracts or
variable life insurance policies issued by Participating Insurance Companies for
additional information.

TAXES

Each Fund will be treated as a separate entity for federal tax purposes. The
Funds have elected to qualify and intend to remain qualified as regulated
investment companies under Subchapter M of the Internal Revenue Code. If so
qualified, a Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year in
which it distributes to its shareholders at least 90% of its net investment
income earned in the fiscal year.

A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests in the
Code and U.S. Treasury regulations. If, as is intended, each Fund meets these
tests and complies with certain other conditions, a segregated asset account
investing solely in shares of a Fund will also be deemed to meet these
diversification requirements. A failure of a Fund to qualify as a regulated
investment company or to meet these conditions and to comply with these tests
could cause the owners of variable annuity contracts and variable life insurance
policies based on such accounts to recognize ordinary income each year in the
amount of any net appreciation of such contract or policy during the year
(including the annual costs of life insurance, if any, provided under such
policy).

The tax consequences of an investment in a Fund are governed by the terms of the
variable annuity or variable life insurance plan through which you invest and
the tax rules governing such annuities and plans. Please refer to the prospectus
for the variable annuity or variable life insurance plan through which you are
investing.

18
<PAGE> 19

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The financial highlights tables are intended to help you understand each Fund's
financial performance for the period since it began operations. Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate that an investor would have earned (or
lost) on an investment in a Fund (assuming reinvestment of all dividends and
distributions, but excluding insurance-related fees and expenses). These
financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Funds' financial statements are included in the SAI
and the Funds' annual report, which are available upon request. Further
performance information is contained in the annual report. No financial
highlights are given for the Total Return Bond VIP Portfolio because investment
operations had not begun as of the Funds' fiscal year-end.

<TABLE>
<CAPTION>
March 18, 1998*
through
EQUITY INCOME VIP PORTFOLIO December 31, 1998
- -------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
--------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.14
Net realized and unrealized loss on investments......... (0.75)
--------
Total from investment operations........................ (0.61)
--------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.12)
--------
Net Asset Value, End of Period.............................. $ 9.27
========
TOTAL RETURN(1)............................................. (6.04)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $988,304
Ratio of expenses to average net assets(2):
Before expense reimbursement.............................. 7.81%
After expense reimbursement............................... 1.15%
Ratio of net investment income to average net assets(2):
Before expense reimbursement............................ (4.95)%
After expense reimbursement............................. 1.71%
Portfolio turnover rate(1).................................. 12%
</TABLE>

* Commencement of operations.
(1) Not annualized.
(2) Annualized.

19
<PAGE> 20

<TABLE>
<CAPTION>
June 10, 1998*
through
INTERNATIONAL VIP PORTFOLIO December 31, 1998
- -------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.04
Net realized and unrealized loss on investments......... (0.48)
------------
Total from investment operations.................... (0.44)
------------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.04)
------------
Net Asset Value, End of Period.............................. $ 9.52
============
TOTAL RETURN(1)............................................. (4.38)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $289,134,958
Ratio of expenses to average net assets(2):
Before expense reimbursement.............................. 1.05%
After expense reimbursement............................... 1.05%
Ratio of net investment income to average net assets(2):
Before expense reimbursement.............................. 1.09%
After expense reimbursement............................... 1.09%
Portfolio turnover rate(1).................................. 24%
</TABLE>

* Commencement of operations.
(1) Not annualized.
(2) Annualized.

20
<PAGE> 21

<TABLE>
<CAPTION>
March 18, 1998*
through
LOW DURATION VIP PORTFOLIO December 31, 1998
- ----------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.46
Net realized and unrealized loss on investments......... (0.03)
----------
Total from investment operations........................ 0.43
----------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.45)
----------
Net Asset Value, End of Period.............................. $ 9.98
==========
TOTAL RETURN(1)............................................. 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $1,723,748
Ratio of expenses to average net assets(2):
Before expense reimbursement.............................. 5.56%
After expense reimbursement............................... 0.58%
Ratio of net investment income to average net assets(2):
Before expense reimbursement.............................. 0.47%
After expense reimbursement............................... 5.45%
Portfolio turnover rate..................................... 296%
</TABLE>

* Commencement of operations.
(1) Not annualized.
(2) Annualized.

21
<PAGE> 22

HOTCHKIS AND WILEY VARIABLE TRUST

725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017

800-236-4479

INFORMATION ABOUT THE FUNDS

Please read this Prospectus before you invest in the Funds. Keep the Prospectus
for future reference. You can get additional information about the Funds in:

- - Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)

- - Annual Report (contains a discussion of market conditions and investment
strategies that affected Fund performance)

- - Semi-annual Report

To get this information and other information regarding the Funds free of charge
or for shareholder questions, contact:

Firstar Mutual Fund Services, LLC
615 East Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 236-4479

Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009

- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied
- - the information is available at the SEC's Internet site at http://www.sec.gov

- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section

You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.

Investment Company Act File No. 811-08163
PROSPECTUS

APRIL 30, 1999

[LOGO]
HOTCHKIS AND WILEY VARIABLE TRUST

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

EQUITY INCOME
VIP PORTFOLIO
---------------------------------------------------
INTERNATIONAL
VIP PORTFOLIO
---------------------------------------------------
TOTAL RETURN BOND
VIP PORTFOLIO
---------------------------------------------------
LOW DURATION
VIP PORTFOLIO
---------------------------------------------------

<PAGE> 23

PROSPECTUS
APRIL 30, 1999

HOTCHKIS AND WILEY VARIABLE TRUST

The Fund is a portfolio of the Hotchkis and Wiley Variable Trust. It is an
investment for variable annuity contracts and variable life insurance contracts
issued by insurance companies that have contracts with the Fund.

INTERNATIONAL VIP PORTFOLIO

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.

The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.
<PAGE> 24

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
KEY FACTS.............................................. 3
INVESTMENT OBJECTIVE AND POLICIES...................... 4
INVESTMENT RISKS....................................... 6
THE ADVISOR AND PORTFOLIO MANAGERS..................... 9
HOW TO BUY AND REDEEM SHARES........................... 10
DIVIDENDS AND TAXES.................................... 11
FINANCIAL HIGHLIGHTS................................... 12
INFORMATION ABOUT THE FUND.........................back cover
</TABLE>

Hotchkis & Wiley logo
<PAGE> 25

KEY FACTS
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE AND MAIN STRATEGIES

This section highlights important information about the Fund. Use this summary
to compare the Fund to other mutual funds that fund a portion of a variable
annuity or insurance contract. More detailed information follows the summary.

VALUE INVESTING

In investing the Fund, Hotchkis and Wiley (the "Advisor") follows a value style.
This means that the Advisor buys stocks that it believes are currently
undervalued by the market and thus have a lower price than their true worth.
Typical value characteristics include:

- - low price-to-earnings ratio relative to the market
- - high dividend yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength

This value discipline sometimes prevents investments in stocks that are in
well-known indexes, like the S&P 500 or similar large foreign indexes.

<TABLE>
<CAPTION>
INTERNATIONAL VIP PORTFOLIO
- ------------------------------------------------------------------------------------------------
<S> <C>
OBJECTIVE - current income
- long-term growth of income
- growth of capital

MAIN INVESTMENTS - international stocks
</TABLE>

MAIN RISKS

As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur because the
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the Fund's
investments goes down, you may lose money.

Investing in foreign securities has additional risks. For example, the
securities may go up or down in value depending on foreign exchange rates,
foreign political and economic developments and U.S. and foreign laws relating
to foreign investment. Foreign securities may also be less liquid, more volatile
and harder to value than U.S. securities. These risks are heightened when the
issuer of the securities is a country or is in a country with an emerging
capital market.

See "Investment Risks" for more information about the risks associated with the
Fund.

3
<PAGE> 26

The Fund is an investment for variable annuity contracts and variable life
insurance contracts offered by separate accounts of insurance companies that
have contracts with the Fund ("Participating Insurance Companies"). The Fund
intends to operate in compliance with current state insurance laws and
regulations regarding such things as its concentration of investments and
purchase and sale of futures contracts, and this may impose limits on portfolio
management.

INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

The Fund's investment objective is to provide CURRENT INCOME and LONG-TERM
GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The Fund invests at least 65% of its total assets in stocks in at least ten
foreign markets. Ordinarily, the Fund invests in stocks of companies located in
the developed foreign markets and invests at least 80% of its total assets in
stocks that pay dividends. It also may invest in stocks that don't pay dividends
or interest, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential.

MONEY MARKET INVESTMENTS

To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Fund temporarily can invest up to 100% of its assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. The Fund may not achieve its objective
using this type of investing.

OTHER STRATEGIES

The Fund uses certain other investment strategies:

- - BOND INVESTMENTS IN THE FUND: the Fund buys common stocks and securities with
common stock characteristics, like convertible preferred stocks, convertible
bonds or warrants. It also may buy bonds. Convertible securities and bonds
will be rated investment grade (the four highest grades) by a major rating
agency like Moody's Investors Service or Standard & Poor's or, if unrated, be
of comparable quality in the Advisor's opinion. After the Fund buys a bond or
convertible security, it may be given a lower rating or stop being rated. This
would not require the Fund to sell the security, but the Advisor will consider
the change in rating in deciding whether the Fund should keep the security.

- - REPURCHASE AGREEMENTS: the Fund can enter into repurchase agreements involving
U.S. Government securities with commercial banks or broker-dealers. This is a
method of short-term investment of cash where the Fund would buy securities
from a bank or broker-dealer and sell them back a short time later (usually
overnight) for a slightly higher price. The Fund intends to be fully
"collateralized" as to such agreements, and the collateral will be
marked-to-market daily. But if the person obligated to repurchase from the
Fund defaults, there may be possible delays and expenses in liquidating the
securities, a decline in their value and loss of interest income.

- - REAL ESTATE INVESTMENT TRUSTS: the Fund can invest in securities of real
estate investment trusts or REITs.

4
<PAGE> 27

- - DERIVATIVES: the Fund may use "derivatives," whose performance is derived from
the performance of an underlying asset. The Fund may use derivatives to hedge
against changes in foreign currency exchange rates or securities prices; for
liquidity; or as part of its overall investment strategies. Types of
derivatives that the Fund may use include forward contracts and options.
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments. Derivatives, however, are volatile and involve
significant risks, including credit risk, currency risk, leverage risk,
liquidity risk and index risk. The Fund will mark liquid assets as segregated
or enter offsetting positions to cover its obligations, if any, under options
and swap agreements to avoid leveraging the Fund.

- - BORROW MONEY: the Fund can borrow up to 10% of the value of its total assets.

- - SHORT SALES AGAINST-THE-BOX: the Fund can borrow and sell "short" securities
when it also owns an equal amount of those securities (or their equivalent).
No more than 25% of the Fund's total assets can be held as collateral for
short sales at any one time.

- - WHEN-ISSUED or DELAYED DELIVERY: the Fund can buy securities on a when-issued
or delayed delivery basis. The Fund will mark liquid assets as segregated in
an amount equal to the when-issued securities.

- - CORPORATE LOANS: the Fund can invest in corporate loans. Commercial banks and
other financial institutions make corporate loans to companies that need
capital to grow or restructure. Borrowers generally pay interest on corporate
loans at rates that change in response to changes in market interest rates
such as the London Interbank Offered Rate ("LIBOR") or the prime rates of U.S.
banks. As a result, the value of corporate loan investments is generally less
responsive to shifts in market interest rates. Because the trading market for
corporate loans is less developed than the secondary market for bonds and
notes, the Fund may experience difficulties from time to time in selling its
corporate loans. Borrowers frequently provide collateral to secure repayment
of these obligations. Leading financial institutions often act as agent for a
broader group of lenders, generally referred to as a "syndicate". The
syndicate's agent arranges the corporate loans, holds collateral and accepts
payments of principal and interest. If the agent developed financial problems,
the Fund may not recover its investment, or there might be a delay in the
Fund's recovery. By investing in a corporate loan, the Fund becomes a member
of the syndicate.

- - ILLIQUID INVESTMENTS: the Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund
buys illiquid securities, it may be unable to quickly resell them or may be
able to sell them only at a price below current value.

- restricted securities: Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that
the Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no
active trading market.

Restricted securities may be illiquid. The Fund may be unable to sell them
on short notice or may be able to sell them only at a price below current
value. The Fund may get only limited information about the issuer, so it
may be less able to predict a loss. In addition, if Fund management
receives material adverse non-public information about the issuer, the Fund
will not be able to sell the security.

- 144A: Rule 144A securities are restricted securities that can be resold to
qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are considered
liquid.

5
<PAGE> 28

INVESTMENT RISKS
- --------------------------------------------------------------------------------

This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.

MARKET AND SELECTION RISK

FOREIGN MARKET RISK

Since the Fund may invest in foreign securities, it offers the potential for
more diversification than an investment only in the United States. This is
because stocks traded on foreign markets have often (though not always)
performed differently than stocks in the United States. However, such
investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, investments
in foreign securities involve the following risks, which are generally greater
for investments in emerging markets:

- - The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices. They
could also impair the Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or otherwise
adversely affect the Fund's operations.

- - Because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for the Fund to buy and
sell securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United States.

- - Foreign markets may have different clearance and settlement procedures. In
certain markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, settlement may be delayed and the
Fund's assets may be uninvested and not earning returns. The Fund also may
miss investment opportunities or be unable to sell an investment because of
these delays.

6
<PAGE> 29

- - The value of the Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.

- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.

- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect the Fund's non-U.S. holdings.

- - If the Fund purchases a bond issued by a foreign government, the government
may be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

- - If the euro, or EMU as a whole, does not take effect as planned.

- - If a participating country withdraws from EMU.

- - If the computing, accounting and trading systems used by the Fund's service
providers, or by other entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency
beginning with euro conversion.

RISKS OF CONVERTIBLE SECURITIES

ADDITIONAL BOND RISKS

7
<PAGE> 30

- - CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If
there is an early call of a bond, the Fund may lose income and may have to
invest the proceeds of the redemption in bonds with lower yields than the
called bond.

- - WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, delayed-delivery securities and forward
commitments involve the risk that the security the Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will not meet its obligation, in
which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.

- - CORPORATE LOANS -- Corporate loans are subject to the risk of loss of
principal and income. Borrowers do not always provide collateral for corporate
loans and the value of the collateral may not completely cover the borrower's
obligations at the time of a default. If a borrower files for protection from
its creditors under the U.S. bankruptcy laws, these laws may limit the Fund's
rights to its collateral. In addition, the value of collateral may erode
during a bankruptcy case. In the event of a bankruptcy, the holder of a
corporate loan may not recover its principal, may experience a long delay in
recovering its investment and may not receive interest during the delay.

RISKS OF DERIVATIVES

Derivatives involve the following risks:

- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to the Fund.

- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.

- - INDEX RISK -- If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, the Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite
direction to the index), may create leverage, to the extent that they increase
or decrease in value at a rate that is a multiple of the changes in the
applicable index.

Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Fund and
the risks associated with these instruments.

8
<PAGE> 31

THE ADVISOR AND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------

THE ADVISOR

Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400, has been the Fund's investment advisor since 1998. The
Advisor is a division of Merrill Lynch Asset Management, L.P., a Delaware
limited partnership. The Advisor supervises and arranges the purchase and sale
of securities held in the Fund's portfolio and administers the Fund. The Advisor
also manages other mutual funds and separate investment advisory accounts.

The Fund paid an annualized fee to the Advisor for the fiscal period ended
December 31, 1998 of .75% of its average net assets. The Advisor has agreed to
make reimbursements so that the regular annual operating expenses of the Fund
will not exceed 1.35% of its average net assets. The Advisor has agreed to this
expense limit for one year, and will thereafter give shareholders prior notice
if this reimbursement policy will change. No reimbursement was made to the Fund
for the fiscal period ended December 31, 1998.

SUBADVISORS

The Advisor has entered into a subadvisory agreement with Mercury Asset
Management International Limited, 33 King William Street, London, England EC4R
9AS, and Merrill Lynch Asset Management U.K. Limited, Ropemaker Place, 25
Ropemaker Street, London, England E2Y 9LY, affiliated investment advisors that
are indirect subsidiaries of Merrill Lynch & Co., Inc. The subadvisory
arrangements are for investment research, recommendations and other
investment-related services to be provided to the Fund. There is no increase in
the aggregate fees paid by the Fund for these services.

PORTFOLIO MANAGERS

The portfolio managers who have responsibility for the day-to-day management of
the Fund's portfolio are Sarah Ketterer, Harry Hartford and David Chambers. Ms.
Ketterer is a managing director of the Advisor and has served as portfolio
manager of the Fund since it began operations in June 1998. Before joining the
Advisor, Ms. Ketterer was with Bankers Trust Company as an Associate from 1987
to 1990 and a Financial Analyst with Dean Witter Reynolds from 1983 to 1985. Mr.
Hartford is a managing director of the Advisor and has served as a portfolio
manager of the Fund since June 1998. Before joining the Advisor, Mr. Hartford
was with the Investment Bank of Ireland (now Bank of Ireland Asset Management)
as a Senior Manager, International and Global Equities, from 1985 to 1994. Mr.
Chambers is a managing director of the Advisor and has served as a portfolio
manager of the Fund since June 1998. He has been associated with Mercury Asset
Management International in London since July 1998. Before joining the Advisor,
Mr. Chambers was with Baring Asset Management, Inc. as Senior Vice President,
Global Equities from 1992 to 1995 and Baring Brothers, London, England as
Assistant Director, Corporate Finance from 1990 to 1991.

A NOTE ABOUT YEAR 2000

9
<PAGE> 32

properly address this problem before January 1, 2000. The Fund's management
expects to have addressed this problem before then, and does not anticipate that
the services it provides will be adversely affected. The Fund's other service
providers have told the Fund's management that they also expect to resolve the
Year 2000 Problem, and the Fund's management will continue to monitor the
situation as the Year 2000 approaches. However, if the problem has not been
fully addressed, the Fund could be negatively affected. The Year 2000 Problem
could also have a negative impact on the issuers of securities in which the Fund
invests, and this could hurt the Fund's investment returns.

HOW TO BUY AND REDEEM SHARES
- --------------------------------------------------------------------------------

Investors may not purchase or redeem shares of the Fund directly, but only
through variable annuity contracts and variable life insurance policies offered
through the separate accounts of Participating Insurance Companies. You should
refer to the prospectus of the Participating Insurance Company's separate
account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select the Fund as an investment option
for the applicable contract or policy and how to redeem monies from the
applicable contract or policy.

The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the Fund based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectus describing the variable annuity contracts
and variable life insurance policies issued by the Participating Insurance
Companies) to be effected on that day under variable annuity contracts and
variable life insurance policies. Orders received by the Fund are effected on
business days only. Orders for the purchase of shares of the Fund are effected
at the net asset value per share next calculated after an order is received in
proper form by the Fund or its designee so long as payment for the shares is
received by the end of the next business day. Redemptions are effected at the
net asset value per share next calculated after receipt in proper form of a
redemption request by the Fund or its designee. The separate account of a
Participating Insurance Company shall be a designee of the Fund for receipt of
requests for purchase and redemption, and receipt by this designee shall
constitute receipt by the Fund, so long as the Fund receives notice of such
requests in accordance with applicable requirements on the next following
business day. Separate accounts must transmit purchase and redemption orders
promptly. Payment for redemptions will be made by the Fund within seven days
after the request is received. The Fund may suspend the right of redemption
under certain extraordinary circumstances in accordance with the rules of the
Securities and Exchange Commission.

The Fund does not assess any sales charges or redemption fees. Mortality and
expense risk fees and other charges may be assessed by Participating Insurance
Companies under the variable annuity contracts or variable life insurance
policies. The Participating Insurance Companies are required to describe these
fees in the prospectuses for the contracts or policies.

Shares of the Fund may be sold to and held by separate accounts that fund
variable annuity and variable life insurance contracts issued by Participating
Insurance Companies. The Fund currently does not foresee any disadvantages to
the holders of variable annuity contracts and variable life insurance policies
of Participating Insurance Companies arising from the fact that interests of the
holders of variable annuity contracts and variable life insurance policies may
differ due to differences of tax treatment or other considerations or due to
conflicts between the Participating Insurance Companies. Nevertheless, the
Trustees will monitor events to seek to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. Should a material irreconcilable
conflict arise between the holders of variable annuity contracts and variable
life insurance policies of Participating Insurance Companies, the Participating
Insurance Companies may be

10
<PAGE> 33

required to withdraw the assets allocable to some or all of the separate
accounts from the Fund. Any such withdrawal could disrupt orderly portfolio
management to the potential detriment of such holders. The variable annuity
contracts and variable life insurance policies are described in the separate
prospectuses issued by the Participating Insurance Companies. The Fund assumes
no responsibility for such prospectuses.

DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS AND DISTRIBUTIONS

The Fund pays income dividends, if any, yearly.

The Fund pays distributions of any net realized short-term gains and any net
capital gains every year.

See the prospectuses for variable annuity contracts or variable life insurance
policies issued by Participating Insurance Companies for additional information.

TAXES

The Fund has elected to qualify and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year in
which it distributes to its shareholders at least 90% of its net investment
income earned in the fiscal year.

A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests in the
Code and U.S. Treasury regulations. If, as is intended, the Fund meets these
tests and complies with certain other conditions, a segregated asset account
investing solely in shares of the Fund will also be deemed to meet these
diversification requirements. A failure of the Fund to qualify as a regulated
investment company or to meet these conditions and to comply with these tests
could cause the owners of variable annuity contracts and variable life insurance
policies based on such accounts to recognize ordinary income each year in the
amount of any net appreciation of such contract or policy during the year
(including the annual costs of life insurance, if any, provided under such
policy).

The tax consequences of an investment in the Fund are governed by the terms of
the variable annuity or variable life insurance plan through which you invest
and the tax rules governing such annuities and plans. Please refer to the
prospectus for the variable annuity or variable life insurance plan through
which you are investing.

11
<PAGE> 34

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the period since it began operations. Certain
information reflects financial results for a single Fund share. The total return
in the table represents the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions, but excluding insurance-related fees and expenses). These
financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Fund's financial statements are included in the SAI
and the Fund's annual report, which are available upon request. Further
performance information is contained in the annual report.

* Commencement of operations.
(1) Not annualized.
(2) Annualized.

12
<PAGE> 35

HOTCHKIS AND WILEY VARIABLE TRUST

725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017

800-236-4479

INFORMATION ABOUT THE FUND

Please read this Prospectus before you invest in the Fund. Keep the Prospectus
for future reference. You can get additional information about the Fund in:

- - Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)

- - Annual Report (contains a discussion of market conditions and investment
strategies that affected Fund performance)

- - Semi-annual Report

To get this information free of charge or for shareholder questions, contact:

Firstar Mutual Fund Services, LLC
615 East Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 236-4479

Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009

- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied

- - the information is available at the SEC's Internet site at http://www.sec.gov

- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section

You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with
information that is different.

Investment Company Act File No. 811-08163
PROSPECTUS

APRIL 30, 1999

[LOGO]
HOTCHKIS AND WILEY VARIABLE TRUST

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

INTERNATIONAL
VIP PORTFOLIO
---------------------------------------------------

<PAGE> 36

HOTCHKIS AND WILEY VARIABLE TRUST

STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 1999

The Hotchkis and Wiley Variable Trust (the "Trust") is an investment company
which offers shares of four investment funds -- Equity Income VIP Portfolio,
International VIP Portfolio, Total Return Bond VIP Portfolio and Low Duration
VIP Portfolio (each, a "Fund" and collectively, the "Funds"). The Equity Income
VIP Portfolio and the International VIP Portfolio are sometimes referred to as
the "Stock Funds." The Total Return Bond VIP Portfolio and the Low Duration VIP
Portfolio are sometimes referred to as the "Bond Funds." The shares of the Funds
are offered only to separate accounts of participating life insurance companies
("Participating Insurance Companies") for the purpose of funding variable
annuity contracts and variable life insurance contracts.

This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated April 30, 1999 of the Funds.
Copies of the prospectus may be obtained at no charge from the Trust, 725 S.
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Hotchkis and Wiley (the
"Advisor") is the investment advisor to the Funds.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... B-2
Description of the Funds, Their Investments and Risks....... B-2
Investment Restrictions................................... B-2
Repurchase Agreements..................................... B-3
U.S. Government Securities................................ B-3
Municipal Obligations..................................... B-4
Corporate Debt Securities................................. B-6
Convertible Securities.................................... B-6
Mortgage-Related Securities............................... B-6
Asset-Backed Securities................................... B-10
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. B-10
Duration.................................................. B-11
Effective Maturity........................................ B-12
Derivative Instruments.................................... B-12
Foreign Securities........................................ B-16
Foreign Currency Options and Related Risks................ B-18
Forward Foreign Currency Exchange Contracts............... B-19
Foreign Investment Risks.................................. B-21
Risk Factors Relating to Investing in High Yield
Securities.............................................. B-23
Illiquid Securities....................................... B-23
Reverse Repurchase Agreements............................. B-25
Dollar Rolls.............................................. B-25
Borrowing................................................. B-25
Loans of Portfolio Securities............................. B-25
When-Issued Securities.................................... B-26
Real Estate Investment Trusts............................. B-26
Temporary Defensive Position.............................. B-26
Management.................................................. B-26
The Advisor............................................... B-28
Subadvisors............................................... B-29
The Distributor........................................... B-29
Other Service Providers................................... B-29
Portfolio Transactions and Brokerage...................... B-29
Trust Shares................................................ B-31
Net Asset Value............................................. B-32
Dividends and Tax Status.................................... B-33
Performance Information..................................... B-34
General Information About the Trust's Shareholders.......... B-35
Appendix -- Description of Ratings.......................... A-1
Financial Statements........................................ 1
Report of Independent Accountants........................... 17
</TABLE>
<PAGE> 37

TRUST HISTORY

The Trust was organized on February 4, 1997 as a Massachusetts business trust.
The Trust is a diversified, open-end, management investment company currently
consisting of four separate series.

DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS

The investment objective of the Equity Income VIP Portfolio is to provide
current income and long-term growth of income, accompanied by growth of capital.

The investment objective of the International VIP Portfolio is to provide
current income and long-term growth of income, accompanied by growth of capital.

The investment objective of the Total Return Bond VIP Portfolio is to maximize
long-term total return.

The investment objective of the Low Duration VIP Portfolio is to maximize total
return, consistent with preservation of capital.

The portfolio and strategies with respect to the composition of each Fund are
described in the Funds' prospectus.

INVESTMENT RESTRICTIONS

Each Fund has adopted the following restrictions (in addition to their
investment objectives) as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority" of that Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940 (the "1940
Act"). Under the 1940 Act, the vote of the holders of a "majority" of a Fund's
outstanding voting securities means the vote of the holders of the lesser of (1)
67% of the shares of the Fund represented at a meeting at which the holders of
more than 50% of its outstanding shares are represented or (2) more than 50% of
the outstanding shares.

Except as noted, none of the Funds may:

1. Purchase any security, other than obligations of the U.S. Government, its
agencies, or instrumentalities ("U.S. Government securities"), if as a
result: (i) with respect to 75% of its total assets, more than 5% of the
Fund's total assets (determined at the time of investment) would then be
invested in securities of a single issuer; or (ii) more than 25% of the
Fund's total assets (determined at the time of investment) would be invested
in one or more issuers having their principal business activities in a
single industry.

2. Purchase securities on margin (but any Fund may obtain such short-term
credits as may be necessary for the clearance of transactions), provided
that the deposit or payment by a Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.

3. Make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short (short sale against-the-box), and
unless not more than 25% of the Fund's net assets (taken at current value)
is held as collateral for such sales at any one time.

4. Issue senior securities, borrow money or pledge its assets except that any
Fund may borrow from a bank for temporary or emergency purposes in amounts
not exceeding 10% (taken at the lower of cost or current value) of its total
assets (not including the amount borrowed) and pledge its assets to secure
such borrowings; none of

B-2
<PAGE> 38

the Funds (except the Bond Funds) will purchase any additional portfolio
securities while such borrowings are outstanding. (The Bond Funds may borrow
from banks or enter into reverse repurchase agreements and pledge assets in
connection therewith, but only if immediately after each borrowing there is
asset coverage of 300%.)

5. Purchase any security (other than U.S. Government securities) if as a
result, with respect to 75% of the Fund's total assets, the Fund would then
hold more than 10% of the outstanding voting securities of an issuer.

6. Buy or sell commodities or commodity contracts or real estate or interests
in real estate, although it may purchase and sell securities which are
secured by real estate and securities of companies which invest or deal in
real estate. (For the purposes of this restriction, forward foreign currency
exchange contracts are not deemed to be commodities or commodity contracts.
This restriction does not apply to the Bond Funds.)

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading account in
securities.

10. Make loans, except through repurchase agreements. (This restriction does not
apply to the Bond Funds, which may lend portfolio securities having an
aggregate market value of up to one-third of the total assets of the Fund.)

Any percentage limitation on a Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

Each of the Funds may invest in repurchase agreements collaterized by U.S.
Government securities. A repurchase agreement is an agreement where the seller
agrees to repurchase a security from a Fund at a mutually agreed-upon time and
price. The period of maturity is usually quite short, possibly overnight or a
few days, although it may extend over a number of months. The resale price is
more than the purchase price, reflecting an agreed-upon rate of return effective
for the period of time a Fund's money is invested in the repurchase agreement. A
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of instruments declines, a Fund will require
additional collateral. In the event of a default, insolvency or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral. In such
circumstances, the Fund could experience a delay or be prevented from disposing
of the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.

U.S. GOVERNMENT SECURITIES

U.S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal National Mortgage
Association, Government National Mortgage Association, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Tennessee Valley Authority, Inter-American Development Bank,
Asian Development Bank, Student Loan Marketing Association and the International
Bank for Reconstruction and Development.

B-3
<PAGE> 39

Except for U.S. Treasury securities, obligations of U.S. Government agencies and
instrumentalities may or may not be supported by the full faith and credit of
the United States. Some are backed by the right of the issuer to borrow from the
Treasury; others by discretionary authority of the U.S. Government to purchase
the agencies' obligations; while still others, such as the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
In the case of securities not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitment. Each Fund will invest in
securities of such instrumentality only when the Advisor is satisfied that the
credit risk with respect to any instrumentality is acceptable.

The Funds may invest in component parts of U.S. Treasury notes or bonds, namely,
either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of: (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) receipts evidencing the component parts (corpus or coupons)
of Treasury obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of Treasury obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and are not issued by the U.S.
Treasury; therefore they are not U.S. Government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.

MUNICIPAL OBLIGATIONS

The Bond Funds may invest in municipal obligations. The two principal
classifications of municipal bonds, notes and commercial paper are "general
obligation" and "revenue" bonds, notes or commercial paper. General obligation
bonds, notes or commercial paper are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include states,
counties, cities, towns and other governmental units. Revenue bonds, notes and
commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.

Included within the revenue bonds category are participations in municipal lease
obligations or installment purchase contracts of municipalities (collectively,
"lease obligations"). State and local governments issue lease obligations to
acquire equipment leases and facilities. Lease obligations may have risks not
normally associated with general obligation or other revenue bonds. Leases and
installment purchase or conditional sale contracts (which may provide

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for title to the leased asset to pass eventually to the issuer) have developed
as a means for governmental issuers to acquire property and equipment without
the necessity of complying with the constitutional and statutory requirements
generally applicable for the issuance of debt. Certain lease obligations contain
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on an annual
or other periodic basis. Consequently, continued lease payments on those lease
obligations containing "non-appropriation" clauses are dependent on future
legislative actions. If such legislative actions do not occur, the holders of
the lease obligations may experience difficulty in exercising their rights,
including disposition of the property.

Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Shareholders, depending on
their individual tax status, may be subject to the federal alternative minimum
tax on the portion of a distribution attributable to these obligations. Interest
on private activity obligations will be considered exempt from federal income
taxes; however, shareholders should consult their own tax advisors to determine
whether they may be subject to the federal alternative minimum tax.

Resource recovery obligations are a type of municipal revenue obligation issued
to build facilities such as solid waste incinerators or waste-to-energy plants.
Usually, a private corporation will be involved and the revenue cash flow will
be supported by fees or units paid by municipalities for the use of the
facilities. The viability of a resource recovery project, environmental
protections regulations and project operator tax incentives may affect the value
and credit quality of these obligations.

Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.

A variable rate obligation is one whose terms provide for the adjustment of its
interest rate on set dates and which, upon such adjustment, can reasonably be
expected to have a market value that approximates its par value. A floating rate
obligation has terms which provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Variable or floating rate obligations may be secured by bank letters of credit.

Variable rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on one portion reflects short-term interest rates, while the interest rate on
the other portion is typically higher than the rate available on the original
fixed-rate bond.

Yields on municipal securities are dependent on a variety of factors, including
the general conditions of the municipal bond and municipal note markets, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. The achievement of the Bond Funds' investment objectives is dependent
in part on the continuing ability of the issuers of municipal securities in
which the Bond Funds invest to meet their obligations for the payment of
principal and interest when due. Obligations of issuers of municipal securities
are subject to the

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provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978, as amended.
Therefore, the possibility exists that, as a result of litigation or other
conditions, the ability of any issuer to pay, when due, the principal of and
interest on its municipal securities may be materially affected.

CORPORATE DEBT SECURITIES

A Fund's investments in U.S. dollar or foreign currency-denominated corporate
debt securities of domestic or foreign issuers are limited to corporate debt
securities (corporate bonds, debentures, notes and other similar corporate debt
instruments) which meet the minimum ratings criteria set forth for the Fund, or,
if unrated, are in the Advisor's opinion comparable in quality to corporate debt
securities in which the Fund may invest. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.

CONVERTIBLE SECURITIES

The Funds may invest in convertible securities of domestic or foreign issuers,
which meet the ratings criteria set forth in the prospectus. A convertible
security is a fixed-income security (a bond or preferred stock) which may be
converted at a stated price within a specified period of time into a certain
quantity of common stock or other equity securities of the same or a different
issuer. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. While providing a fixed income stream (generally higher in yield
than the income derivable from common stock but lower than that afforded by a
similar non-convertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation attendant upon a market price advance in the convertible
security's underlying common stock.

In general, the market value of a convertible security is at least the higher of
its "investment value" (that is, its value as a fixed-income security) or its
"conversion value" (that is, its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.

MORTGAGE-RELATED SECURITIES

The Bond Funds may invest in residential or commercial mortgage-related
securities, including mortgage pass-through securities, collateralized mortgage
obligations ("CMOs"), adjustable rate mortgage securities, CMO residuals,
stripped mortgage-related securities, floating and inverse floating rate
securities and tiered index bonds.

Mortgage Pass-Through Securities. Mortgage pass-through securities represent
interests in pools of mortgages in which payments of both principal and interest
on the securities are generally made monthly, in effect "passing through"
monthly payments made by borrowers on the residential or commercial mortgage
loans which underlie the securities (net of any fees paid to the issuer or
guarantor of the securities). Mortgage pass-through securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of

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principal due to the sale of underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose a Fund to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
repayment has been purchased at a premium, in the event of prepayment, the value
of the premium would be lost.

There are currently three types of mortgage pass-through securities: (1) those
issued by the U.S. Government or one of its agencies or instrumentalities, such
as the Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"); (2) those issued by private issuers that represent
an interest in or are collateralized by pass-through securities issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities;
and (3) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or pass-through securities without a
government guarantee but usually having some form of private credit enhancement.

Ginnie Mae is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. Ginnie Mae is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by the
institutions approved by Ginnie Mae (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.

Obligations of Fannie Mae and Freddie Mac are not backed by the full faith and
credit of the United States Government. In the case of obligations not backed by
the full faith and credit of the United States Government, the Fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Fannie Mae and Freddie Mac may borrow from the U.S. Treasury to meet
its obligations, but the U.S. Treasury is under no obligation to lend to Fannie
Mae or Freddie Mac.

Private mortgage pass-through securities are structured similarly to Ginnie Mae,
Fannie Mae, and Freddie Mac mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.

Pools created by private mortgage pass-through issuers generally offer a higher
rate of interest than government and government-related pools because there are
no direct or indirect government or agency guarantees of payments in the private
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. The insurance and guarantees and the credit worthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Funds' investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Private mortgage
pass-through securities may be bought without insurance or guarantees if,
through an examination of the loan experience and practices of the
originator/servicers and poolers, the Advisor determines that the securities
meet the Fund's quality standards.

Collateralized Mortgage Obligations. CMOs are debt obligations collateralized by
residential or commercial mortgage loans or residential or commercial mortgage
pass-through securities. Interest and prepaid principal are generally paid
monthly. CMOs may be collateralized by whole mortgage loans or private mortgage
pass-through securities but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by Ginnie Mae, Freddie Mac, or
Fannie Mae. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit ("REMIC"). All future references to CMOs also
include REMICs.

CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral which is ordinarily unrelated to the stated
maturity

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date. CMOs often provide for a modified form of call protection through a de
facto breakdown of the underlying pool of mortgages according to how quickly the
loans are repaid. Monthly payment of principal received from the pool of
underlying mortgages, including prepayments, is first returned to investors
holding the shortest maturity class. Investors holding the longer maturity
classes usually receive principal only after the first class has been retired.
An investor may be partially protected against a sooner than desired return of
principal because of the sequential payments.

Certain issuers of CMOs are not considered investment companies pursuant to a
rule adopted by the Securities and Exchange Commission ("SEC"), and the Funds
may invest in the securities of such issuers without the limitations imposed by
the 1940 Act on investments by the Fund in other investment companies. In
addition, in reliance on an earlier SEC interpretation, the Fund's investments
in certain other qualifying CMOs, which cannot or do not rely on the rule, are
also not subject to the limitation of the 1940 Act on acquiring interests in
other investment companies. In order to be able to rely on the SEC's
interpretation, these CMOs must be unmanaged, fixed asset issuers, that: (1)
invest primarily in mortgage-backed securities; (2) do not issue redeemable
securities; (3) operate under general exemptive orders exempting them from all
provisions of the 1940 Act; and (4) are not registered or regulated under the
1940 Act as investment companies. To the extent that the Funds select CMOs that
cannot rely on the rule or do not meet the above requirements, the Funds may not
invest more than 10% of their assets in all such entities and may not acquire
more than 3% of the voting securities of any single such entity.

The Bond Funds may also invest in, among other things, parallel pay CMOs,
Planned Amortization Class CMOs ("PAC bonds"), sequential pay CMOs, and floating
rate CMOs. Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. PAC bonds generally require payments
of a specified amount of principal on each payment date. Sequential pay CMOs
generally pay principal to only one class while paying interest to several
classes. Floating rate CMOs are securities whose coupon rate fluctuates
according to some formula related to an existing market index or rate. Typical
indices would include the eleventh district cost-of-funds index ("COFI"), the
London Interbank Offered Rate ("LIBOR"), one-year Treasury yields, and ten-year
Treasury yields.

Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.

The ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. In the event that
market rates of interest rise more rapidly to levels above that of the ARM's
maximum rate, the ARM's coupon may represent a below market rate of interest. In
these circumstances, the market value of the ARM security will likely have
fallen.

Certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is then utilized to reduce the outstanding principal
balance of the ARM.

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CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying a series of CMOs is
applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances the Fund may fail to recoup fully its initial investment in a CMO
residual.

CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities Act. CMO residuals, whether or not registered under such Act, may
be subject to certain restrictions on transferability, and may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.

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

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

Although SMBSs are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently introduced. As a result, established trading markets have not

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yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.

Inverse Floaters. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction to the interest rate
on another security or index level. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.

Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed rate bond.

ASSET-BACKED SECURITIES

The Bond Funds may invest in various types of asset-backed securities. Through
the use of trusts and special purpose corporations, various types of assets,
primarily automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the mortgage
pass-through or in a pay-through structure similar to the CMO structure.
Investments in these and other types of asset-backed securities must be
consistent with the investment objectives and policies of the Funds.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

The yield characteristics of mortgage-related and asset-backed securities differ
from traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Funds
purchase such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Funds purchase these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Funds may invest a portion of their assets in
derivative mortgage-related securities which are highly sensitive to changes in
prepayment and interest rates. The Advisor will seek to manage these risks (and
potential benefits) by diversifying its investments in such securities and
through hedging techniques.

During periods of declining interest rates, prepayment of mortgages underlying
mortgage-related securities can be expected to accelerate. Accordingly, a Fund's
ability to maintain positions in high-yielding mortgage-related securities will
be affected by reductions in the principal amount of such securities resulting
from such prepayments, and its ability to reinvest the returns of principal at
comparable yields is subject to generally prevailing interest rates at that
time. Conversely, slower than expected prepayments may effectively change a
security that was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities tend to fluctuate more in
response to interest rate changes, leading to increased net asset value
volatility. Prepayments may also result in the

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realization of capital losses with respect to higher yielding securities that
had been bought at a premium or the loss of opportunity to realize capital gains
in the future from possible future appreciation.

Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.

DURATION

In selecting securities for the Bond Funds, the Advisor makes use of the concept
of duration for fixed-income securities. Duration is a measure of the expected
life of a fixed-income security. Duration incorporates a bond's yield, coupon
interest payments, final maturity and call features into one measure. Most debt
obligations provide interest ("coupon") payments in addition to a final ("par")
payment at maturity. Some obligations also have call provisions. Depending on
the relative magnitude of these payments, the market values of debt obligations
may respond differently to changes in the level and structure of interest rates.

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

Futures, options and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions (backed by a segregated account of cash
and cash equivalents) will lengthen a Fund's duration by approximately the same
amount that holding an equivalent amount of the underlying securities would.

Short futures or put options positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.

There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Advisor will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.

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EFFECTIVE MATURITY

The Bond Funds each invest in a diversified portfolio of fixed-income securities
of varying maturities. The effective maturity is the weighted average period
over which a security's principal is expected to be paid. Stated maturity is the
date when the issuer is scheduled to make the final payment of principal.
Effective maturity differs from stated maturity in that it estimates the
anticipated effect of expected principal prepayments and call provisions.

The effective maturity of a debt security will be the stated maturity, except:
(1) in the case of a security with a call provision, the maturity date will be
considered the call date if there is a high probability, in the opinion of the
Advisor, that the security will be called; (2) in the case of securities with
unconditional put provisions entitling the security holder to receive the
security's approximate amortized cost, the maturity will be considered to be the
next put date; (3) in the case of mortgage-backed or other amortizing
securities, the maturity will be considered to be the average life remaining
(the length of time it is expected to take to retire half of the remaining
principal through amortizing payments) based on prepayment assumptions that the
Advisor believes appropriate; and (4) in the case of a variable or floating rate
investment grade security which, in the Advisor's opinion, will have a market
value approximating amortized cost on the next interest rate reset date, the
maturity will be considered to be the next reset date. However, no Bond Fund
will invest more than 5% of its net assets at the time of purchase in floating
or variable rate instruments of any one issuer, nor invest more than 20% of its
net assets at the time of purchase in floating or variable rate instruments of
issuers within the same industry.

DERIVATIVE INSTRUMENTS

As indicated in the prospectus, to the extent consistent with their investment
objectives and policies and the investment restrictions listed in this Statement
of Additional Information, the Funds may purchase and write call and put options
on securities, securities indexes and on foreign currencies and enter into
futures contracts and use options on futures contracts. The Funds also may enter
into swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Funds may use these techniques to hedge against changes
in interest rates, foreign currency exchange rates, or securities prices or as
part of their overall investment strategies. The International VIP Portfolio and
the Bond Funds may also purchase and sell options relating to foreign currencies
for the purpose of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. Each Fund
will maintain segregated accounts consisting of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under options and
futures contracts to avoid leveraging of the Fund.

Options on Securities and on Securities Indexes. A Fund may purchase put options
on securities to protect holdings in an underlying or related security against a
substantial decline in market value. A Fund may purchase call options on
securities to protect against substantial increases in prices of securities the
Fund intends to purchase pending its ability to invest in such securities in an
orderly manner. A Fund may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. A Fund may write a call or
put option only if the option is "covered" by the Fund holding a position in the
underlying securities or by other means which would permit immediate
satisfaction of the Fund's obligation as writer of the option. Prior to exercise
or expiration, an option may be closed out by an offsetting purchase or sale of
an option of the same series.

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The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
securities decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Fund is not sold when it has remaining value, and if the
market price of the underlying security, in the case of a put, remains equal to
or greater than the exercise price or, in the case of a call, remains less than
or equal to the exercise price, the Fund will lose its entire investment in the
option. Also, where a put or call option on a particular security is purchased
to hedge against price movements in a related security, the price of the put or
call option may move more or less than the price of the related security. There
can be no assurance that a liquid market will exist when a Fund seeks to close
out an option position. Furthermore, if trading restrictions or suspensions are
imposed on the options markets, a Fund may be unable to close out a position.

There are several risks associated with transactions in options on securities
and on indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.

There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. If a Fund were unable to close out an option that
it had purchased on a security, it would have to exercise the option in order to
realize any profit or the option may expire worthless. If a Fund were unable to
close out a covered call option that it had written on a security, it would not
be able to sell the underlying security unless the option expired without
exercise. As the writer of a covered call option, a Fund forgoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the premium and the
exercise price of the call.

If trading were suspended in an option purchased by a Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it had purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.

Futures Contracts and Options on Futures Contracts. A Fund may use interest
rate, foreign currency or index futures contracts, as specified for that Fund in
the prospectus and if permitted by its investment restrictions. An interest
rate, foreign currency or index futures contract provides for the future sale by
one party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified price
and time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.

A Fund may purchase and write call and put options on futures. Options on
futures possess many of the same characteristics as options on securities and
indexes (discussed above). An option on a futures contract gives the

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holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true.

Each Fund will use futures contracts and options on futures contracts in
accordance with the rules of the Commodity Futures Trading Commission ("CFTC").
For example, a Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's securities or the price of the securities which the Fund intends to
purchase. A Fund's hedging activities may include sales of futures contracts as
an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
that Fund's exposure to interest rate fluctuations, the Fund may be able to
hedge its exposure more effectively and perhaps at a lower cost by using futures
contracts and options on futures contracts.

A Fund will only enter into futures contracts and options on futures contracts
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.

When a purchase or sale of a futures contract is made by a Fund, the Fund is
required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.

A Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.

Limitations on Use of Futures and Options Thereon. When purchasing a futures
contract, a Fund will maintain with its custodian (and mark-to-market on a daily
basis) cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets that, when added to the amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract. Alternatively, the Fund may "cover" its position by purchasing a

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put option on the same futures contract with a strike price as high or higher
than the price of the contract held by the Fund.

When selling a futures contract, a Fund will maintain with its custodian (and
mark-to-market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Trust's custodian).

When selling a call option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.

When selling a put option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that equal
the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.

In order to comply with current applicable regulations of the CFTC pursuant to
which the Trust avoids being deemed a "commodity pool operator," the Funds are
limited in their futures trading activities to positions which constitute "bona
fide hedging" positions within the meaning and intent of applicable CFTC rules,
or to non-hedging positions for which the aggregate initial margin and premiums
will not exceed 5% of the liquidation value of the Fund's assets.

Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
a Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.

The particular securities comprising the index underlying the index financial
futures contract may vary from the securities held by a Fund. As a result, the
Fund's ability to hedge effectively all or a portion of the value of its
securities through the use of such financial futures contracts will depend in
part on the degree to which price movements in the index underlying the
financial futures contract correlate with the price movements of the securities

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held by the Fund. The correlation may be affected by disparities in the Fund's
investments as compared to those comprising the index and general economic or
political factors. In addition, the correlation between movements in the value
of the index may be subject to change over time as additions to and deletions
from the index alter its structure. The correlation between futures contracts on
U.S. Government securities and the securities held by a Fund may be adversely
affected by similar factors and the risk of imperfect correlation between
movements in the prices of such futures contracts and the prices of securities
held by the Fund may be greater. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity, which
could at times make it difficult or impossible to liquidate existing positions.

Each Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments. The liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days. A Fund will enter into a futures position only if, in
the judgment of the Advisor, there appears to be an actively traded secondary
market for such futures contracts.

The successful use of transactions in futures and related options also depends
on the ability of the Advisor to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent interest rates
remain stable during the period in which a futures contract or option is held by
a Fund or such rates move in a direction opposite to that anticipated, the Fund
may realize a loss on a hedging transaction which is not fully or partially
offset by an increase in the value of portfolio securities. As a result, the
Fund's total return for such period may be less than if it had not engaged in
the hedging transaction.

Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by a Fund
of margin deposits in the event of the bankruptcy of a broker with whom the Fund
has an open position in a financial futures contract.

The amount of risk a Fund 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 on
a futures contract 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.

FOREIGN SECURITIES

The Funds may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other securities convertible into securities of
issuers based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts, usually issued by a U.S. bank or trust company,
evidencing ownership of the underlying securities; EDRs are European

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receipts evidencing a similar arrangement. Generally, ADRs are issued in
registered form, denominated in U.S. dollars, and are designed for use in the
U.S. securities markets; EDRs are issued in bearer form, denominated in other
currencies, and are designed for use in European securities markets.

The Bond Funds may also invest in fixed-income securities of issuers located in
emerging foreign markets. Emerging markets generally include every country in
the world other than the United States, Canada, Japan, Australia, Malaysia, New
Zealand, Hong Kong, South Korea, Singapore and most Western European countries.
In determining what countries constitute emerging markets, the Advisor will
consider, among other things, data, analysis and classification of countries
published or disseminated by the International Bank for Reconstruction and
Development (commonly known as the World Bank) and the International Finance
Corporation. Currently, investing in many emerging markets may not be desirable
or feasible, because of the lack of adequate custody arrangements for a Fund's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop,
the Fund expects to expand and further broaden the group of emerging markets in
which it invests.

From time to time, emerging markets have offered the opportunity for higher
returns in exchange for a higher level of risk. Accordingly, the Advisor
believes that a Bond Fund's ability to invest in emerging markets throughout the
world may enable the achievement of results superior to those produced by funds,
with similar objectives to those of these Funds, that invest solely in
securities in developed markets. There is no assurance that any Bond Fund will
achieve these results.

The Bond Funds may invest in the following types of emerging market fixed-income
securities: (1) fixed-income securities issued or guaranteed by governments,
their agencies, instrumentalities or political subdivisions, or by government
owned, controlled or sponsored entities, including central banks (collectively,
"Sovereign Debt"), including Brady Bonds (described below); (2) interests in
issuers organized and operated for the purpose of restructuring the investment
characteristics of Sovereign Debt; (3) fixed-income securities issued by banks
and other business entities; and (4) fixed-income securities denominated in or
indexed to the currencies of emerging markets. Fixed-income securities held by a
Fund may take the form of bonds, notes, bills, debentures, bank debt
obligations, short-term paper, loan participations, assignments and interests
issued by entities organized and operated for the purpose of restructuring the
investment characteristics of any of the foregoing. There is no requirement with
respect to the maturity of fixed-income securities in which the Fund may invest.

The Bond Funds may invest in Brady Bonds and other Sovereign Debt of countries
that have restructured or are in the process of restructuring Sovereign Debt
pursuant to the Brady Plan. "Brady Bonds" are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the World Bank and the International Monetary Fund ("IMF"). The Brady
Plan framework, as it has developed, contemplates the exchange of commercial
bank debt for newly issued Brady Bonds. Brady Bonds may also be issued in
respect of new money being advanced by existing lenders in connection with the
debt restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.

Emerging market fixed-income securities generally are considered to be of a
credit quality below investment grade, even though they often are not rated by
any nationally recognized statistical rating organizations. Investment in
emerging market fixed-income securities will be allocated among various
countries based upon the Advisor's analysis

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of credit risk and its consideration of a number of factors, including:
prospects for relative economic growth among the different countries in which
the Bond Funds may invest; expected levels of inflation; government policies
influencing business conditions; the outlook for currency relationships; and the
range of the individual investment opportunities available to international
investors. The Advisor's emerging market sovereign credit analysis includes an
evaluation of the issuing country's total debt levels, currency reserve levels,
net exports/imports, overall economic growth, level of inflation, currency
fluctuation, political and social climate and payment history. Particular fixed-
income securities will be selected based upon credit risk analysis of potential
issuers, the characteristics of the security and interest rate sensitivity of
the various debt issues available with respect to a particular issuer, analysis
of the anticipated volatility and liquidity of the particular debt instruments,
and the tax implications to the Fund. The emerging market fixed-income
securities in which the Bond Funds may invest are not subject to any minimum
credit quality standards.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

The Funds may take positions in options on foreign currencies to hedge against
the risk of foreign exchange rate fluctuations on foreign securities the Funds
hold in their portfolios or intend to purchase. For example, if a Fund were to
enter into a contract to purchase securities denominated in a foreign currency,
it could effectively fix the maximum U.S. dollar cost of the securities by
purchasing call options on that foreign currency. Similarly, if a Fund held
securities denominated in a foreign currency and anticipated a decline in the
value of that currency against the U.S. dollar, it could hedge against such a
decline by purchasing a put option on the currency involved. The markets in
foreign currency options are relatively new, and a Fund's ability to establish
and close out positions in such options is subject to the maintenance of a
liquid secondary market. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.

The quantities of currencies underlying option contracts represent odd lots in a
market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.

There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations be firm or revised on a timely
basis. Quotation information is generally representative of very large
transactions in the interbank market and may not reflect smaller transactions
where rates may be less favorable. Option markets may be closed while
round-the-clock interbank currency markets are open, and this can create price
and rate discrepancies.

Risks of Options Trading. The Funds may effectively terminate their rights or
obligations under options by entering into closing transactions. Closing
transactions permit a Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. The value of a
foreign currency option depends on the value of the underlying currency relative
to the U.S. dollar. Other factors affecting the value of an option are the time
remaining until expiration, the relationship of the exercise price to market
price, the historical price volatility of the underlying currency and general
market conditions. As a result, changes in the value of an option position may
have no relationship to the investment merit of a foreign security. Whether a
profit or loss is realized on a closing transaction depends on the price
movement of the underlying currency and the market value of the option.

Options normally have expiration dates of up to nine months. The exercise price
may be below, equal to or above the current market value of the underlying
currency. Options that expire unexercised have no value, and a Fund will realize
a loss of any premium paid and any transaction costs. Closing transactions may
be effected only by

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negotiating directly with the other party to the option contract, unless a
secondary market for the options develops. Although the Funds intend to enter
into foreign currency options only with dealers which agree to enter into, and
which are expected to be capable of entering into, closing transactions with the
Funds, there can be no assurance that a Fund will be able to liquidate an option
at a favorable price at any time prior to expiration. In the event of insolvency
of the counter-party, a Fund may be unable to liquidate a foreign currency
option. Accordingly, it may not be possible to effect closing transactions with
respect to certain options, with the result that a Fund would have to exercise
those options that it had purchased in order to realize any profit.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Funds may use forward contracts to protect against uncertainty in the level
of future exchange rates. The Funds will not speculate with forward contracts or
foreign currency exchange rates.

A Fund may enter into forward contracts with respect to specific transactions.
For example, when a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when a Fund anticipates the
receipt in a foreign currency of dividend or interest payments on a security
that it holds, the Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of the payment, by entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the underlying
transaction. A Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.

A Fund also may use forward contracts in connection with portfolio positions to
lock in the U.S. dollar value of those positions, to increase the Fund's
exposure to foreign currencies that the Advisor believes may rise in value
relative to the U.S. dollar or to shift the Fund's exposure to foreign currency
fluctuations from one country to another. For example, when the Advisor believes
that the currency of a particular foreign country may suffer a substantial
decline relative to the U.S. dollar or another currency, it may enter into a
forward contract to sell the amount of the former foreign currency approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency. This investment practice generally is referred to as
"cross-hedging" when another foreign currency is used.

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 securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. A Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency or

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<PAGE> 55

(2) the Fund maintains in a segregated account cash, U.S. Government securities,
equity securities or other liquid, unencumbered assets, marked-to-market daily,
in an amount not less than the value of the Fund's total assets committed to the
consummation of the contracts. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Advisor believes it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of the
Fund will be served.

At or before the maturity date of a forward contract that requires a Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, a Fund may
close out a forward contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize a
gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate between the currencies
involved moved between the execution dates of the first and second contracts.

The cost to the Fund of engaging in forward contracts varies with factors such
as the currencies involved, the length of the contract period and the market
conditions then prevailing. Because forward contracts are usually entered into
on a principal basis, no fees or commissions are involved. The use of forward
contracts does not eliminate fluctuations in the prices of the underlying
securities the Fund owns or intends to acquire, but it does fix a rate of
exchange in advance. In addition, although forward contracts limit the risk of
loss due to a decline in the value of the hedged currencies, at the same time
they limit any potential gain that might result should the value of the
currencies increase.

Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend to convert holdings of foreign currencies into U.S. dollars on a
daily basis. The Funds may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.

Swap Agreements. The Funds may enter into interest rate, index and currency
exchange rate swap agreements for purposes of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded the desired return. Swap agreements are
two party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. The "notional amount" of the swap agreement is
only a fictive basis on which to calculate the obligations which the parties to
a swap agreement have agreed to exchange. A Fund's obligations (or rights) under
a swap agreement will generally be equal only to the net amount to be paid or
received under the agreement based on the relative values of the positions held
by each party to the agreement (the "net amount"). A Fund's obligations under a
swap agreement will be accrued daily (offset against any amounts owing to the
Fund) and any accrued but unpaid net amounts owed to a swap counter-party will
be covered by segregating cash, U.S.

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Government securities, equity securities or other liquid, unencumbered assets
marked-to-market daily, to avoid any potential leveraging of the Fund's
portfolio. A Fund will not enter into a swap agreement with any single party if
the net amount owed or to be received under existing contracts with that party
would exceed 5% of the Fund's assets.

Whether a Fund's use of swap agreements will be successful in furthering its
investment objective of total return will depend on the Advisor's ability
correctly to predict whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counter-party. The Advisor will cause a Fund to
enter into swap agreements only with counter-parties that would be eligible for
consideration as repurchase agreement counter-parties. Restrictions imposed by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.

FOREIGN INVESTMENT RISKS

Foreign Market Risk. Because the Funds may invest in foreign securities, the
Funds offer you more diversification than an investment only in the United
States since prices of securities traded on foreign markets have often, though
not always, moved counter to prices in the United States. Foreign security
investment, however, involves special risks not present in U.S. investments that
can increase the chances that the Funds will lose money. In particular, the
Stock Funds are subject to the risk that because there are generally fewer
investors on foreign exchanges and a smaller number of shares traded each day,
it may be difficult for a Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

Currency Risk and Exchange Risk. Securities in which a Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign currency,
your investment in a security denominated in that currency loses value because
the currency is worth fewer U.S. dollars. Similarly when the U.S.

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<PAGE> 57

dollar decreases in value against a foreign currency, your investment in a
security denominated in that currency gains value because the currency is worth
more U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.

For a number of years, certain European countries have been seeking economic
unification that would, among other things, reduce barriers between countries,
increase competition among companies, reduce government subsidies in certain
industries, and reduce or eliminate currency fluctuations among these European
countries. The Treaty of European Union (the "Maastricht Treaty") seeks to set
out a framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). Among other things, EMU
establishes a single common European currency (the "euro") that was introduced
on January 1, 1999 and is expected to replace the existing national currencies
of all EMU participants by July 1, 2002. Upon implementation of EMU, certain
securities issued in participating EU countries (beginning with government and
corporate bonds) were redenominated in the euro, and are now listed, traded,
declaring dividends and making other payments only in euros.

No assurance can be given that the changes planned for the EU can be
successfully implemented, or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will not
be completed, or will be completed but then partially or completely unwound.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU at any time by an
initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Funds' investments
in Europe generally or in specific countries participating in EMU. Gains or
losses from euro conversion may be taxable to International VIP Portfolio
shareholders under foreign or, in certain limited circumstances, U.S. tax laws.

Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the United States securities laws do. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for a Fund's portfolio
manager to completely and accurately determine a company's financial condition.

Certain Risks of Holding Fund Assets Outside the United States. A Fund generally
holds the foreign securities in which it invests outside the United States in
foreign banks and securities depositories. These foreign banks and securities
depositories may be recently organized or new to the foreign custody business.
They may also have operations subject to limited or no regulatory oversight.
Also, the laws of certain countries may put limits on a Fund's ability to
recover its assets if a foreign bank or depository or issuer of a security or
any of their agents goes bankrupt. In addition, it can be expected that it will
be more expensive for a Fund to buy, sell and hold securities in certain

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<PAGE> 58

foreign markets than it is in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense of investing in
foreign markets reduces the amount a Fund can earn on its investments.

Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for a Fund to carry out
transactions. If a Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If a
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.

Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations may
apply.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

A description of security ratings is attached as an Appendix. Lower-rated or
unrated (that is, high yield) securities are more likely to react to
developments affecting market risk (such as interest rate sensitivity, market
perception of creditworthiness of the issuer and general market liquidity) and
credit risk (such as the issuer's inability to meet its obligations) than are
more highly rated securities, which react primarily to movements in the general
level of interest rates. The Advisor considers both credit risk and market risk
in making investment decisions for the Funds. Investors should carefully
consider the relative risk of investing in high yield securities and understand
that such securities are not generally meant for short-term trading.

The amount of high yield securities outstanding proliferated in the 1980's in
conjunction with the increase in merger and acquisition and leveraged buyout
activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Advisor could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower-rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Funds' net asset value.

Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.

ILLIQUID SECURITIES

A Fund may not hold more than 15% of its net assets in illiquid securities.
Illiquid securities generally include repurchase agreements which have a
maturity of longer than seven days, and securities that are illiquid by virtue
of

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<PAGE> 59

the absence of a readily available market (either within or outside of the
United States) or because they have legal or contractual restrictions of resale.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements have a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. 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
redemption within seven days. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Also market
quotations are less readily available. The judgment of the Advisor may at times
play a greater role in valuing these securities than in the case of unrestricted
securities. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting 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 Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities,
convertible 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 to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.

Rule 144A under the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A established a "safe harbor" from the registration requirements
of the Securities Act for resales of certain securities to qualified
institutional buyers. The investment adviser anticipates that the market for
certain restricted securities such as institutional commercial paper and foreign
securities will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Advisor will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisor will consider, among others, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (for example, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (1) it much be rated in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations ("NRSRO"), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the Advisor, and
(2) it must not be "traded flat" (that is, without accrued interest) or in
default as to principal or interest. Investing in Rule 144A securities could
have the effect of increasing the level of Fund illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these securities. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.

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REVERSE REPURCHASE AGREEMENTS

The Bond Funds may enter into reverse repurchase agreements, whereby a Fund
sells securities concurrently with entering into an agreement to repurchase
those securities at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on those securities. Reverse repurchase agreements are speculative techniques
involving leverage and are considered borrowings by these Funds for purposes of
the limit applicable to borrowings.

DOLLAR ROLLS

The Bond Funds may use dollar rolls as part of their investment strategy. In a
dollar roll, a Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar securities (same
type and coupon) on a specified future date from the same party. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or cash equivalent security position that matures on or before the forward
settlement date of the dollar roll transaction.

The Bond Funds will segregate cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, market-to-market daily, equal
in value to their obligations with respect to dollar rolls. Dollar rolls involve
the risk that the market value of the securities retained by the Fund may
decline below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. If the buyer of the securities under a dollar
roll files for bankruptcy or becomes insolvent, the Fund's use of the proceeds
of the agreement may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Dollar rolls are speculative techniques involving
leverage and are considered borrowings by these Funds for purposes of the limit
applicable to borrowings.

BORROWING

As a fundamental policy, the Stock Funds may borrow money, but only from banks
for temporary or emergency purposes in amounts not exceeding 10% of each Fund's
total assets. The Bond Funds may borrow for temporary, emergency or investment
purposes. This borrowing may be unsecured. The 1940 Act requires a Fund to
maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed.
Borrowing subjects a Fund to interest costs which may or may not be recovered by
appreciation of the securities purchased, and can exaggerate the effect on net
asset value of any increase or decrease in the market value of a Fund's
portfolio. This is the speculative factor known as leverage.

LOANS OF PORTFOLIO SECURITIES

For the purpose of achieving income, the Bond Funds may lend their portfolio
securities, provided: (1) the loan is secured continuously by collateral
consisting of short-term, high quality debt securities, including U.S.
Government securities, negotiable certificates of deposit, bankers' acceptances
or letters of credit, maintained on a daily marked-to-market basis in an amount
at least equal to the current market value of the securities loaned; (2) the
Fund may at any time call the loan and obtain the return of the securities
loaned; (3) the Fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund.

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<PAGE> 61

WHEN-ISSUED SECURITIES

The International and Bond Funds may purchase securities on a when-issued or
delayed-delivery basis, generally in connection with an underwriting or other
offering. When-issued and delayed-delivery transactions occur when securities
are bought with payment for and delivery of the securities scheduled to take
place at a future time, beyond normal settlement dates, generally from 15 to 45
days after the transaction. The price that the Fund is obligated to pay on the
settlement date may be different from the market value on that date. While
securities may be sold prior to the settlement date, the Funds intend to
purchase such securities with the purpose of actually acquiring them, unless a
sale would be desirable for investment reasons. At the time the Fund makes a
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security each day in determining the
Fund's net asset value. The Fund will also establish a segregated account with
its custodian in which it will hold cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, equal
in value to its obligations for when-issued securities.

REAL ESTATE INVESTMENT TRUSTS

Each Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
Internal Revenue Code requirements. REITs offer investors greater liquidity and
diversification than direct ownership of properties, as well as greater income
potential than an investment in common stocks. Like any investment in real
estate, though, a REIT's performance depends on several factors, such as its
ability to find tenants for its properties, to renew leases and to finance
property purchases and renovations.

TEMPORARY DEFENSIVE POSITION

When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, a Fund may invest all or part of
its assets in short-term investment grade debt obligations of the U.S.
Government, its agencies and instrumentalities, bank certificates of deposit,
bankers' acceptances, high quality commercial paper, demand notes and repurchase
agreements.

MANAGEMENT

The Trustees oversee the actions of the Funds' Advisor and other service
providers and decide upon matters of general policy. The Trustees also review
the actions of the Funds' officers, who conduct and supervise the daily business
operations of the Funds. The Trustees and officers of the Trust are:

Robert L. Burch III (64) -- Trustee -- One Rockefeller Plaza, New York, NY
10020. Managing Partner, A.W. Jones Co. (investments); Chairman, Jonathan Mfg.
Corp. (slide manufacturing).

John A. G. Gavin (67) -- Trustee -- 2100 Century Park West, Los Angeles, CA
90067. Chairman, Gamma Services Corp. (venture capital) (since 1968); Principal,
Gavin, Dailey & Partners (consulting) (since 1993); U.S. Ambassador to Mexico
(1981 - 1986); Director, Atlantic Richfield Co., Dresser Industries, Inc.,
Pinkertons, International Wire Corp. and Kap Resources.

Joe Grills (64) -- Trustee -- P.O. Box 98, Rapidan, VA 22733. Member of the
Committee of Investment of Employee Benefit Assets of the Financial Executives
Institute ("CIEBA") (since 1986); member of CIEBA's Executive Committee (since
1988) and its Chairman (from 1991 - 1992); Assistant Treasurer of International
Business Machines Incorporated ("IBM") and Chief Investment Officer of IBM
Retirement Funds (1986 - 1993); Member of the

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<PAGE> 62

Investment Advisory Committees of the State of New York Common Retirement Fund
and the Howard Hughes Medical Institute (since 1997); Director, Duke Management
Company (since 1992) and elected Vice Chairman (May 1998); Director, KIMCO
Realty Corporation (since 1997); Director, LaSalle Street Fund (since 1995);
Member of the Investment Advisory Committee of the Virginia Retirement System
(since 1998); Director, Montpelier Foundation (since December 1998); Trustee or
Director of 22 registered investment companies (consisting of 55 portfolios) for
which Merrill Lynch Asset Management, L.P. or its affiliate, Fund Asset
Management, L.P., is the advisor.

Robert B. Hutchinson (79) -- Trustee -- 2525 Montevista Place West, Seattle, WA
98198. Former Chairman (1987 - 1988) and Director (1976 - 1988), Prudential Bank
(savings bank); Director and former Senior Vice President, Finance and
Secretary, Simpson Investment Co. (holding company for a wood products company,
pulp and paper company and a PVC products company); Director, Enterprises
International, Inc. (industrial strapping material manufacturer).

Merle T. Welshans (80) -- Trustee -- 14360 Ladue Road, Chesterfield, MO 63017.
Adjunct Professor of Finance, Washington University; Chairperson of the
Investment Committee of the Missouri United Methodist Foundation; Trustee,
Deaconess Hospital Foundation.

Richard R. West (61) -- Trustee -- Box 604, Genoa, NV 89411. Professor of
Finance (since 1984), Dean (1984 - 1993), and currently Dean Emeritus, New York
University Leonard N. Stern School of Business Administration; Director, Vornado
Realty Trust, Inc. (real estate holding company); Director, Bowne & Co., Inc.
(financial printers); Director, Alexander's, Inc. (real estate company); Trustee
or Director of 56 registered investment companies (consisting of 81 portfolios)
for which Merrill Lynch Asset Management, L.P. or its affiliate, Fund Asset
Management, L.P., is the advisor.

Nancy D. Celick (47) -- President and Principal Executive Officer -- 725 South
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Chief Administrative
Officer of the Advisor (since 1998); Chief Financial Officer of the Advisor
(1993 - 1998); Chief Financial Officer of Kennedy-Wilson, Inc. (auction
marketing services) (1992 - 1993); Chief Financial Officer of First National
Corporation (bank holding company) (1984 - 1992).

Gail Bardin (51) -- Executive Vice President -- 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. Managing Director of the Advisor (since 1996);
Partner of the Advisor (1994 - 1996); Principal of the Advisor (1992 - 1994);
Portfolio Manager of the Advisor (1988 - 1992).

Mark D. Cone (31) -- Vice President -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. Vice President of the Advisor; Retail Account
Manager, Neuberger & Berman (1991 - 1994).

Gracie Fermelia (37) -- Secretary, Treasurer, and Principal Financial and
Accounting Officer -- 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400. Vice President of the Advisor; Senior Manager, Price Waterhouse
(1985 - 1994).

The Trust does not pay salaries to any of its officers or fees to any of its
Trustees affiliated with the Advisor. The following table sets forth the
aggregate compensation paid to the Trustees during the Trust's fiscal year ended
December 31, 1998 and the aggregate compensation paid to the Trustees for
service on the Trust's Board and that of

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any other fund for which the Advisor serves as investment adviser or has an
investment adviser that is an affiliated person of the Advisor ("Fund Complex")
for the calendar year ended December 31, 1998.

<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
AGGREGATE FROM TRUST AND
COMPENSATION FUND COMPLEX
NAME AND POSITION FROM TRUST PAID TO TRUSTEES*
----------------- ------------ -----------------
<S> <C> <C>
Robert L. Burch III,................................ $ 8,000 $ 20,000
Trustee
John A. G. Gavin,................................... $ 8,000 $ 20,000
Trustee
Joe Grills,......................................... $ 8,000 $186,333
Trustee
Robert B. Hutchinson,............................... $ 8,000 $ 18,500
Trustee
Merle T. Welshans,.................................. $ 8,000 $ 20,000
Trustee
Richard R. West,.................................... $ 8,000 $326,125
Trustee
</TABLE>

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

* Each Trustee also serves as a Trustee of the Hotchkis and Wiley Funds. Messrs.
Grills and West also serve on the boards of other investment companies advised
by Merrill Lynch Asset Management, L.P. and its advisory affiliates.

For information as to ownership of shares, see "General Information About the
Trust's Shareholders."

THE ADVISOR

The Advisor provides the Funds with management and investment advisory services.
Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P. ("MLAM"),
is located at 725 South Figueroa Street, Suite 4000, Los Angeles, California
90017-5400. MLAM is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc., a financial services holding company incorporated in Delaware. MLAM and
its advisory affiliates act as the investment advisor for more than 140
registered investment companies and offer portfolio management and portfolio
analysis services to individual and institutional accounts.

The Equity Income and International VIP Portfolios pay the Advisor for the
services performed a fee at the annual rate of 0.75% of each Fund's average net
assets. The Total Return Bond VIP Portfolio pays the Advisor a fee at the annual
rate of 0.55% of its average daily net assets. The Low Duration VIP Portfolio
pays the Advisor a fee at the annual rate of 0.46% of its average daily net
assets. For the fiscal period ended December 31, 1998, the International VIP
Portfolio paid the Advisor $1,019,881. The Equity Income VIP Portfolio and the
Low Duration VIP Portfolio paid no advisory fees and were reimbursed $44,455 and
$51,340, respectively, by the Advisor for the fiscal period ended December 31,
1998.

In addition, the Advisor has agreed to limit the annual operating expenses of
the Equity Income VIP Portfolio to 1.15% of the Fund's average net assets. The
Advisor has agreed to limit the annual operating expenses of the International
VIP Portfolio to 1.35% of the Fund's average net assets. The Advisor has agreed
to limit the annual operating expenses of the Total Return Bond VIP Portfolio to
0.65% of the Fund's average net assets. The Advisor has agreed to limit the
annual operating expenses of the Low Duration VIP Portfolio to 0.58% of the
Fund's average net assets. These expense limits will be in place through
February 2000. For the fiscal period ended December 31,

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1998, the Advisor waived a portion of its fee as follows: Equity Income VIP
Portfolio -- $5,646; and Low Duration VIP Portfolio -- $5,111.

Each of the four Investment Advisory Agreements provides that the Advisor shall
not be liable to the Trust for any error of judgment by the Advisor or for any
loss sustained by any of the Funds except in the case of a breach of fiduciary
duty with respect to the receipt of compensation for services (in which case any
award of damages will be limited as provided in the 1940 Act) or of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.

SUBADVISORS

The Advisor has entered into subadvisory agreements with Mercury Asset
Management International Limited and Merrill Lynch Asset Management U.K.
Limited, affiliated investment advisors that are indirect subsidiaries of
Merrill Lynch & Co., Inc. The subadvisory arrangements are for investment
research, recommendations and other investment-related services to be provided
to the International VIP Portfolio at rates of compensation as may be agreed by
the parties. There is no increase in the aggregate fees paid by this Fund for
such services.

THE DISTRIBUTOR

Princeton Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor and makes a continuous offering of the
Fund's shares. It is not compensated by the Funds. The distributor is an
indirect subsidiary of Merrill Lynch & Co., Inc., and is an affiliate of the
Advisor.

OTHER SERVICE PROVIDERS

The Trust's custodian, Firstar Bank Milwaukee, N.A., 615 East Michigan Street,
Milwaukee, Wisconsin, is responsible for holding the Funds' assets and Firstar
Mutual Fund Services, LLC ("FMFS"), located at the same address, acts as the
Trust's accounting services agent, transfer agent and dividend paying agent.
FMFS is responsible for the issuance, transfer and redemption of shares and the
opening and maintenance of shareholder accounts. For these services, FMFS
receives an annual fee of $14.00 per shareholder account. FMFS is also
reimbursed for its out-of-pocket expenses.

The Chase Manhattan Bank, Four Chase MetroTech Center, Brooklyn, New York 11245,
through its global custody network, provides custodial services for assets of
the Trust held outside the U.S.

The Trust's independent accountant, PricewaterhouseCoopers LLP, 100 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, examines the Trust's financial
statements and assist in the preparation of certain reports to the Securities
and Exchange Commission.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Investment Advisory Agreements state that in connection with its duties to
arrange for the purchase and the sale of securities held in the portfolio of
each Fund by placing purchase and sale orders for that Fund, the Advisor shall
select such broker-dealers ("brokers") as shall, in the Advisor's judgment,
implement the policy of the Trust to achieve "best execution", that is, prompt
and efficient execution at the most favorable securities price. In making such
selection, the Advisor is authorized in the Agreements to consider the
reliability, integrity and financial condition of the broker. The Advisor is
also authorized by the Agreements to consider whether the broker provides
brokerage and/or research services to the Fund and/or other accounts of the
Advisor. The Agreements state that the commissions paid to brokers may be higher
than another broker would have charged if a good faith determination is made by
the Advisor that the commission is reasonable in relation to the services
provided, viewed in terms of either that particular transaction or the Advisor's
overall responsibilities as to the accounts as to which it exercises

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investment discretion and that the Advisor shall use its judgment in determining
that the amount of commissions paid are reasonable in relation to the value of
brokerage and research services provided and need not place or attempt to place
a specific dollar value on such services or on the portion of commission rates
reflecting such services. The Agreements provide that to demonstrate that such
determinations were in good faith, and to show the overall reasonableness of
commissions paid, the Advisor shall be prepared to show that commissions paid
(1) were for purposes contemplated by the Agreements; (2) were for products or
services which provide lawful and appropriate assistance to the Advisor's
decision-making process; and (3) were within a reasonable range as compared to
the rates charged by brokers to other institutional investors as such rates may
become known from available information. The Advisor is also authorized to
consider sales of shares of each Fund and/or of any other investment companies
for which the Advisor acts as Advisor as a factor in the selection of brokers to
execute brokerage and principal transactions, subject to the requirements of
"best execution", as defined above, although the Advisor is not currently doing
so.

The research services discussed above may be in written form or through direct
contact with individuals and may include information as to particular companies
and securities as well as market, economic or institutional areas and
information assisting the Trust in the valuation of the Funds' investments. The
research which the Advisor receives for the Funds' brokerage commissions,
whether or not useful to a Fund, may be useful to the Advisor in managing the
accounts of the Advisor's other advisory clients. Similarly, the research
received for the commissions of such accounts may be useful to any Fund.

In the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission although the price of the security usually includes a profit to the
dealer. Money market instruments usually trade on a "net" basis as well. On
occasion, certain money market instruments may be purchased by the Funds
directly from an issuer in which case no commissions or discounts are paid. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.

The International VIP Portfolio anticipates that its brokerage transactions
involving securities of companies headquartered in countries other than the U.S.
will be conducted primarily on the principal exchanges of such countries.
Transactions on foreign exchanges are usually subject to fixed commissions which
are generally higher than negotiated commissions on U.S. transactions, although
the Trust will endeavor to achieve the best net results in effecting its
portfolio transactions. There is generally less government supervision and
regulation of exchanges and brokers in foreign countries than in the U.S.

The value of any Fund's aggregate holdings of the securities of its regular
brokers or dealers (as defined in Rule 10b-1 of the 1940 Act) as of December 31,
1998 is as follows:

<TABLE>
<CAPTION>
REGULAR AGGREGATE
FUND BROKER-DEALER HOLDINGS
- ------------------------------------------------- --------------- ---------
<S> <C> <C>
Low Duration VIP Portfolio Lehman Brothers $74,463
</TABLE>

During the fiscal period ended December 31, 1998, the following brokerage
commissions were paid by the Funds:

<TABLE>
<S> <C>
Equity Income VIP Portfolio................................. $ 891
International VIP Portfolio................................. $ 415,319
Low Duration VIP Portfolio.................................. $ 0
</TABLE>

The Funds did not effect any transactions with an affiliated broker-dealer for
the fiscal period ended December 31, 1998.

B-30
<PAGE> 66

TRUST SHARES

The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in each Fund. Each share represents an
interest in a Fund proportionately equal to the interest of each other share.
Upon the Trust's liquidation, all shareholders would share pro rata in the net
assets of the Fund in question available for distribution to shareholders. If
they deem it advisable and in the best interest of shareholders, the Board of
Trustees may create classes of shares. The Board of Trustees has created four
series of shares, and may create additional series in the future, which have
separate assets and liabilities; each of such series has or will have a
designation including the word "Series." Income and operating expenses not
specifically attributable to a particular Fund are allocated fairly among the
Funds by the Trustees, generally on the basis of the relative net assets of each
Fund.

The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.

Ten shareholders holding the lesser of $25,000 worth or one percent of a Fund's
shares may advise the Trustees in writing that they wish to communicate with
other shareholders for the purpose of requesting a meeting to remove a Trustee.
The Trustees will then, if requested by the applicants, mail at the applicants'
expense the applicants' communication to all other shareholders.

The Trust or any Fund may be terminated if approved by the vote of a majority of
the Trustees or by the approval of the holders of a majority of the Trust's
outstanding shares, as defined in the 1940 Act. If not so terminated, the Trust
will continue indefinitely.

Rule 18f-2 under the 1940 Act provides that as to any investment company which
has two or more series outstanding and as to any matter required to be submitted
to shareholder vote, such matter is not deemed to have been effectively acted
upon unless approved by the holders of a "majority" (as defined in the Rule) of
the voting securities of each series affected by the matter. Such separate
voting requirements do not apply to the election of Trustees or the ratification
of the selection of accountants. A change in investment policy may go into
effect as to one or more series whose holders so approve the change even though
the required vote is not obtained as to the holders of other affected series.

The rights accompanying Fund shares are legally vested in the separate accounts.
However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the separate accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in separate accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
separate account prospectus.

B-31
<PAGE> 67

NET ASSET VALUE

As indicated in the Funds' prospectus, the net asset value per share of each
Fund's shares will be determined on each day that the New York Stock Exchange is
open for trading. That Exchange annually announces the days on which it will not
be open for trading; the most recent announcement indicates that it will not be
open on the following days: New Year's Day, Martin Luther King, Jr. Holiday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, that Exchange may close on days not
included in that announcement. Also, no Fund is required to compute its net
asset value on any day on which no order to purchase or redeem its shares is
received.

Securities are valued by an independent pricing agent to the extent possible. In
determining the net asset value of each Fund's shares, equity securities that
are listed on a securities exchange (whether domestic or foreign) or quoted by
The Nasdaq Stock Market ("NSM") are valued at the last sale price on that day as
of the close of regular trading on the New York Stock Exchange (which is
currently 4:00 p.m., New York time), or, in the absence of recorded sales, at
the average of readily available closing bid and asked prices on such exchange
or on NSM. Unlisted equity securities that are not included in NSM are valued at
the average of the quoted bid and asked prices in the over-the-counter market.

Fixed-income securities which are traded on a national securities exchange will
be valued at the last sale price or, if there was no sale on such day, at the
average of readily available closing bid and asked prices on such exchange.
However, securities with a demand feature exercisable within one to seven days
are valued at par. Prices for fixed-income securities may be based on quotations
received from one or more market-makers in the securities, or on evaluations
from pricing services. Fixed-income securities for which quotations or prices
are not readily available are valued at their fair value as determined by the
Advisor under guidelines established by the Board of Trustees, with reference to
fixed-income securities whose prices are more readily obtainable or to an
appropriate matrix utilizing similar factors. As a broader market does not
exist, the proceeds received upon the disposal of such securities may differ
from their recorded value. Debt securities which mature in less than 60 days are
valued at amortized cost (unless the Board of Trustees determines that this
method does not represent fair value), if their original maturity was 60 days or
less or by amortizing the value as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days.

Options, futures contracts and options thereon which are traded on exchanges are
valued at their last sale or settlement price as of the close of the exchanges
or, if no sales are reported, at the average of the quoted bid and asked prices
as of the close of the exchange.

Trading in securities listed on foreign securities exchanges or over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange. In addition, foreign securities trading may not take place
on all business days in New York and may occur on days on which the New York
Stock Exchange is not open. In addition, foreign currency exchange rates are
generally determined prior to the close of trading on the New York Stock
Exchange. Events affecting the values of foreign securities and currencies will
not be reflected in the determination of net asset value unless the Board of
Trustees determines that the particular event would materially affect net asset
value, in which case an adjustment will be made. Investments quoted in foreign
currency are valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time of valuation. Foreign currency exchange
transactions conducted on a spot basis are valued at the spot rate prevailing in
the foreign exchange market.

B-32
<PAGE> 68

Securities and other assets for which market quotations are not readily
available are valued at their fair value as determined by the Advisor under
guidelines established by and under the general supervision and responsibility
of the Board of Trustees.

DIVIDENDS AND TAX STATUS

Each Fund has elected to qualify and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code (the "Code").
Qualification as a regulated investment company requires, among other things,
that (1) at least 90% of each Fund's annual gross income, without offset for
losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of securities, foreign currencies or options
(including forward contracts) thereon; and (2) each Fund diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities). In addition, in order not to be subject to federal taxation, each
Fund must distribute to its shareholders at least 90% of its net investment
income, other than net capital gains, earned in each year.

A separate account upon which a variable annuity contract or variable life
insurance contract is based must meet certain diversification requirements set
forth in the Code and U.S. Treasury regulations ("Regulations"). The Code
provides a safe harbor provision under which a separate account will be treated
as satisfying the diversification requirements if, as of the close of each
quarter, the assets in the account meet the diversification requirements for a
regulated investment company and no more than 55% of those assets consist of
cash, cash items, U.S. government securities and securities of other regulated
investment companies. The U.S. Treasury regulations provide an alternative to
the safe harbor provision of the Code. Under such regulations, a separate
account will satisfy the diversification requirements if, among other things,
the regulated investment company underlying such account invests no more than
(1) 55% of the value of its assets in one investment, (2) 70% of the value of
its assets in two investments, (3) 80% of the value of its assets in three
investments, and (4) 90% of the value of its assets in four investments. If, as
is intended, each Fund meets these requirements and complies with certain other
conditions, a separate account investing solely in shares of a Fund will also be
deemed to meet these diversification requirements. However, a failure of a Fund
to qualify as a regulated investment company or to meet such conditions and to
comply with such requirements could cause the owners of variable annuity
contracts and variable life insurance contracts based on such accounts to
recognize ordinary income each year in the amount of any net appreciation of
such contract during the year (including the annual costs of life insurance, if
any, provided under such contract).

A Fund is required to pay an excise tax to the extent it does not distribute to
its shareholders during such calendar year at least 98% of its ordinary income
for that calendar year, 98% of its capital gains over capital losses for the
one-year period ending October 31 in such calendar year, and all undistributed
ordinary income and capital gains for the preceding respective one-year period.
The Funds intend to meet these distribution requirements to avoid excise tax
liability.

Certain provisions of the Code and Regulations may require a Fund to recognize
income with respect to an investment before cash is received. In order to meet
the distribution requirements, the Fund may need to sell investments it
otherwise may wish to hold to insure that it has sufficient cash to meet these
requirements.

B-33
<PAGE> 69

Dividends paid by a Fund from its ordinary income and distributions of the
Fund's net realized capital gains are includable in the respective Participating
Insurance Company's gross income. Distributions of a Fund's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Participating Insurance Companies if certain requirements are met.
The tax treatment of such dividends and distributions depends on the respective
Participating Insurance Company's tax status. To the extent that income of a
Fund represents dividends on common or preferred stock, rather than interest
income, its distributions to the Participating Insurance Companies will be
eligible for the present 70% dividends received deduction applicable in the case
of a life insurance company as provided in the Code. See the prospectus for the
contracts issued by your Participating Insurance Company for a description of
the respective Insurance Company's tax status, the taxation of an investment in
your particular contract and the charges which may be made to cover any taxes
attributable to the separate account.

Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors.

PERFORMANCE INFORMATION

Total Return. Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:

P(1+T)(n) = ERV

where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.

Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication. Average annual total
return, or "T" in the above formula, is computed by finding the average annual
compounded rates of return over the period that would equate the initial amount
invested to the ending redeemable value. Average annual total return assumes the
reinvestment of all dividends and distributions.

Yield. Annualized yield quotations used in a Fund's advertising and promotional
materials are calculated by dividing the Fund's interest income for a specified
thirty-day period, net of expenses, by the average number of shares outstanding
during the period, and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the period. Yield quotations are calculated according to the following
formula:

<TABLE>
<S> <C>
YIELD = 2 [(a - b + 1)(6) - 1]
-----
cd
</TABLE>

where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the last
day of the period.

Except as noted below, in determining net investment income earned during the
period ("a" in the above formula), a Fund calculates interest earned on each
debt obligation held by it during the period by: (1) computing the obligation's
yield to maturity, based on the market value of the obligation (including actual
accrued interest) on the last business day of the period or, if the obligation
was purchased during the period, the purchase price plus accrued interest; (2)
dividing the yield to maturity by 360 and multiplying the resulting quotient by
the market value of the

B-34
<PAGE> 70

obligation (including actual accrued interest). Once interest earned is
calculated in this fashion for each debt obligation held by the Fund, net
investment income is then determined by totaling all such interest earned.

For purposes of these calculations, the maturity of an obligation with one or
more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.

The 30-day yield for the Low Duration VIP Portfolio for the period ended
December 31, 1998 was 5.41%. (Unsubsidized 30-day yield for the Portfolio for
the period ended December 31, 1998 was 1.87%.)

Other information. Each Fund's performance data quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in a
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount. Yields and total returns quoted for a Fund
include the effect of deducting the Fund's expenses, but may not include charges
and expenses attributable to a particular variable annuity contract or variable
life insurance policy. Including these charges in the quotations of a Fund's
yield and total return would have the effect of decreasing performance. Since
shares of the Funds can be purchased only through a variable annuity contract or
variable life insurance policy, a purchaser of such contract or policy should
carefully review the prospectus for the applicable variable annuity contract or
variable life insurance policy for information on relevant charges and expenses.
Performance information for the Funds must always be accompanied by, and be
reviewed with, performance information for the insurance product which invests
in the Funds.

In advertising and promotional materials, a Fund may compare its performance
with data published by Lipper, Inc. ("Lipper"), Morningstar, Inc.
("Morningstar") or CDA Investment Technologies, Inc. ("CDA"). The Fund also may
refer in such materials to mutual fund performance rankings and other data, such
as comparative asset, expense and fee levels, published by Lipper, Morningstar
or CDA. Advertising and promotional materials also may refer to discussions of
the Fund and comparative mutual fund data and ratings reported in independent
periodicals including, but not limited to, The Wall Street Journal, Money
Magazine, Forbes, Business Week, Financial World and Barron's.

GENERAL INFORMATION ABOUT THE TRUST'S SHAREHOLDERS

As of January 31, 1999, Hotchkis and Wiley, 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400, owned of record, and to the knowledge of the
Trust, beneficially 95.05% of the outstanding shares of the Equity Income VIP
Portfolio and may be deemed a controlling person of that Fund.

As of January 31, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the International VIP Portfolio:

Merrill Lynch Life Insurance Company, Bldg 3, 4(th) Floor, 4804 Deer Lake
Drive E, Jacksonville, FL 32246-6484 -- 92.56%

ML Life Insurance Company of New York, Bldg 3, 4(th) Floor, 4804 Deer Lake
Drive E, Jacksonville, FL 32246-6484 -- 7.44%

As of January 31, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Low Duration VIP Portfolio:

Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 61.39%

American General Life Insurance Company, P.O. Box 1591, Houston, TX
77251-1591 -- 38.61%

B-35
<PAGE> 71

APPENDIX -- DESCRIPTION OF RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS:

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

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

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

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

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

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

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

SHORT-TERM DEBT RATINGS:

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.

"PRIME-1" -- Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of these characteristics:

- - Leading market positions in well-established industries.

- - High rates of return on funds employed.

A-1
<PAGE> 72

- - Conservative capitalization structure 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.

"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Adequate alternate liquidity is maintained.

MUNICIPAL BOND RATINGS:

Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or "MIG" with variable rate demand obligations being
designated as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term maturities, but
having neither a variable rate nor demand feature. Factors used in determining
ratings include liquidity of the borrower and short-term cyclical elements.

STANDARD & POOR'S RATING GROUP

BOND RATINGS:

"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obliger's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" -- An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

"A" -- An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

"BBB" -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its commitment on the
obligation.

Obligations rated BB and B are regarded as having significant speculative
characteristics. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.

COMMERCIAL PAPER RATINGS:

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

"A-1" -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2
<PAGE> 73

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL BOND RATINGS:

S&P uses SP-1, SP-2 and SP-3 to rate short-term municipal obligations. A rating
of SP-1 denotes a strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a (+)
designation.

FITCH INVESTORS SERVICE, INC.

BOND RATINGS:

The following summarizes the ratings used by Fitch for corporate bonds:

"AAA" -- "AAA" ratings denote the lowest expectation of credit risk. They are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.

"AA" -- "AA" ratings denote a very low expectation of credit risk. They indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.

"A" -- "A" ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.

"BBB" -- "BBB" ratings indicate that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

"BB" -- "BB" ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.

"B" -- "B" ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.

PLUS (+) MINUS (-) -- Plus and minus signs may be appended to a rating to denote
relative status within major rating categories. Such suffixes are not added to
the "AAA" long-term rating category or to short-term ratings other than "F1."

SHORT-TERM DEBT RATINGS:

"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

A-3
<PAGE> 74

"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

The following summarizes the ratings used by Duff & Phelps for long-term debt:

"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.

"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

"BBB+," "BBB," "BBB-" -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.

"BB+," "BB," "BB-" -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.

"B+," "B," "B-" -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.

SHORT-TERM DEBT RATINGS:

"D-1+" -- Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.

"D-1" -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.

"D-1-" -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

"D-2" -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

A-4
<PAGE> 75

Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO

<TABLE>
<CAPTION>
COMMON STOCKS -- 97.3% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 5.1%
.........................................................
Lockheed Martin Corporation 180 $ 15,255
.........................................................
Northrop Grumman Corporation 260 19,013
.........................................................
Rockwell International Corporation 340 16,511
...................... .......................
--------
50,779
- ---------------------------------------------------------
APPAREL & TEXTILES -- 0.8%
.........................................................
Russell Corporation 400 8,125
- ---------------------------------------------------------
AUTO PARTS -- 2.0%
.........................................................
Dana Corporation 370 15,123
.........................................................
TRW Inc. 90 5,057
...................... .......................
--------
20,180
- ---------------------------------------------------------
AUTOS & TRUCKS -- 6.1%
.........................................................
Ford Motor Company 500 29,343
.........................................................
General Motors Corporation 430 30,772
...................... .......................
--------
60,115
- ---------------------------------------------------------
BANKS -- 7.3%
.........................................................
Bank One Corporation 624 31,863
.........................................................
First Union Corporation 300 18,243
.........................................................
KeyCorp 300 9,600
.........................................................
Washington Mutual, Inc. 336 12,831
...................... .......................
--------
72,537
- ---------------------------------------------------------
BEVERAGES -- 1.3%
.........................................................
Anheuser-Busch Companies, Inc. 200 13,125
- ---------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 3.0%
.........................................................
Georgia-Pacific (Timber Group) 400 9,525
.........................................................
Weyerhaeuser Company 400 20,325
...................... .......................
--------
29,850
- ---------------------------------------------------------
CHEMICALS -- 3.1%
.........................................................
The Dow Chemical Company 200 18,188
.........................................................
Union Carbide Corporation 300 12,750
...................... .......................
--------
30,938
- ---------------------------------------------------------
CONGLOMERATES -- 1.9%
.........................................................
Tenneco, Inc. 550 18,734
- ---------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------
Shares Value
<S> <C> <C>
CONSUMER PRODUCTS -- 1.3%
.........................................................
Fortune Brands, Inc. 270 $ 8,538
.........................................................
Tupperware Corporation 240 3,945
...................... .......................
--------
12,483
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.7%
.........................................................
Harsco Corporation 235 7,153
- ---------------------------------------------------------
FINANCIAL SERVICES -- 2.9%
.........................................................
Associates First Capital Corporation--
Class A 142 6,017
.........................................................
Household International, Inc. 280 11,095
.........................................................
Transamerica Corporation 100 11,550
...................... .......................
--------
28,662
- ---------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 1.7%
.........................................................
Whirlpool Corporation 300 16,613
- ---------------------------------------------------------
INSURANCE -- 6.0%
.........................................................
American General Corporation 130 10,140
.........................................................
Lincoln National Corporation 200 16,363
.........................................................
Ohio Casualty Corporation 100 4,113
.........................................................
Safeco Corporation 300 12,881
.........................................................
St. Paul Companies, Inc. 220 7,645
.........................................................
TIG Holdings, Inc. 500 7,781
...................... .......................
--------
58,923
- ---------------------------------------------------------
MACHINERY -- 2.0%
.........................................................
Deere & Company 125 4,140
.........................................................
New Holland N.V. 1,120 15,330
...................... .......................
--------
19,470
- ---------------------------------------------------------
METALS & MINING -- 4.0%
.........................................................
Alcoa, Inc. 180 13,421
.........................................................
Phelps Dodge Corporation 200 10,175
.........................................................
Reynolds Metals Company 300 15,806
...................... .......................
--------
39,402
- ---------------------------------------------------------
NATURAL GAS -- 0.9%
.........................................................
Eastern Enterprises 200 8,750
- ---------------------------------------------------------
</TABLE>

See Notes to the Financial Statements

1
<PAGE> 76
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO

<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
OIL -- DOMESTIC -- 6.7%
.........................................................
Atlantic Richfield Company 130 $ 8,483
.........................................................
Occidental Petroleum Corporation 1,100 18,563
.........................................................
Phillips Petroleum Company 500 21,313
.........................................................
USX-Marathon Group, Inc. 360 10,845
.........................................................
Ultramar Diamond Shamrock Corporation 300 7,275
...................... .......................
--------
66,479
- ---------------------------------------------------------
PAPER -- 3.9%
.........................................................
Georgia-Pacific Group 200 11,713
.........................................................
International Paper Company 300 13,443
.........................................................
Union Camp Corporation 200 13,500
...................... .......................
--------
38,656
- ---------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.8%
.........................................................
Eastman Kodak Company 240 17,280
- ---------------------------------------------------------
POLLUTION CONTROL -- 2.4%
.........................................................
Browning-Ferris Industries, Inc. 530 15,072
.........................................................
Waste Management, Inc. 175 8,159
...................... .......................
--------
23,231
- ---------------------------------------------------------
RAILROADS -- 2.1%
.........................................................
CSX Corporation 200 8,300
.........................................................
Norfolk Southern Corporation 400 12,675
...................... .......................
--------
20,975
- ---------------------------------------------------------
RETAIL -- 4.1%
.........................................................
Intimate Brands, Inc. 300 8,963
.........................................................
J.C. Penney Company, Inc. 200 9,375
.........................................................
May Department Stores Company 220 13,283
.........................................................
Sears, Roebuck & Company 200 8,500
...................... .......................
--------
40,121
- ---------------------------------------------------------
SAVINGS & LOANS -- 1.9%
.........................................................
Fannie Mae 250 18,500
- ---------------------------------------------------------
STEEL -- 1.4%
.........................................................
USX-U.S. Steel Group, Inc. 600 13,800
- ---------------------------------------------------------
TOBACCO -- 4.3%
.........................................................
Philip Morris Companies, Inc. 800 42,800
- ---------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------
Shares Value
<S> <C> <C>
UTILITY -- ELECTRIC -- 11.0%
.........................................................
CMS Energy Corporation 400 $ 19,375
.........................................................
Edison International 660 18,398
.........................................................
GPU, Inc. 100 4,418
.........................................................
Illinova Corporation 365 9,125
.........................................................
P P & L Resources, Inc. 448 12,488
.........................................................
PacifiCorp 200 4,213
.........................................................
Public Service Enterprises Group, Inc. 360 14,400
.........................................................
SCANA Corporation 410 13,223
.........................................................
Texas Utilities Company 210 9,804
.........................................................
USEC, Inc. 200 2,775
...................... .......................
--------
108,219
- ---------------------------------------------------------
UTILITY -- TELEPHONE -- 7.6%
.........................................................
AT&T Corporation 300 22,575
.........................................................
ALLTEL Corporation 250 14,953
.........................................................
Bell Atlantic Corporation 190 10,070
.........................................................
GTE Corporation 100 6,500
.........................................................
SBC Communications, Inc. 400 21,450
...................... .......................
--------
75,548
- ---------------------------------------------------------
Total common stocks
(cost $1,032,118) 961,448
</TABLE>

<TABLE>
<S> <C> <C>
- ------------------------------------------------------------
Principal
VARIABLE RATE DEMAND NOTES* -- 2.5% Amount
- ------------------------------------------------------------
General Mills, Inc., 5.2337% $ 7,979 7,979
............................................................
Pitney Bowes, Inc., 5.2337% 16,560 16,560
...................... .......................
--------
Total variable rate demand notes
(cost $24,539) 24,539
- ------------------------------------------------------------
Total investments -- 99.8% (cost
$1,056,657) 985,987
............................................................
Other assets in excess of
liabilities -- 0.2% 2,317
...................... .......................
--------
Total net assets -- 100.0% $988,304
- ------------------------------------------------------------
</TABLE>

* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of December 31, 1998.

See Notes to the Financial Statements

2
<PAGE> 77

Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO

<TABLE>
<S> <C> <C>
COMMON STOCKS -- 93.9%
- ------------------------------------------------------------
AUSTRALIA -- 6.3% Shares Value
- ------------------------------------------------------------
AIRLINES -- 1.4%
............................................................
Qantas Airways Limited 2,014,845 $ 4,115,712
- ------------------------------------------------------------
BANKS -- 1.9%
............................................................
Australia and New Zealand
Banking Group, Ltd. 829,085 5,431,621
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Pioneer International, Ltd. 2,000,000 4,232,609
- ------------------------------------------------------------
INSURANCE -- 1.5%
............................................................
QBE Insurance Group, Ltd. 1,038,776 4,301,152
..................... ...................... -----------
Total Australia 18,081,094
- ------------------------------------------------------------
AUSTRIA -- 0.5%
- ------------------------------------------------------------
STEEL -- 0.5%
............................................................
Boehler - Uddeholm AG 30,870 1,436,755
..................... ...................... -----------
Total Austria 1,436,755
- ------------------------------------------------------------
CANADA -- 3.3%
- ------------------------------------------------------------
BANKS -- 1.2%
............................................................
Canadian Imperial Bank of
Commerce 135,080 3,341,823
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.0%
............................................................
Imasco, Ltd. 135,510 2,884,881
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 0.2%
............................................................
Nexfor, Inc. 106,493 419,455
- ------------------------------------------------------------
METALS & MINERALS -- 0.8%
............................................................
Noranda, Inc. 244,250 2,425,008
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 0.1%
............................................................
Canadian Hunter Exploration
Ltd. # 61,063 397,542
..................... ...................... -----------
Total Canada 9,468,709
- ------------------------------------------------------------
FINLAND -- 1.5%
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.5%
............................................................
UPM-Kymmene OYJ 158,780 4,450,400
..................... ...................... -----------
Total Finland 4,450,400
- ------------------------------------------------------------
FRANCE -- 10.9%
- ------------------------------------------------------------
AEROSPACE -- DEFENSE -- 1.8%
............................................................
Thomson CSF 119,723 5,140,834
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
BANKS -- 2.9%
............................................................
Banque Nationale de Paris 58,596 $ 4,824,578
............................................................
Societe Generale 21,380 3,461,792
..................... ...................... -----------
8,286,370
- ------------------------------------------------------------
BEVERAGES -- 1.4%
............................................................
Pernod Ricard SA 62,215 4,040,606
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Lafarge SA 46,470 4,414,809
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 0.9%
............................................................
Societe BIC SA 47,749 2,648,322
- ------------------------------------------------------------
OIL-INTERNATIONAL -- 2.4%
............................................................
Elf Aquitaine SA 34,160 3,948,164
Total SA 30,139 3,052,039
..................... ...................... -----------
7,000,203
..................... ...................... -----------
Total France 31,531,144
- ------------------------------------------------------------
GERMANY -- 6.6%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
Commerzbank AG 101,170 3,199,273
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.2%
............................................................
Dyckerhoff AG 4,819 1,335,943
............................................................
Friedrich Grohe AG 7,730 2,040,897
..................... ...................... -----------
3,376,840
- ------------------------------------------------------------
CHEMICALS -- 1.2%
............................................................
Bayer AG 61,735 2,576,425
............................................................
SGL Carbon AG 15,415 924,980
..................... ...................... -----------
3,501,405
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 1.5%
............................................................
Buderus AG 7,215 2,627,931
............................................................
Vossloh AG 55,405 1,629,048
..................... ...................... -----------
4,256,979
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.6%
............................................................
VEBA AG 77,963 4,664,151
..................... ...................... -----------
Total Germany 18,998,648
- ------------------------------------------------------------
</TABLE>

See Notes to the Financial Statements

3
<PAGE> 78
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
HONG KONG -- 3.0%
- ------------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.9%
............................................................
Hang Lung Development Company
Limited 2,102,000 $ 2,251,959
............................................................
New World Development Co., Ltd. 1,220,000 3,070,747
..................... ...................... -----------
5,322,706
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 1.1%
............................................................
Swire Pacific Ltd. Class A 734,500 3,289,811
..................... ...................... -----------
Total Hong Kong 8,612,517
- ------------------------------------------------------------
IRELAND -- 2.4%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.0%
............................................................
Greencore Group PLC 627,720 2,899,758
- ------------------------------------------------------------
PAPER -- 1.4%
............................................................
Jefferson Smurfit Group PLC 2,205,650 3,977,005
..................... ...................... -----------
Total Ireland 6,876,763
- ------------------------------------------------------------
ITALY -- 3.5%
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.6%
............................................................
ENI SPA 689,400 4,512,833
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.9%
............................................................
Telecom Italia SPA 557,900 4,767,928
............................................................
Telecom Italia SPA -- RNC 117,000 737,519
..................... ...................... -----------
5,505,447
..................... ...................... -----------
Total Italy 10,018,280
- ------------------------------------------------------------
JAPAN -- 8.8%
- ------------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.5%
............................................................
Nintendo Co., Ltd. 45,900 4,455,722
- ------------------------------------------------------------
ELECTRONICS -- 2.1%
............................................................
Kyocera Corporation 85,600 4,530,430
............................................................
Sony Corporation 20,400 1,488,406
..................... ...................... -----------
6,018,836
- ------------------------------------------------------------
FINANCIAL SERVICES -- 2.3%
............................................................
Aiful Corporation 14,100 857,501
............................................................
Promise Company, Ltd. 112,800 5,880,005
..................... ...................... -----------
6,737,506
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
LEISURE/TOYS -- 1.4%
............................................................
NAMCO Ltd. 199,000 $ 4,004,702
............................................................
STEEL -- 1.5%
............................................................
Yodogawa Steel Works, Ltd. 1,166,000 4,403,515
..................... ...................... -----------
Total Japan 25,620,281
- ------------------------------------------------------------
NETHERLANDS -- 9.4%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
ABN AMRO Holding N.V. 154,870 3,257,843
- ------------------------------------------------------------
CHEMICALS -- 1.6%
............................................................
Akzo Nobel N.V. 103,985 4,734,809
- ------------------------------------------------------------
ELECTRONICS -- 1.5%
............................................................
Koninklijke (Royal) Philips
Electronics N.V. 66,136 4,437,866
- ------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 3.7%
............................................................
Fortis (NL) N.V. 61,930 5,131,879
............................................................
ING Groep N.V. 90,555 5,521,837
............................................ -----------
10,653,716
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.5%
............................................................
Koninklijke KPN N.V. 83,795 4,194,804
..................... ...................... -----------
Total Netherlands 27,279,038
- ------------------------------------------------------------
NORWAY -- 0.5%
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.5%
............................................................
Kvaerner ASA -- Class A 72,490 1,427,156
..................... ...................... -----------
Total Norway 1,427,156
- ------------------------------------------------------------
SINGAPORE -- 2.1%
- ------------------------------------------------------------
COMPUTERS -- 2.1%
............................................................
Creative Technology Limited # 396,300 5,944,500
..................... ...................... -----------
Total Singapore 5,944,500
- ------------------------------------------------------------
SPAIN -- 2.4%
- ------------------------------------------------------------
BANKS -- 1.0%
............................................................
Banco Bilbao Vizcaya S.A. 179,850 2,822,564
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.4%
............................................................
Telefonica de Espana S.A. 88,190 3,925,112
............................................................
Telefonica de Espana
S.A. -- Bonus Rights # 88,190 78,378
-----------
4,003,490
............................................ -----------
Total Spain 6,826,054
- ------------------------------------------------------------
</TABLE>

See Notes to the Financial Statements

4
<PAGE> 79
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
SWEDEN -- 2.4%
- ------------------------------------------------------------
BANKS -- 0.9%
............................................................
Skandinaviska Enskilda Banken
AB 247,844 $ 2,614,259
- ------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.5%
............................................................
Electrolux AB -- Class B 250,510 4,311,252
..................... ...................... -----------
Total Sweden 6,925,511
- ------------------------------------------------------------
SWITZERLAND -- 6.4%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.5%
............................................................
Nestle SA "registered" 1,999 4,351,664
- ------------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.4%
............................................................
Saurer AG "registered"# 4,690 2,800,000
............................................................
Sulzer AG "registered" 6,970 4,242,388
............................................ -----------
7,042,388
- ------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 2.5%
............................................................
Novartis AG "registered" 3,687 7,247,834
............................................ -----------
Total Switzerland 18,641,886
- ------------------------------------------------------------
UNITED KINGDOM -- 23.9%
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.7%
............................................................
Coats Viyella PLC 4,525,450 2,033,064
- ------------------------------------------------------------
BANKS -- 4.2%
............................................................
Lloyds TSB Group PLC 433,277 6,149,505
............................................................
National Westminster Bank PLC 317,410 6,115,820
............................................ -----------
12,265,325
- ------------------------------------------------------------
BUILDING MATERIALS -- 2.1%
............................................................
Hanson PLC 777,000 6,144,247
- ------------------------------------------------------------
CHEMICALS -- 2.6%
............................................................
BOC Group PLC 266,563 3,903,085
............................................................
Laporte PLC 469,810 3,642,786
............................................ -----------
7,545,871
- ------------------------------------------------------------
DIVERSIFIED -- 1.3%
............................................................
Cookson Group PLC 1,729,690 3,741,426
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 3.8%
............................................................
BTR PLC 1,110,490 2,272,717
............................................................
Tomkins PLC 1,300,520 6,123,913
............................................................
Williams PLC 468,041 2,628,350
............................................ -----------
11,024,980
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
ENGINEERING & CONSTRUCTION -- 1.5%
............................................................
TI Group PLC 782,750 $ 4,223,073
- ------------------------------------------------------------
FOOD & BEVERAGES -- 1.4%
............................................................
Allied Domecq PLC 442,510 4,023,822
- ------------------------------------------------------------
FOOD PRODUCERS -- 0.6%
............................................................
Hillsdown Holdings PLC 1,392,245 1,760,576
- ------------------------------------------------------------
INSURANCE -- 2.6%
............................................................
Allied Zurich AG PLC # 250,635 3,751,184
............................................................
CGU PLC 244,040 3,814,901
............................................ -----------
7,566,085
- ------------------------------------------------------------
RETAIL -- FOOD CHAINS -- 1.4%
............................................................
Tesco PLC 1,414,710 4,060,524
- ------------------------------------------------------------
TOBACCO -- 0.8%
............................................................
B.A.T. Industries PLC 275,855 2,446,954
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 0.9%
............................................................
Powergen PLC 202,000 2,661,964
..................... ...................... -----------
69,497,911
Total United Kingdom
............................................ -----------
Total common stocks
(cost $273,799,897) 271,636,647
- ------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C> <C>
Principal
CASH EQUIVALENTS -- 6.2% Amount
- -----------------------------------------------------------
Vista Institutional Prime
Money Market Fund $17,995,273 17,995,273
............................................
-----------
Total cash equivalents
(cost $17,995,273) 17,995,273
- -----------------------------------------------------------
Total investments -- 100.1%
(cost $291,795,170) 289,631,920
...........................................................
Liabilities in excess of other
assets -- (0.1)% (496,962)
..................... ......................
-----------
Total net assets -- 100.0% $289,134,958
- -----------------------------------------------------------
</TABLE>

# -- Non income producing security.

See Notes to the Financial Statements

5
<PAGE> 80
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO

<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 21.7% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
EUROBANKS -- 5.7%
...........................................................
Okobank, CLB 9/09/2002, 5.7386%,
9/29/2049 # $ 50,000 $ 50,082
...........................................................
Svenska Hndls Banken, CLB
3/03/2002, 5.7767%, 3/29/2049 # 50,000 48,898
...................... .......................
---------
98,980
- -----------------------------------------------------------
FINANCIAL SERVICES -- 7.3%
...........................................................
Florida Windstorm (Acquired
4/06/1998, cost $51,543), 6.85%,
8/25/2007 r 50,000 52,114
...........................................................
Lehman Brothers Holdings, 6.20%,
1/15/2002 75,000 74,463
...............................................
---------
126,577
- -----------------------------------------------------------
INDUSTRIAL (DOMESTIC) -- 2.9%
...........................................................
Rite Aid Corp.
(Acquired 12/16/1998, cost
$49,914),
5.50%, 12/15/2000 r 50,000 49,814
- -----------------------------------------------------------
OIL & GAS (DOMESTIC) -- 2.7%
...........................................................
Harcor Energy, Inc.,
CLB 7/15/1999,
14.875%, 7/15/2002 40,000 45,844
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 3.1%
...........................................................
Continental Cablevision, Inc., CLB
6/01/1999, 11.00%, 6/01/2007 50,000 53,773
- -----------------------------------------------------------
Total corporate bonds and notes
(cost $374,665) 374,988
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 14.3% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.5%
...........................................................
Federal Home Loan Mortgage
Corporation, Gold Series, 6.00%,
12/01/2028' $100,000 $ 98,896
...........................................................
Federal National Mortgage
Association,
1993-142 SA, 8.7490%, 10/25/2022# 17,769 17,813
...........................................................
1996-63 SC, 10.6890%, 1/18/2027# 24 24
...........................................................
1997-76 FT, 6.0250%, 9/17/2027# 31,876 31,641
...........................................................
1998-48 ZN, 6.50%, 8/25/2028 16,004 15,967
...................... .......................
---------
164,341
- -----------------------------------------------------------
PASS-THROUGH SECURITIES -- 3.6%
...........................................................
Government National Mortgage
Association, 8247, 6.6250%,
7/20/2023 # 60,221 61,509
- -----------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.2%
...........................................................
Federal National Mortgage
Association,
1997-30 EA (PO), 0.00%,
5/18/2027 19,379 19,105
...........................................................
1998-48 CI (IO), 6.50%,
8/25/2028 11,576 1,072
...............................................
---------
20,177
- -----------------------------------------------------------
Total government agency
mortgage-backed securities (cost
$246,281) 246,027
- -----------------------------------------------------------
</TABLE>

See Notes to the Financial Statements

6
<PAGE> 81
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO

<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE- Principal
BACKED SECURITIES -- 23.5% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES -- 10.3%
...........................................................
Associates Manufactured Housing
Pass Through Certificates, CLB,
1996-2 A4, 6.60%, 6/15/2027 $ 75,000 $ 76,551
...........................................................
Champion Auto Grantor Trust
(Acquired 3/18/1998, cost
$29,983), CLB, 1998-A A, 6.11%,
10/15/2002 r 29,983 30,105
...........................................................
Green Tree Financial Corporation,
CLB, 1996-5 B2, 8.45%, 7/15/2027 19,997 18,985
...........................................................
Green Tree Recreational, Equipment
& Consumer Trust, CLB, 1996-B
CTFS, 7.70%, 7/15/2018 50,000 48,250
...........................................................
The Money Store Home Equity Trust,
CLB, 1994-C A3, 7.40%, 3/15/2018 3,028 3,030
...............................................
---------
176,921
- -----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 13.2%
...........................................................
Citicorp Mortgage Securities,
Inc., CLB, 1997-3 A2, 6.92%,
8/25/2027 19,511 19,586
...........................................................
ICI Funding Corporation Secured
Assets Corporation, CLB, 1997-2
1A4, 7.60%, 7/25/2028 70,000 70,296
...........................................................
Independent National Mortgage
Corporation, CLB, 1996-E A5,
7.00%, 5/25/2026 54,517 54,880
...........................................................
Ocwen Residential MBS Corp., CLB,
(Acquired 6/18/1998, cost
$42,204), 1998-R2 AP 4.9739%,
11/25/2034 # r 42,256 42,471
...........................................................
Residential Funding Mortgage
Securities, Inc., CLB, 1998-S17
A6, 6.75%, 8/25/2028 40,714 40,825
...............................................
---------
228,058
- -----------------------------------------------------------
Total non-agency mortgage-backed
securities (cost $407,968) 404,979
- -----------------------------------------------------------
Principal
U.S. TREASURY OBLIGATIONS -- 31.9% Amount Value
- -----------------------------------------------------------
U.S. Treasury Notes:
5.875%, 11/30/2001" $285,000 $ 294,530
...........................................................
6.25%, 02/28/2002 100,000 104,531
...........................................................
5.50%, 2/29/2000 150,000 151,453
- -----------------------------------------------------------
Total U.S. Treasury obligations
(cost $548,751) 550,514
- -----------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 13.8%
- -----------------------------------------------------------
General Mills, Inc., 5.2337% 62,237 62,237
...........................................................
Pitney Bowes, Inc., 5.2337% 84,129 84,129
...........................................................
Sara Lee Corp., 5.2287% 58,011 58,011
...........................................................
Warner-Lambert Co., 5.1760% 32,974 32,974
...................... .......................
---------
Total variable rate demand notes
(cost $237,351) 237,351
- -----------------------------------------------------------
Total investments -- 105.2%
(cost $1,815,016) 1,813,859
...........................................................
Liabilities in excess of other assets --(5.2)% (90,111)
..............................................
---------
Total net assets -- 100.0% $1,723,748
- -----------------------------------------------------------
</TABLE>

# Variable rate security. The rate listed is as of December 31, 1998.

* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of December 31, 1998.

IO -- Interest Only.

PO -- Principal Only.

CLB -- Callable.

r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.

' -- When-issued security.

" -- Security segregated as collateral to cover when-issued security.

See Notes to the Financial Statements

7
<PAGE> 82

Financial Statements -- December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
EQUITY LOW
INCOME INTERNATIONAL DURATION
VIP VIP VIP
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value*................................. $ 985,987 $289,631,920 $1,813,859
Foreign currency**..................................... -- 320,385 --
Dividends and interest receivable...................... 2,545 452,757 17,105
Receivable for investments sold........................ 5,152 -- 18
Organizational expenses, net of accumulated
amortization........................................ 16,183 16,917 16,183
Prepaid expenses....................................... 124 1,345 3,752
---------- ------------ ----------
Total assets...................................... 1,009,991 290,423,324 1,850,917
---------- ------------ ----------
LIABILITIES:
Payable to Advisor..................................... 5,528 178,629 3,009
Payable for forward currency exchange contracts........ -- 157,797 --
Payable for investments purchased...................... -- 634,648 99,248
Dividends payable...................................... -- -- 7,775
Accrued expenses and other liabilities................. 16,159 317,292 17,137
---------- ------------ ----------
Total liabilities................................. 21,687 1,288,366 127,169
---------- ------------ ----------
Net assets........................................ $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
NET ASSETS CONSIST OF:
Paid in capital........................................ $1,060,991 $294,944,329 $1,726,654
Undistributed net investment income.................... 1,547 62,996 1,612
Undistributed net realized loss on securities and
foreign currency transactions....................... (3,564) (3,646,344) (3,361)
Net unrealized depreciation of securities and foreign
currency............................................ (70,670) (2,226,023) (1,157)
---------- ------------ ----------
Net assets........................................ $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)......................................... 106,635 30,379,778 172,775
Net asset value per share (offering and redemption
price).............................................. $ 9.27 $ 9.52 $ 9.98
========== ============ ==========
*Cost of Investments.................................... $1,056,657 $291,795,170 $1,815,016
========== ============ ==========
**Cost of Foreign Currency............................... $ -- $ 314,263 $ --
========== ============ ==========
</TABLE>

See Notes to the Financial Statements

8
<PAGE> 83

Financial Statements -- Period Ended December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
EQUITY
INCOME INTERNATIONAL LOW DURATION
VIP VIP VIP
PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(1)
-------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income*
Dividends...................................... $ 20,815 $ 2,909,676 --
Interest....................................... 746 110 $ 68,296
-------- ----------- --------
Total income.............................. 21,561 2,909,786 68,296
-------- ----------- --------
Expenses
Advisory fee................................... 5,646 1,019,881 5,211
Legal and auditing fees........................ 6,238 38,457 5,473
Custodian fees and expenses.................... 3,036 107,772 5,394
Accounting and transfer agent fees and
expenses..................................... 25,952 44,148 28,675
Administration fee............................. 4,070 53,644 4,128
Trustees' fees and expenses.................... 9,006 49,015 8,745
Reports to shareholders........................ 422 34,205 904
Registration fees.............................. 1,666 80,472 1,741
Amortization of organizational expenses........ 2,280 1,546 2,280
Other expenses................................. 456 874 470
-------- ----------- --------
Total expenses............................ 58,772 1,430,014 63,021
Less, expense reimbursement.................... (50,101) -- (56,451)
-------- ----------- --------
Net expenses.............................. 8,671 1,430,014 6,570
-------- ----------- --------
Net investment income............................. 12,890 1,479,772 61,726
-------- ----------- --------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities and foreign
currency transactions........................ (3,564) (3,884,261) (143)
Net change in unrealized depreciation of
securities and foreign currency.............. (70,670) (2,226,023) (1,157)
-------- ----------- --------
Net loss on investments........................... (74,234) (6,110,284) (1,300)
-------- ----------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $(61,344) $(4,630,512) $ 60,426
======== =========== ========

*Net of Foreign Taxes Withheld...................... $ 96 $ 304,486 $ --
======== =========== ========
</TABLE>

(1) For the period March 18, 1998 (commencement of operations) through December
31, 1998.

(2) For the period June 10, 1998 (commencement of operations) through December
31, 1998.

See Notes to the Financial Statements

9
<PAGE> 84

Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
EQUITY INCOME VIP INTERNATIONAL VIP LOW DURATION VIP
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ------------------------- -------------------------
March 18, 1998** June 10, 1998** March 18, 1998**
through December 31, 1998 through December 31, 1998 through December 31, 1998
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income...... $ 12,890 $ 1,479,772 $ 61,726
Net realized loss on
securities and foreign
currency transactions.... (3,564) (3,884,261) (143)
Net change in unrealized
depreciation of
securities and foreign
currency................. (70,670) (2,226,023) (1,157)
---------- ------------ ----------
Net increase
(decrease) in net
assets resulting
from operations..... (61,344) (4,630,512) 60,426
---------- ------------ ----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income...... (12,711) (1,179,786) (64,700)
---------- ------------ ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares
sold..................... 1,070,974 299,085,362 1,713,346
Shares issued in connection
with payment of dividends
and distributions........ 12,711 1,179,786 56,925
Cost of shares redeemed.... (21,326) (5,319,892) (42,249)
---------- ------------ ----------
Net increase in net
assets from Fund
share
transactions........ 1,062,359 294,945,256 1,728,022
---------- ------------ ----------
Total increase in net assets... 988,304 289,134,958 1,723,748
NET ASSETS:
Beginning of period........ -- -- --
---------- ------------ ----------
End of period*............. $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
*Including undistributed net
investment income of: $ 1,547 $ 62,996 $ 1,612
========== ============ ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold................ 107,647 30,816,414 171,309
Shares issued in connection
with payment of dividends
and distributions........ 1,390 125,916 5,683
Shares redeemed............ (2,402) (562,552) (4,217)
---------- ------------ ----------
Net increase.......... 106,635 30,379,778 172,775
========== ============ ==========
** Commencement of operations.
</TABLE>

See Notes to the Financial Statements

10
<PAGE> 85

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998

NOTE 1.

ACCOUNTING POLICIES. Hotchkis and Wiley Variable Trust (the "Trust") is
registered under the Investment Company Act of 1940 as a diversified, open-end,
management investment company. The Trust was organized as a Massachusetts
business trust on February 4, 1997 and consists of four series of shares
comprising the Equity Income VIP Portfolio, the International VIP Portfolio, the
Low Duration VIP Portfolio and the Total Return Bond VIP Portfolio
(collectively, the "Funds"), the assets of which are invested in separate,
independently managed portfolios. Investment operations of the Funds began on
March 18, 1998 (the Equity Income VIP Portfolio and the Low Duration VIP
Portfolio) and on June 10, 1998 (the International VIP Portfolio). The Total
Return Bond VIP Portfolio has not commenced operations other than those relating
to organizational matters. Shares of the Funds are not offered to the general
public but may only be purchased by the separate accounts of participating
insurance companies for the purpose of funding variable annuity contracts and/or
variable life insurance contracts.

The Equity Income VIP Portfolio seeks to provide current income and long-term
growth of income, accompanied by growth of capital. The International VIP
Portfolio seeks to provide current income and long-term growth of income,
accompanied by growth of capital. The Low Duration VIP Portfolio seeks to
maximize total return, consistent with preservation of capital. The Total Return
Bond VIP Portfolio seeks to maximize long-term total return. The following is a
summary of significant accounting policies followed by the Funds in the
preparation of the financial statements.

ORGANIZATIONAL EXPENSES: Expenses incurred by the Equity Income VIP Portfolio,
International VIP Portfolio and the Low Duration VIP Portfolio in connection
with the organization, registration and the initial public offering of shares
are being deferred and amortized over the period of benefit, but not to exceed
sixty months from the Funds' commencement of operations. These costs were
advanced by the Advisor and will be reimbursed by the Funds. The proceeds of any
redemption of the initial shares by the original shareholder will be reduced by
a pro-rata portion of any then unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of such redemption.

SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the
over-the-counter market. Fixed-income securities are normally valued on the
basis of quotes obtained from brokers and dealers or pricing services. Certain
fixed-income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed-income securities

11
<PAGE> 86
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998

whose prices are more readily obtainable or an appropriate matrix utilizing
similar factors. As a broader market does not exist, the proceeds received upon
the disposal of such securities may differ from quoted values previously
furnished by such market makers. Securities for which market quotations are not
otherwise available are valued at fair value as determined in good faith by
Hotchkis and Wiley (the "Advisor") under procedures established by the Board of
Trustees. Short-term investments which mature in less than 60 days are valued at
amortized cost (unless the Board of Trustees determines that this method does
not represent fair value), if their original maturity was 60 days or less, or by
amortizing the values as of the 61st day prior to maturity, if their original
term to maturity exceeded 60 days. Investments quoted in foreign currency are
valued daily in U.S. dollars on the basis of the foreign currency exchange rate
prevailing at the time of valuation.

FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are maintained
in U.S. dollars. For the International VIP Portfolio, foreign currency
transactions are translated into U.S. dollars on the following basis: (i) market
value of investment securities, assets and liabilities at the daily rates of
exchange, and (ii) purchases and sales of investment securities, dividend and
interest income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The International VIP Portfolio does not
isolate and treat as ordinary income that portion of the results of operations
arising as a result of changes in the exchange rate from the fluctuations
arising from changes in the market prices of securities held during the period.
However, for federal income tax purposes, the International VIP Portfolio does
isolate and treat as ordinary income the effect of changes in foreign exchange
rates arising from actual foreign currency transactions and the effect of
changes in foreign exchange rates arising from trade date and settlement date
differences.

FORWARD CURRENCY EXCHANGE CONTRACTS: The International VIP Portfolio utilizes
forward currency exchange contracts for the purpose of hedging foreign currency
risk. Under these contracts, they are obligated to exchange currencies at
specific future dates. Risks arise from the possible inability of
counter-parties to meet the terms of their contracts and from movements in
currency values.

FEDERAL INCOME TAXES: It is each Fund's intent to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and each Fund
intends to distribute investment company net taxable income and net capital
gains to shareholders. Therefore, no federal income tax provision is required.

EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.

RESTRICTED SECURITIES: The Low Duration VIP Portfolio owns investment securities
which are unregistered and thus restricted as to resale. These securities are
valued by the Fund after giving due consideration to pertinent factors including
recent private sales, market conditions and the issuer's

12
<PAGE> 87
- --------------------------------------------------------------------------------

financial performance. Where future disposition of these securities requires
registration under the Securities Act of 1933, the Fund has the right to include
these securities in such registration, generally without cost to the Fund. The
Fund has no right to require registration of unregistered securities. At
December 31, 1998, the Low Duration VIP Portfolio had restricted securities with
an aggregate market value of $174,504, representing 10% of the net assets of the
Fund.

WHEN-ISSUED SECURITIES: The Funds may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Funds record purchases of when-issued securities and reflect
the values of such securities in determining net asset value in the same manner
as other portfolio securities. The Funds segregate and maintain at all times
cash or other liquid assets in an amount at least equal to the amount of
outstanding commitments for when-issued securities.

USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly for the Low Duration VIP Portfolio, declared and paid quarterly
for the Equity Income VIP Portfolio and declared and paid semi-annually for the
International VIP Portfolio. Distributions of net realized capital gains, if
any, will be declared at least annually. Prior to July 1, 1998, dividends from
net investment income were declared daily and paid monthly for the Low Duration
VIP Portfolio.

OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified to paid in capital.

NOTE 2.

INVESTMENT ADVISORY AGREEMENTS. Each Fund has an investment advisory agreement
with the Advisor, with whom certain officers and Trustees of the Trust are
affiliated. The Advisor is a division of Merrill Lynch Asset Management, L.P.,
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The Advisor
receives a fee, computed daily and payable monthly, at the annual rates
presented below as applied to each Fund's daily net assets. The Advisor has
voluntarily agreed to pay all operating expenses in excess of the annual rates
presented below as applied to each Fund's daily net assets. For the

13
<PAGE> 88
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998

period ended December 31, 1998, the Advisor reimbursed the following expenses:

<TABLE>
<CAPTION>
Equity Income International Low Duration
VIP Portfolio VIP Portfolio VIP Portfolio
---------------------------------------------
<S> <C> <C> <C>
ANNUAL ADVISORY RATE..................................... 0.75% 0.75% 0.46%
ANNUAL CAP ON EXPENSES................................... 1.15% 1.35% 0.58%
EXPENSE REIMBURSEMENT.................................... $50,101 $0 $56,451
</TABLE>

As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Trustees of the Funds has adopted procedures which allow the Funds,
under certain conditions described in the Rule, to acquire newly-issued
securities from a member of an underwriting group in which an affiliated
underwriter participates.

NOTE 3.

SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the period ended December 31, 1998 were as
follows:

<TABLE>
<CAPTION>
Purchases Sales
------------------------------- ------------------------------
Fund U.S. Government Other U.S. Government Other
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME VIP PORTFOLIO..... $ 15,224 $ 1,124,274 -- $ 103,816
INTERNATIONAL VIP PORTFOLIO..... -- 326,422,822 -- 48,920,665
LOW DURATION VIP PORTFOLIO...... 3,566,834 1,570,733 $2,775,659 779,785
</TABLE>

As of December 31, 1998, unrealized appreciation (depreciation) for federal
income tax purposes was as follows:

<TABLE>
<CAPTION>
Net Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME VIP PORTFOLIO.................... $ (70,670) $ 58,130 $ (128,800)
INTERNATIONAL VIP PORTFOLIO.................... (4,087,155) 23,654,334 (27,741,489)
LOW DURATION VIP PORTFOLIO..................... (1,157) 7,863 (9,020)
</TABLE>

At December 31, 1998, the cost of investments for federal income tax purposes
was $1,056,657, $293,719,075, and $1,815,016 for the Equity Income,
International and Low Duration VIP Portfolios, respectively. Any differences
between book and tax are due primarily to wash sale losses. In addition, the
cost

14
<PAGE> 89
- --------------------------------------------------------------------------------

basis difference in the International VIP Portfolio is due to mark-to-market
adjustments for passive foreign investment companies.

At December 31, 1998, the Equity Income, International and Low Duration VIP
Portfolios had accumulated net realized capital loss carryovers of $3,564,
$3,178,827 and $3,361, respectively, expiring in 2006. To the extent the Funds
realize future net capital gains, those gains will be offset by any unused
capital loss carryover.

NOTE 4.

FORWARD CURRENCY EXCHANGE CONTRACT. At December 31, 1998, the International VIP
Portfolio had entered into a "portfolio hedge" forward currency exchange
contract that obligates the Fund to deliver and receive currency at a specified
future date. The net unrealized depreciation of $61,576 is included in the net
unrealized depreciation section of the accompanying financial statements. The
terms of the open contract are as follows:

<TABLE>
<CAPTION>
Currency to U.S. $ value at Currency to U.S. $ value at
Settlement Date be Delivered December 31, 1998 be Received December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4/30/99 42,905,100 Hong Kong Dollars $5,530,510 42,905,100 Hong Kong Dollars $5,468,934
</TABLE>

NOTE 5.

FEDERAL TAX DISCLOSURE (UNAUDITED). For the period ended December 31, 1998, 100%
of the ordinary distributions paid in the Equity Income VIP Portfolio qualify
for the dividend received deduction available to corporate shareholders.

The International VIP Portfolio intends to make an election under Internal
Revenue Code Section 853 to pass through non-U.S. taxes paid by the Fund to its
shareholders. Non-U.S. taxes paid by the Fund for the period ended 12/31/98 were
$288,516. Foreign source income earned by the Fund for the period ended 12/31/98
was $1,890,256. Shareholders are entitled to claim a credit for foreign taxes or
a deduction, generally at their option.

15
<PAGE> 90

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
EQUITY INCOME INTERNATIONAL LOW DURATION
VIP PORTFOLIO VIP PORTFOLIO VIP PORTFOLIO
------------------------- ------------------------- -------------------------
March 18, 1998* June 10, 1998* March 18, 1998*
through December 31, 1998 through December 31, 1998 through December 31, 1998
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.00 $10.00 $10.00
Income from Investment Operations:
Net investment income.............. 0.14 0.04 0.46
Net realized and unrealized loss on
investments...................... (0.75) (0.48) (0.03)
-------- ------------ ----------
Total from investment operations... (0.61) (0.44) 0.43
-------- ------------ ----------
Less Distributions:
Dividends (from net investment
income).......................... (0.12) (0.04) (0.45)
-------- ------------ ----------
Net Asset Value, End of Period......... $ 9.27 $ 9.52 $ 9.98
======== ============ ==========
Total Return(1)........................ (6.04)% (4.38)% 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period.............. $988,304 $289,134,958 $1,723,748
Ratio of expenses to average net
assets(2):
Before expense reimbursement....... 7.81% 1.05% 5.56%
After expense reimbursement........ 1.15% 1.05% 0.58%
Ratio of net investment income to
average net assets(2):
Before expense reimbursement....... (4.95)% 1.09% 0.47%
After expense reimbursement........ 1.71% 1.09% 5.45%
Portfolio turnover rate(1)............. 12% 24% 296%
</TABLE>

* Commencement of operations.
(1) Not annualized.
(2) Annualized.

See Notes to the Financial Statements

16
<PAGE> 91

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of Hotchkis and Wiley Variable Trust:

In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Equity Income VIP Portfolio,
the International VIP Portfolio and the Low Duration VIP Portfolio (three of the
four portfolios of Hotchkis and Wiley Variable Trust, the "Funds") at December
31, 1998, the results of each of their operations, the changes in each of their
net assets and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

Milwaukee, WI
February 18, 1999