AMERICAN GENERAL SERIES PORTFOLIO CO 2, 497, 2000-03-06

AMERICAN GENERAL SERIES PORTFOLIO CO 2
497, 2000-03-06

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<PAGE> 1

American General Series Portfolio Company 2

Class A Shares
Class B Shares

March 1, 2000

ACTIVELY MANAGED EQUITY FUNDS:
THESE FUNDS INVEST MOSTLY IN STOCKS AND ARE DESIGNED TO INCREASE THE VALUE OF
YOUR INVESTMENT OVER THE LONG TERM.
American General International Growth Fund ("International Growth Fund")
American General International Value Fund ("International Value Fund")
American General Large Cap Growth Fund ("Large Cap Growth Fund")
American General Large Cap Value Fund ("Large Cap Value Fund")
American General Mid Cap Growth Fund ("Mid Cap Growth Fund")
American General Mid Cap Value Fund ("Mid Cap Value Fund")
American General Small Cap Growth Fund ("Small Cap Growth Fund")
American General Small Cap Value Fund ("Small Cap Value Fund")
American General Socially Responsible Fund ("Socially Responsible Fund")

BALANCED FUND:
THIS FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS TO ALLOW FOR LONG-TERM
GROWTH WHILE REDUCING MARKET RISKS.
American General Balanced Fund ("Balanced Fund")

INCOME FUNDS:
THESE FUNDS ARE DESIGNED TO PROVIDE CURRENT INCOME WHILE CONSERVING CAPITAL.
American General Core Bond Fund ("Core Bond Fund")
American General Domestic Bond Fund ("Domestic Bond Fund")
American General High Yield Bond Fund ("High Yield Bond Fund")
American General Municipal Bond Fund ("Municipal Bond Fund")
American General Strategic Bond Fund ("Strategic Bond Fund")

INDEX EQUITY FUNDS:
THESE FUNDS TRACK DIFFERENT INDICES IN ORDER TO PROVIDE GROWTH OVER THE LONG
TERM.
American General Mid Cap Index Fund ("Mid Cap Index Fund")
American General Small Cap Index Fund ("Small Cap Index Fund")
American General Stock Index Fund ("Stock Index Fund")

LIFESTYLE FUNDS:
THESE FUNDS ALLOCATE ASSETS TO OTHER AMERICAN GENERAL FUNDS IN ORDER TO PROVIDE
A DIVERSIFIED, LESS RISKY INVESTMENT.
American General Conservative Growth Lifestyle Fund ("Conservative Growth
Lifestyle Fund")
American General Growth Lifestyle Fund ("Growth Lifestyle Fund")
American General Moderate Growth Lifestyle Fund ("Moderate Growth Lifestyle
Fund")

MONEY MARKET FUNDS:
THESE FUNDS PROVIDE LIQUIDITY AND PRESERVATION OF CAPITAL.
American General Money Market Fund ("Money Market Fund")
American General Municipal Money Market Fund ("Municipal Money Market Fund")

NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The SEC maintains an internet website at http://www.sec.gov that contains the
Statement of Additional Information ("SAI"), material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE 3
Balanced Fund 3
Conservative Growth Lifestyle Fund 5
Core Bond Fund 9
Domestic Bond Fund 13
Growth Lifestyle Fund 16
High Yield Bond Fund 20
International Growth Fund 23
International Value Fund 25
Large Cap Growth Fund 28
Large Cap Value Fund 31
Mid Cap Growth Fund 33
Mid Cap Index Fund 36
Mid Cap Value Fund 38
Moderate Growth Lifestyle Fund 41
Money Market Fund 44
Municipal Bond Fund 46
Municipal Money Market Fund 49
Small Cap Growth Fund 51
Small Cap Index Fund 54
Small Cap Value Fund 57
Socially Responsible Fund 60
Stock Index Fund 63
Strategic Bond Fund 65
MORE ABOUT PORTFOLIO INVESTMENTS 68
WELCOME TO AMERICAN GENERAL CORPORATION (ADVISER AND
SUB-ADVISER INFORMATION) 73
SHAREHOLDER ACCOUNT INFORMATION 78
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE 86
FINANCIAL HIGHLIGHTS 98
</TABLE>

2
<PAGE> 3

RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE

- --------------------------------------------------------------------------------
BALANCED FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Balanced

INVESTMENT ADVISER
The Variable Annuity Life Insurance Company ("VALIC")

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

INVESTMENT OBJECTIVE
Seeks balanced accomplishment of (i) conservation of principal and (ii)
long-term growth of capital and income through investment in fixed-income and
equity securities. This investment objective can be changed by the Board of
Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund invests in a combination of fixed-income and equity securities in order
to maintain the value of your principal investment and provide you with capital
growth and income over the long term. We select securities for the Fund's
portfolio by identifying fixed-income (bonds and preferred stock) and equity
(stock) securities that represent fundamental values at reasonable prices. We
implement this philosophy using a system of portfolio managers, under which a
different group of portfolio managers makes investment decisions for the
fixed-income and equity portions of the Fund.

Fixed-income Portion: Up to 75% of the Fund's total assets may be invested in
fixed-income securities rated A or better by Moody's Investors Service
("Moody's") or Standard & Poor ("S&P") or of comparable investment quality. The
Sub-Adviser is not required to sell the security, however, if the rating is
downgraded. At all times, at least 25% of the Fund's total assets are invested
in fixed-income senior securities. The Fund may hold up to 20% of its total
assets in high-yielding, high risk fixed-income securities ("junk bonds").

Equity Portion: Up to 75% of the Fund's total assets may be invested in equity
securities listed on national securities exchanges or in the national
over-the-counter market, NASDAQ. Equity securities include American Depositary
Receipts ("ADRs"), which are certificates issued by a U.S. depositary bank,
representing foreign shares held by the bank. ADRs carry the same currency,
political and economic risks as the underlying foreign shares. Up to 10% of the
Fund's total assets may be invested in the securities of U.S. small
capitalization companies ("Small Caps"). Small Caps are companies that have
total assets (capitalization) of approximately $150 million to $1.25 billion.
See "More About Portfolio Investments."

Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.

Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.

3
<PAGE> 4

Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities involves significantly greater credit risk, market risk
and interest rate risk than higher rated fixed-income securities, achievement of
the Fund's investment objective is dependent upon the Sub-Adviser's investment
analysis. Accordingly, the Fund's investments may be worth less than what the
Fund paid for them.

Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.

Value Investing Risk: The risk that the portfolio manager's judgment that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.

[GRAPH]

ANNUAL RETURN CLASS A = 12.03%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 6.69%
Worst Quarter: Class A 3rd 1999 (5.14)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a broad measure of market performance and to a blend of two indices ("Balanced
Blend"). The Balanced Blend is composed of 40% Lehman Brothers Government and
Corporate Index and 60% S&P 500 Index. Each is a widely recognized, unmanaged
index. The average total return table shows returns with the maximum sales
charge deducted. No sales charge has been applied to the indices used for
comparison in the table. The Fund's past performance does not necessarily
indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return Class A: 5.59%
Average Annual Total Return Class B: 5.79%
40% Lehman Brothers Government and
Corporate Bond/60% S&P 500: 11.40%
</TABLE>

4
<PAGE> 5

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
------------------------------ ------- -------
<S> <C> <C>
Management fees 0.80% 0.80%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.42% 0.96%
----- -----
Total annual fund operating expenses 2.47% 2.76%
===== =====
Fee waiver and/or expense reimbursement (1.40)% (0.94)%
----- -----
Net Expenses 1.07% 1.82%
===== =====
</TABLE>

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

(1) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% contingent deferred sales charge ("CDSC"). Redemptions within 2
years will be charged a CDSC of 0.50%.

(2) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$678 $896 $1,132 $1,810
Class B 1 Year 3 Years 5 Years 10 Years
$701 $903 $1,103 $2,142
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$185 $573 $986 $2,142
</TABLE>

- --------------------------------------------------------------------------------
CONSERVATIVE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks current income and low to moderate growth of capital through investments
in a combination of the Series Company Funds ("Underlying Funds"). This Fund is
suitable for investors who wish to invest in equity securities, but who are not
willing to assume the market risks of either the Growth Lifestyle Fund or the
Moderate Growth Lifestyle Fund. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
5
<PAGE> 6

INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.

Medium Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund

Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund

Bonds 30%-50%
(These Funds invest in fixed-income securities, at
least 65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>

This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.

The Fund is a non-diversified investment company under the Investment Company
Act of 1940 (the "1940 Act") because it invests in a limited number of the
Underlying Funds. However, the Underlying Funds themselves are diversified
companies.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.

The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.

Investment in the Underlying Funds involves manager risk. Manager Risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.

The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.

6
<PAGE> 7

The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.

Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.

Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.

Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.

Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.

Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.

Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.

Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.

Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.

Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.

Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.

7
<PAGE> 8

[GRAPH]

ANNUAL RETURN CLASS A = 13.70%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 10.88%
Worst Quarter: Class A 3rd 1999 (2.95)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a blended index, calculated by including the pro rata portion of each of the
Underlying Fund's respective indices, and the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The S&P 500
Index approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The average total return table shows returns with the maximum
sales charge deducted. No sales charge has been applied to the index used for
comparison in the table. The Fund's past performance does not necessarily
indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: 7.16%
Average Annual Total Return Class B: 8.71%
Conservative Growth Lifestyle Blended
Benchmark: 10.63%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.10% 0.10%
Distribution and service (12b-1) fees None None
Other expenses 0.00% 0.00%
----- -----
Total annual fund operating expenses 0.10% 0.10%
----- -----
----- -----
</TABLE>

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

(3) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(4) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.
8
<PAGE> 9

The numbers below show the total combined operating expenses as a percentage of
net assets, including indirect expenses of the Underlying Funds, after expense
reimbursements. This reflects total average weighted combined operating
expenses.

<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Total Combined Operating Expenses: 1.12% 1.87%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$585 $605 $628 $697
Class B 1 Year 3 Years 5 Years 10 Years
$535 $379 $184 $129
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
CORE BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
American General Investment Management, L.P. ("AGIM")

INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed-income securities. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in medium to high quality
fixed-income securities rated investment grade or higher, or in securities
issued or guaranteed by the U.S. Government, mortgage-backed or asset-backed
securities. U.S. Government securities are securities issued or guaranteed by
the U.S. Government which are supported by the full faith and credit of the U.S.
Government; the right of the issuer to borrow from the U.S. Treasury; the credit
of the issuing government agency; or the authority of the U.S. Government to
purchase obligations of the agency. A portion of the 65% may also be invested in
U.S. dollar-denominated fixed-income securities issued by foreign issuers,
although the Fund currently intends to limit these investments to no more than
40% of its total assets. The Sub-Adviser is not required to dispose of a
security if its rating is downgraded. Up to 10% of the Fund's total assets may
be invested in lower quality fixed-income securities ("junk bonds"), those rated
below Baa3 by Moody's and BBB by S&P.

Up to 35% of the Fund's total assets may be invested in interest-bearing
short-term investments, such as commercial paper, bankers' acceptances, bank
certificates of deposit, and other cash equivalents and cash. Equity securities,
including common or preferred stocks, convertible securities, and warrants, may
comprise up to 20% of the Fund's total assets. See "More About Portfolio
Investments."

9
<PAGE> 10

portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.

10
<PAGE> 11

current financial condition, which may be better or worse than the rating
indicates. Credit ratings are only one factor VALIC or a Sub-Adviser relies on
in evaluating lower-rated fixed-income securities. The analysis by VALIC or the
Sub-Adviser of a lower rated security may also include consideration of the
issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, regulatory concerns, and
responsiveness to changes in business conditions and interest rates. VALIC or
the Sub-Adviser also may consider relative values based on anticipated cash
flow, interest or dividend coverage, balance sheet analysis, and earnings
prospects.

PERFORMANCE INFORMATION

The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.

[GRAPH]

ANNUAL RETURN CLASS A = (1.04)%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 3rd 1999 0.40%
Worst Quarter: Class A 2nd 1999 (1.25)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Lehman Brothers Aggregate Bond Index, a total return index measuring both
the capital price changes and the income underlying the universe of securities,
weighted by market value outstanding. The average total return table shows
returns with the maximum sales charge deducted. No sales charge has been applied
to the index used for comparison in the table. The Fund's past performance does
not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: (5.74)%
Average Annual Total Return Class B: (6.42)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

11
<PAGE> 12

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
------------------------------ ------- -------
<S> <C> <C>
Management fees 0.48% 0.48%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 0.86% 0.74%
----- -----
Total annual fund operating expenses 1.59% 2.22%
===== =====
Fee waiver and/or expense reimbursement (0.54)% (0.42)%
----- -----
Net Expenses 1.05% 1.80%
===== =====
</TABLE>

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

(5) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(6) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$577 $793 $1,028 $1,701
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>

12
<PAGE> 13

- --------------------------------------------------------------------------------
DOMESTIC BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments primarily in investment grade fixed-income securities and
other income producing securities. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in investment grade U.S.
corporate fixed-income securities, rated at least A by Moody's or S&P, in
securities issued or guaranteed by the U.S. Government, Yankee bonds, or in
mortgage-backed or asset-backed securities. U.S. Government securities are
securities issued or guaranteed by the U.S. Government which are supported by
the full faith and credit of the U.S. Government; the right of the issuer to
borrow from the U.S. Treasury; the credit of the issuing government agency; or
the authority of the U.S. Government to purchase obligations of the agency. The
Sub-Adviser is not required to dispose of a security if its rating is
downgraded.

Up to 35% of total assets may be invested in non-U.S. investment grade
intermediate and long-term corporate fixed-income securities rated at least A by
Moody's or S&P, including Eurodollar fixed-income securities, securities issued
or guaranteed by the Canadian Government, its provinces or their
instrumentalities, or interest bearing short-term investments, such as
commercial paper, bankers' acceptances, bank certificates of deposit and other
cash equivalents and cash. Currently, Eurodollar fixed-income securities will be
limited to no more than 20% of the Fund's total assets.

To increase the Fund's earning potential, we may use up to 25% of the Fund's
assets to make some higher risk investments in mortgage-related securities or
bonds rated less than A by Moody's or S&P. No minimum rating requirement applies
to these junk bonds. See "More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

13
<PAGE> 14

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.

[GRAPH]

ANNUAL RETURN CLASS A = (3.31)%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 3rd 1999 (0.35)%
Worst Quarter: Class A 1st 1999 (1.60)%
</TABLE>

14
<PAGE> 15

sales charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: (7.90)%
Average Annual Total Return Class
B: (8.41)%
Lehman Brothers Aggregate Bond
Index: (0.83)%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.60% 0.60%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.45% 0.95%
----- -----
Total annual fund operating expenses 2.30% 2.55%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.27)% (0.77)%
----- -----
Net Expenses 1.03% 1.78%
----- -----
----- -----
</TABLE>

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

(7) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(8) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$575 $787 $1,017 $1,679
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$697 $891 $1,083 $2,100
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$181 $561 $965 $2,100
</TABLE>

15
<PAGE> 16

- --------------------------------------------------------------------------------
GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks growth through investments in a combination of the Series Company Funds
("Underlying Funds"). This Fund is suitable for investors seeking the potential
for capital growth that a fund investing predominately in equity securities may
offer. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.

<TABLE>
<S> <C>
International Equity Securities 25%-35%
(These Funds invest at least 65% in non-U.S.
companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 15%-25%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 20%-30%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 5%-15%
(These Funds invest in fixed-income securities, at
least 65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
American General High Yield Bond Fund
</TABLE>

The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.

16
<PAGE> 17

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.

The securities that Underlying Funds invest in also involve various risks:

Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

17
<PAGE> 18

[GRAPH]

ANNUAL RETURN CLASS A = 28.92%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 20.47%
Worst Quarter: Class A 3rd 1999 (2.27)%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return Class A: 21.50%
Average Annual Total Return Class B: 23.89%
Growth Lifestyle Blended Benchmark Index: 18.43%
</TABLE>

18
<PAGE> 19

<TABLE>
<CAPTION>
<S> <C> <C>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(9) 5%-Footnote(10)
Maximum account fee None None
</TABLE>

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

(9) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(10) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Total Combined Operating Expenses: 1.21% 1.96%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$585 $605 $628 $697
Class B 1 Year 3 Years 5 Years 10 Years
$535 $379 $184 $129
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

19
<PAGE> 20

- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
AGIM

INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investment in a diversified portfolio of high yielding, high risk
fixed-income securities. This investment objective can be changed by the Board
of Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in below-investment grade
U.S. and foreign junk bonds. These high yielding, high risk fixed-income
securities are rated below Baa3 by Moody's and BBB- by S&P. Up to 15% can be
rated below Caa3 by Moody's or CCC- by S&P. The Fund may also invest up to 35%
of total assets in below-investment grade foreign fixed-income securities.

To balance this risk, the Fund may invest up to 35% in investment grade
securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P. In
addition, the Fund may invest up to 15% in zero coupon securities (securities
not paying current cash interest), and up to 20% of total assets in equity
securities. Equity securities includes common or preferred stocks, warrants, and
convertible securities. The Sub-Adviser is not required to dispose of a bond
that is downgraded to below-investment grade. See "More About Portfolio
Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

20
<PAGE> 21

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

[GRAPH]

ANNUAL RETURN CLASS A = 4.05%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 1st 1999 3.89%
Worst Quarter: Class A 3rd 1999 (1.51)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney High Yield Market Index, a widely recognized, unmanaged
index covering a significant portion of the below-investment grade U.S.
corporate bond market. The average total return table shows returns with the
maximum sales charge deducted. No sales charge has

21
<PAGE> 22

been applied to the index used for comparison in the table. The Fund's past
performance does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return Class A: (0.90)%
Average Annual Total Return Class B: (1.48)%
Salomon Smith Barney High Yield Market Index: 1.74%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.70% 0.70%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.06% 0.67 %
----- -----
Total annual fund operating expenses 2.01% 2.37%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.76)% (0.37)%
----- -----
Net Expenses 1.25% 2.00%
----- -----
----- -----
</TABLE>

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

(11) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(12) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$596 $853 $1,130 $1,919
Class B 1 Year 3 Years 5 Years 10 Years
$718 $956 $1,195 $2,332
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$203 $628 $1,079 $2,332
</TABLE>

22
<PAGE> 23

- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Jacobs Asset Management

INVESTMENT OBJECTIVE
Seeks to provide long-term capital appreciation by investing in equity
securities of non-U.S. companies, the majority of which are expected to be in
developed markets. The Fund may invest across the capitalization spectrum,
although it intends to emphasize smaller capitalization stocks. This investment
objective can be changed by the Board of Trustees, without the approval of the
Fund shareholders.

INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in the foreign equity
securities of at least three countries outside the United States. Since the Fund
normally intends to be fully invested, foreign equity securities will usually
represent closer to 80-85% of the Fund's total assets. Foreign equity securities
include common and preferred stock, convertible preferred stock, rights, and
warrants, American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), and Global Depositary Receipts ("GDRs"). ADRs are certificates issued
by a U.S. depositary bank, representing foreign shares held by the bank, to
facilitate trading in foreign securities. GDRs and EDRs are very similar to
ADRs. Generally, ADRs are designed for use in U.S. securities markets and EDRs
are designed for use in European securities markets. GDRs are designed for use
when the issuer is raising capital in more than one market simultaneously, such
as the issuer's local market and the U.S. ADRs, EDRs and GDRs each carry the
same currency, political and economic risks as the underlying foreign shares.

The Fund may invest up to 40% of total assets in the equity securities of
issuers located in emerging market countries. An "emerging market country" is
any country which, in the opinion of the Sub-Adviser, is generally considered to
be an emerging or developing country by the international financial community,
including the International Bank for Reconstruction and Development (known as
"The World Bank") and the International Finance Corporation. The Fund will focus
its emerging market investments on those countries in which the Sub-Adviser
believes the economies are developing and the markets are becoming more
sophisticated.

We will use a flexible, value-oriented approach to selecting this Fund's
investments, focusing on companies rather than on countries or markets. Our goal
is to identify stocks selling at the greatest discount to their intrinsic future
value. Value is ascertained through an analysis of price/cash flow, enterprise
value/cash flow, and price/future earnings. This Fund invests in a wide range of
equity securities, including those of smaller capitalization companies ("Small
Caps"). Up to 50% of the Fund's total assets may be invested in Small Caps,
which are companies that have total assets (capitalization) of approximately
$150 million to $1.25 billion. See "More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

23
<PAGE> 24

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

[GRAPH]

ANNUAL RETURN CLASS A = 56.04%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 44.40%
Worst Quarter: Class A 1st 1999 (0.49)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney Primary Market Index. The Salomon Smith Barney Primary
Market Index is a sub-index of the Salomon Smith Barney Broad Market Index,
which measures the performance of equities from 23 countries and 18 regions
throughout the world. Each company with equity capital of at least $100 million
is tracked by the Salomon Smith Barney Index. The average total return table
shows returns with the maximum sales charge deducted. No sales charge has been
applied to the index used for comparison in the table. The Fund's past
performance does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return Class A: 47.07%
Average Annual Total Return Class B: 49.15%
Salomon Smith Barney Primary Market Index: 24.51%
</TABLE>

24
<PAGE> 25

<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(13) 5%-Footnote(14)
Maximum account fee None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.90% 0.90%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.53% 1.25%
----- -----
Total annual fund operating expenses 2.68% 3.15%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.28)% (1.00)%
----- -----
Net Expenses 1.40% 2.15%
----- -----
----- -----
</TABLE>

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

(13) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(14) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$709 $993 $1,298 $2,163
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$732 $1,000 $1,270 $2,487
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$218 $673 $1,155 $2,487
</TABLE>

- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
25
<PAGE> 26

INVESTMENT OBJECTIVE
Seeks to provide growth of capital and future income through investments
primarily in securities of non-U.S. issuers and securities whose principal
markets are outside of the United States. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in foreign securities.
Since the Fund normally intends to be fully invested, foreign equity securities
will usually represent closer to 80-85% of the Fund's total assets. While the
assets of the Fund can be invested with geographical flexibility, the emphasis
will be on securities of companies located in Europe, Canada, Australia, and the
Far East, giving due consideration to economic, social, and political
developments, currency risks and the liquidity of various national markets.

Up to 90% of the amount invested in foreign securities may be invested in put
and call options on foreign currencies and forward currency contracts. A put
option on foreign currency is a security that gives the Fund the right to sell a
particular foreign currency within a stated period of time. A call option on
foreign currency gives the Fund the right to buy a particular foreign currency
within a stated period of time. A forward currency contract is an agreement to
buy or sell foreign currency at an agreed-upon price and date.

The Fund may invest in the equity securities of issuers located in emerging
market countries. An "emerging market country" is any country which, in the
opinion of the Sub-Adviser, is generally considered to be an emerging or
developing country by the international financial community, including the
International Bank for Reconstruction and Development (known as "The World
Bank") and the International Finance Corporation. The Fund will focus its
emerging market investments on those countries in which the Sub-Adviser believes
the economies are developing and the markets are becoming more sophisticated.

This Fund may invest up to 10% of total assets in the securities of foreign
small capitalization companies ("Foreign Small Caps"). Foreign Small Caps are
companies that have total assets (capitalization) of approximately $150 million
to $1.25 billion. See "More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Derivatives Risk: The risk that loss may result from a Fund's investments in put
and call options, futures, swaps, structured securities and other derivative
instruments. These instruments may be leveraged so that small changes may
produce disproportionate losses to a Fund.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

26
<PAGE> 27

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

[GRAPH]

ANNUAL RETURN CLASS A = 65.99%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 27.19%
Worst Quarter: Class A 3rd 1999 7.78%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return Class A: 56.45%
Average Annual Total Return Class B: 59.42%
Salomon Smith Barney Primary
Market Index: 24.51%
</TABLE>

27
<PAGE> 28

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 1.00% 1.00%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.40% 1.06%
----- -----
Total annual fund operating expenses 2.65% 3.06%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.36)% (1.02)%
----- -----
Net Expenses 1.29% 2.04%
----- -----
----- -----
</TABLE>

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

(15) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(16) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$699 $961 $1,243 $2,047
Class B 1 Year 3 Years 5 Years 10 Years
$722 $968 $1,215 $2,374
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$207 $640 $1,099 $2,374
</TABLE>

- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management

INVESTMENT OBJECTIVE
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of large cap U.S. issuers that are expected to have better
prospects for earnings growth than the growth rate of the general domestic
economy. Dividend income is a secondary objective. This investment objective can
be changed by the Board of Trustees, without the approval of the Fund
shareholders.

INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in the equity securities of
large cap U.S. issuers. Large cap U.S. issuers include the largest 1,000
companies by market capitalization traded in the United States.

Research Department, other industry sources and objective quantitative analysis.
Next, the Fund's investment portfolio is constructed by balancing expected
returns against portfolio risk, trading fees and investment objectives. The Fund
is intended to be constructed with minimum deviations from the sector, risk
statistics and macroeconomic sensitivity of the Fund's benchmark, the Russell
1000(R) Growth Index. A proprietary multi-factor model is used in seeking to
ensure risks taken are both intended and are warranted due to expected return.
Lastly, the Fund is traded regularly and rebalanced in seeking to ensure all
positions are in line with current market outlooks and benchmark weights.

The Fund may invest up to 25% of total assets in the equity securities of other
U.S. and foreign issuers. The securities of the foreign issuers must be traded
in the United States. This includes convertible securities, ADRs and GDRs. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. GDRs are very
similar to ADRs. Generally, ADRs are designed for use in the United States
securities markets, while GDRs are designed for use when the issuer is raising
capital in more than one market simultaneously, such as the issuer's local
market and the U.S. ADRs and GDRs each carry the same currency, political and
economic risks as the underlying foreign shares. See "More About Portfolio
Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Derivatives Risk: The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instruments.
These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

29
<PAGE> 30

[GRAPH]

ANNUAL RETURN CLASS A = 37.12%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 23.86%
Worst Quarter: Class A 3rd 1999 (2.43)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 1000(R) Growth Index. The Russell 1000(R) Growth Index is a
sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index follows the
3,000 largest U.S. companies, based on total market capitalization. The Russell
1000(R) Growth Index measures the performance of the 1,000 largest companies in
the Russell 3000(R) Index, focusing on those with higher price-to-book ratios
and higher forecasted growth values. The average total return table shows
returns with the maximum in funds sales charge deducted. No sales charge has
been applied to the index used for comparison in the table. The Fund's past
performance does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return Class A: 29.23%
Average Annual Total Return Class B: 30.88%
Russell 1000(R) Growth Index: 33.16%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.55% 0.55%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.23% 0.79%
----- -----
Total annual fund operating expenses 2.03% 2.34%
===== =====
Fee waiver and/or expense reimbursement (0.93)% (0.49)%
----- -----
Net Expenses 1.10% 1.85%
===== =====
</TABLE>

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

(17) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(18) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

31
<PAGE> 31

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$681 $905 $1,147 $1,843
Class B 1 Year 3 Years 5 Years 10 Years
$704 $912 $1,119 $2,174
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$188 $582 $1,002 $2,174
</TABLE>

- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/State Street Global Advisers

INVESTMENT OBJECTIVE
Seeks to provide total returns that exceed over time the Russell 1000(R) Value
Index through investment in equity securities. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.

The Russell 1000(R) Value Index is a sub-index of the Russell 1000(R) Index,
which measures the performance of the 1,000 largest companies in the Russell
3000(R) Index, focusing on those with lower price-to-book ratios and lower
forecasted growth values. As of June 30, 1999, the latest Russell index
reconstitution date, the average market capitalization in the Russell 1000(R)
Index was $12.1 billion.

INVESTMENT STRATEGY
The Fund will invest at least 65% of total assets in the equity securities of
the largest 1200 companies by market capitalization traded in the United States.
The Sub-Adviser combines financial accounting data with earnings forecasts
provided by many security analysts. This quantitative method allows the
Sub-Adviser to quickly and systematically evaluate large amounts of data. The
constructed portfolio is well-diversified, maintaining industry and sector
exposures and macroeconomic and risk characteristics that are similar to the
Index.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

31
<PAGE> 32

Market Risk also refers to the risk that the value of the securities purchased
by the Fund may decline as a result of economic, political or market conditions
or an issuer's financial circumstances. Because the Fund maintains sector
weights at a similar level to that of the Index, your investment may experience
similar changes in value and share similar risks. In order to avoid unintended
exposures to economic factors, including the direction of the economy, interest
rates, energy prices and inflation, we maintain the proportion of equity
securities from different economic sectors in this Fund's portfolio at a level
similar to that of the Index.

Quantitative Method Risk: The different factors that go into the quantitative
analysis can be changed periodically. The weight of each factor may also change;
thus, the analytical model may have different historical or future performance
compared to the Fund.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

[GRAPH]

ANNUAL RETURN CLASS A = 5.27%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 2nd 1999 12.65%
Worst Quarter: Class A 3rd 1999 (9.73)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 1000(R) Value Index. The average total return table shows returns
with the maximum sales charge deducted. No sales charge has been applied to the
index used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return Class A: (0.78)%
Average Annual Total Return Class B: (0.65)%
Russell 1000(R) Value Index: 7.35%
</TABLE>

32
<PAGE> 33

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.50% 0.50%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.38% 0.98%
----- -----
Total annual fund operating expenses 2.13% 2.48%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.08)% (0.68)%
----- -----
Net Expenses 1.05% 1.80%
----- -----
----- -----
</TABLE>

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

(19) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(20) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$676 $890 $1,122 $1,788
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>

- --------------------------------------------------------------------------------
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.
33
<PAGE> 34

INVESTMENT OBJECTIVE
Seeks capital appreciation principally through investments in medium
capitalization equity securities, such as common and preferred stocks and
securities convertible into common stocks. Current income is a secondary
objective. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.

INVESTMENT STRATEGY
This Fund will invest at least 65% of total assets in the equity securities of
medium capitalization companies. Medium capitalization companies generally
include companies with a market capitalization of $1 to $10 billion. We will
seek to achieve capital appreciation through an opportunistic investment
strategy with a growth bias. This Fund will purchase equity securities of those
companies that appear to be undervalued relative to their growth potential in
the securities markets, because the companies are presently out of favor, not
well known or possess value that is not currently recognized by the investment
community. The Sub-Adviser uses a "bottom up" approach to select specific
investments, employing analysis that contains elements of traditional dividend
discount and earnings yield models, establishes predicted relative valuation for
equity and fixed-income markets, and determines the attractiveness of individual
securities through evaluation of growth and risk characteristics of the
underlying company relative to the overall equity market. Although the Fund's
portfolio securities generally will be acquired for the long term, they may be
sold under some of the following circumstances when the Sub-Adviser believes
that: a) the anticipated price appreciation has been achieved or is no longer
probable; b) alternative investments offer superior total return prospects; or
c) fundamentals change adversely.

Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, and convertible securities.
See "More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Management Style Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued relative to its growth potential in the
securities markets may prove incorrect.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

[GRAPH]

ANNUAL RETURN CLASS A = 3.29%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 16.76%
Worst Quarter: Class A 3rd 1999 (11.92)%
</TABLE>

34
<PAGE> 35

The table compares the average annual returns for calendar year 1999 to that of
the Russell Midcap(TM) Growth Index. The Russell Midcap(TM) Growth Index focuses
on Russell Midcap companies with higher price-to-book ratios and higher
forecasted growth values. The average total return table shows returns with the
maximum sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return Class A: (2.65)%
Average Annual Total Return Class B: (2.65)%
Russell Midcap(TM) Growth Index: 51.29%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.65% 0.65%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.46% 1.09%
----- -----
Total annual fund operating expenses 2.36% 2.74%
===== =====
Fee waiver and/or expense reimbursement (1.32)% (0.95)%
----- -----
Net Expenses 1.04% 1.79%
===== =====
</TABLE>

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

(21) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(22) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$675 $887 $1,117 $1,777

Class B 1 Year 3 Years 5 Years 10 Years
$698 $894 $1,088 $2,110
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$182 $564 $971 $2,110
</TABLE>

35
<PAGE> 36
- --------------------------------------------------------------------------------
MID CAP INDEX FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
The Mid Cap Index Fund seeks to provide investment results that are similar to
the performance of the S&P 400 Mid Cap Index ("Index"). As a group, the
investment results, before expenses, are expected to approximate the total
return (the combination of capital changes and income) of selected common stocks
that statistically reflect the Index. This investment objective can be changed
by the Board of Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY

An index fund tries to match the performance of its target index as closely as
possible by owning only stocks in the index, and holding them in the same
proportions, so the fund will mimic the overall performance of the index. The
Mid Cap Index Fund seeks to match the investment performance of the S&P 400 Mid
Cap Index. The S&P 400 Mid Cap Index is composed of 400 domestic stocks, chosen
for market size, liquidity, and industry group representation. Four industry
groups are represented: Industrials, Utilities, Financials, and Transportation.
The S&P 400 Mid Cap Index holds each stock in proportion to its total value in
the stock market.

The Fund invests its assets in companies that are listed in the Index, except
for a small portion in cash, to be available for redemptions. Since it may not
be possible for this Fund to buy every stock included in the Index, or in the
same proportions, the Fund invests in a sampling of common stocks in the Index.
The common stocks of the S&P Mid Cap 400 Index to be included in the Fund will
be selected utilizing a statistical sampling technique known as "optimization."
This process selects stocks for the Fund so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate
those of the Index. The common stocks held by the Fund are weighted to make the
Fund's aggregate investment characteristics similar to those of the Index as a
whole.

Generally, an index fund tries to mirror the target index and its performance.
The performance will not match exactly, though, because the index fund incurs
operating expenses and other investment overhead as part of its normal
operations. The index is an unmanaged group of securities, so it does not have
these expenses. An investor cannot invest directly in an index. These
differences between an index fund and its index are called tracking differences.
An index fund seeks a tracking difference of about 0.05% or less. The tracking
difference may also be shown as a correlation factor. A correlation factor of
0.95, after expenses, is considered to be good, while a correlation of 1.00 is
perfect.

The tracking differences are reviewed daily by VALIC for each of the index
funds. If an index fund does not accurately track an index, VALIC will rebalance
the Fund's portfolio by selecting securities which will provide a more
representative sampling of the securities in the index as a whole or the sector
diversification within the index, as appropriate.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Investment Style Risk: The Index is made up of the stocks of many medium sized
U.S. companies, which generally includes companies that are valued from $1
billion to approximately $7 billion. Medium-sized companies tend to be more
established and stable than small companies, and are faster growing than large
companies, but may be somewhat more volatile than large companies.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Market Risk may also occur because of daily changes in value. The Index
fluctuates every day, depending on changes in the stock market. Stock markets
often have times when the prices rise and fall every day or every few days.
There is no guarantee that the value of your investment will increase.

36
<PAGE> 37

[MID CAP INDEX GRAPH] ANNUAL RETURN CLASS A = 13.85%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 16.72%
Worst Quarter: Class A 3rd 1999 (8.39)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the S&P Mid Cap 400 Index. The average total return table shows returns with the
maximum in funds sales charge deducted. No sales charge has been applied to the
index used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: 7.30%
Average Annual Total Return Class B: 7.84%
S&P Mid Cap 400 Index: 14.71%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.28% 0.28%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.14% 1.01%
----- -----
Total annual fund operating expenses 1.67% 2.29%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.84)% (0.71)%
----- -----
Net Expenses 0.83% 1.58%
----- -----
----- -----
</TABLE>

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

(23) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(24) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

38
<PAGE> 38

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$655 $825 $1,010 $1,545

Class B 1 Year 3 Years 5 Years 10 Years
$678 $831 $980 $1,883
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Year 5 Year 10 Year
$161 $499 $861 $1,883
</TABLE>

- --------------------------------------------------------------------------------
MID CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Neuberger Berman Management Inc.

INVESTMENT OBJECTIVE
Seeks capital growth, through investment in equity securities of medium
capitalization companies using a value-oriented investment approach. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.

INVESTMENT STRATEGY
This Fund invests at least 65% of total assets in equity securities of medium
capitalization established companies, using a value-oriented investment approach
intended to increase capital with reasonable risk. Medium capitalization
companies include companies with the characteristics of companies included in
the Russell Midcap(TM) Index. As of June 30, 1999, the largest company included
in the Russell Midcap(TM) Index had an approximate market capitalization of
$11.2 billion, while the average market capitalization was approximately $3.9
billion.

We choose securities we believe are undervalued based on strong fundamentals,
including a low price-to-earnings ratio, consistent cash flow, and the company's
track record through all parts of the market cycle. When selecting securities
for this Fund, we also consider other factors, including ownership by a
company's management of the company's stock and the dominance of a company in
its particular field. Up to 35% of the Fund's total assets may be invested in
other equity securities, including common and preferred stocks, convertible
securities, and related equities. See "More About Portfolio Investments."

The Fund may participate in the Initial Public Offering ("IPO") market, and a
portion of the Funds' returns may be attributable to the Fund's investments in
IPOs. There is no guarantee that as the Fund's assets grow that it will
experience significant improvement in performance by investing in IPOs.

The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, % for the fiscal year ended October 31, 1999. The
rate of portfolio turnover is calculated by dividing the lesser of the amount of
purchases or sales of portfolio securities during the fiscal year by the average
of the value of the portfolio securities. A high rate of portfolio turnover
generally involves correspondingly greater brokerage commission expenses, thus
increasing the Fund's operating expenses. The Fund's active trading strategy may
cause the Fund to have a relatively high amount of short-term capital gains,
which are taxable to you at your ordinary income tax rate.

38
<PAGE> 39

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

[MID CAP VALUE GRAPH] ANNUAL RETURN CLASS A = 23.96%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 2nd 1999 16.58%
Worst Quarter: Class A 3rd 1999 (11.34)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell Midcap(TM) Value Index. The Russell Midcap(TM) Value Index measures
the performance of the 800 smallest companies in the Russell 1000(R) Index,
focusing on those with lower price-to-book ratios and lower forecasted growth
values. The Russell 1000(R) Index is a sub-index of the Russell 3000(R) Index.
The Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on
total market capitalization. The average total return table shows returns with
the maximum sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: 16.83%
Average Annual Total Return Class B: 17.29%
Russell Midcap(TM) Value Index: (0.11)%
</TABLE>

39
<PAGE> 40

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.75% 0.75%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.43% 1.02%
----- -----
Total annual fund operating expenses 2.43% 2.77%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.14)% (0.73)%
----- -----
Net Expenses 1.29% 2.04%
----- -----
----- -----
</TABLE>

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

(25) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(26) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$699 $961 $1,243 $2,047
Class B 1 Year 3 Years 5 Years 10 Years
$722 $968 $1,215 $2,374
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$207 $640 $1,099 $2,374
</TABLE>

40
<PAGE> 41

- --------------------------------------------------------------------------------
MODERATE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks growth and current income through investments in a combination of the
Series Company Funds ("Underlying Funds"). This Fund is suitable for investors
who wish to invest in equity securities, but who are not willing to assume the
substantial market risks of the Growth Lifestyle Fund. This investment objective
can be changed by the Board of Trustees, without the approval of the Fund
shareholders.

<TABLE>
<S> <C>
International Equity Securities 10%-20%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of small capitalization
companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium capitalization
companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large capitalization
companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 20%-30%
(These Funds invest in fixed-income securities, at least 65% of
which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>

The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.

INVESTMENT RISKS
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's

41
<PAGE> 42

economies. Because the Fund's assets will be adjusted only periodically, there
should not be any sudden large-scale changes in the Fund's asset allocations.

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

42
<PAGE> 43

[Moderate Growth Lifestyle] ANNUAL RETURN CLASS A = 18.66%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 14.20%
Worst Quarter: Class A 3rd 1999 (3.28)%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return Class A: 11.84%
Average Annual Total Return Class B: 14.03%
Moderate Growth Lifestyle Blended
Benchmark: 13.77%
</TABLE>

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

(27) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(28) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
43
<PAGE> 44

<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Total Combined Operating Expenses: 1.15% 1.90%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$585 $605 $628 $697
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$535 $379 $184 $129
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
MONEY MARKET FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Stability

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. In accordance with
Rule 2a-7 of the 1940 Act, such securities must mature in 13 months or less and
the Fund must have a dollar-weighted average portfolio maturity of 90 days or
less. These practices are designed to reduce risk and minimize any fluctuation
in the share price.

The investments this Fund may buy include:
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks that have
total assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements
- - Money market instruments of foreign issuers payable in U.S. dollars (limited
to no more than 20% of the Fund's net assets)
- - Asset-backed securities
- - Loan participations
- - Adjustable rate securities
- - Variable Rate Demand Notes
- - Illiquid and restricted securities (limited to 10% of the Fund's net assets at
all times)
- - Rule 144A securities (liquid)

44
<PAGE> 45

INVESTMENT RISKS
The Fund invests in short-term money market securities, which present low credit
and interest rate risks. Because the risk to the money you invest is low, the
potential for profit is also low. The rate of income for the Money Market Fund
varies daily depending on short-term interest rates.

Because of the following principal risks, the value of your investment may
fluctuate:

An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

[MONEY MARKET CHART GRAPH] ANNUAL RETURN CLASS A = 4.60%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 1.24%
Worst Quarter: Class A 1st 1999 1.02%
</TABLE>

The table shows the Fund's seven-day yield as of a recent date. Please call
Customer Service at 1-877-999-2434 for the most current yield information. The
Fund's past performance does not necessarily indicate how it will perform in the
future.

<S> <C> <C>
February 15, 2000:
7 Day Current Yield 5.11%
7 Day Effective Yield 5.24%
</TABLE>

45
<PAGE> 46

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.25% 0.25%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 0.92% 0.98%
----- -----
Total annual fund operating expenses 1.42% 2.23%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.62)% (0.68)%
----- -----
Net Expenses 0.80% 1.55%
----- -----
----- -----
</TABLE>

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

(29) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$82 $256 $445 $994
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$675 $822 $964 $1,851
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$158 $490 $846 $1,851
</TABLE>

- --------------------------------------------------------------------------------
MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in fixed-income securities that are exempt from regular
federal income taxation. This investment objective can be changed by the Board
of Trustees, without the approval of the Fund shareholders.

INVESTMENT SUB-ADVISER
AGIM
46
<PAGE> 47

INVESTMENT STRATEGY
The Fund invests at least 80% of total assets in investment grade municipal
fixed-income securities, such as municipal bonds, municipal notes, and other
municipal obligations. Investment grade bonds are those rated at least Baa3 by
Moody's or BBB- by S&P or Fitch, or of comparable quality. The municipal notes
are short-term obligations rated high quality or better by Moody's, S&P, or
Fitch. If the Fund invests in municipal securities issued for certain private
purposes, a portion of the Fund's dividends may be subject to the alternative
minimum tax.

The Fund may invest up to 20% of total assets in taxable fixed-income
securities, including money market instruments, U.S. Government obligations, and
other investment grade securities rated as above. U.S. Government securities are
securities issued or guaranteed by the U.S. Government which are supported by
the full faith and credit of the U.S. Government; the right of the issuer to
borrow from the U.S. Treasury; the credit of the issuing government agency; or
the authority of the U.S. Government to purchase obligations of the agency. See
"More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

47
<PAGE> 48

[MUNICIPAL BOND GRAPH] ANNUAL RETURN CLASS A = (5.75)%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 1st 1999 (0.18)%
Worst Quarter: Class A 2nd 1999 (2.51)%
</TABLE>

The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Seven Through Long
Municipal Bond Index, a widely recognized, unmanaged index of long-term
municipal bonds. The average total return table shows returns with the maximum
sales charge deducted. No sales charge has been applied to the index used for
comparison in the table. The Fund's past performance does not necessarily
indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: (10.23)%
Average Annual Total Return Class B: (11.12)%
Lehman Brothers Seven Through
Long Municipal Bond Index: (3.07)%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.50% 0.50%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.18% 1.06%
----- -----
Total annual fund operating expenses 1.93% 2.56%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.88)% (0.76)%
----- -----
Net Expenses 1.05% 1.80%
----- -----
----- -----
</TABLE>

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

(30) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(31) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
48
<PAGE> 49

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$577 $793 $1,028 $1,701
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>

- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Stability

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
AGIM

INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market securities that are exempt from regular federal income
taxation. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income that is exempt from
federal income tax. We use 95% of the Fund's total assets to buy short-term
securities that are rated within the highest rating category for short-term
fixed-income securities by at least two nationally recognized rating services or
unrated securities of comparable investment quality. These eligible securities
must mature, after giving effect to any demand features, in 13 months or less
and the Fund must have a dollar-weighted average portfolio maturity of 90 days
or less. These practices are mandated by Rule 2a-7 of the 1940 Act and are
designed to reduce risk and minimize fluctuation in the share price. If the Fund
invests in municipal securities issued for certain private purposes, a portion
of the Fund's dividends may be subject to the alternative minimum tax.

The investments this Fund may buy include:
- - Municipal fixed-income securities with remaining maturities of 13 months or
less
- - Commercial paper sold by municipalities rated at least MIG1 or MIG2 by
Moody's or A1 or A2 by S&P
- - Variable rate demand notes
- - Auction rate preferred stock and other adjustable rate obligations that are
exempt from federal income taxation
- - Illiquid and restricted securities, limited to 10% of the Fund's net assets
at all times
- - Rule 144A securities (liquid)

49
<PAGE> 50

INVESTMENT RISKS
The Fund invests in short-term money market securities, which present low credit
and interest rate risks. Because the risk to the money you invest is low, the
potential for profit is also low. The rate of income for the Municipal Money
Market Fund varies daily depending on short-term interest rates.

Because of the following principal risks, the value of your investment may
fluctuate:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

[MUNICIPAL MONEY MARKET GRAPH] ANNUAL RETURN CLASS A = 2.28%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 0.66%
Worst Quarter: Class A 1st 1999 0.44%
</TABLE>

<TABLE>
<S> <C>
February 15, 2000:
7 Day Current Yield 2.50%
7 Day Effective Yield 2.53%
</TABLE>

50
<PAGE> 51

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.50% 0.50%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.14% 1.19%
----- -----
Total annual fund operating expenses 1.89% 2.69%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.84)% (0.89)%
----- -----
Net Expenses 1.05% 1.80%
----- -----
----- -----
</TABLE>

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

(32) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$107 $334 $580 $1,287
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
Without redemptions, your costs would be:
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>

- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.

INVESTMENT OBJECTIVE
Seeks to provide long-term growth from a portfolio of equity securities of small
capitalization growth companies. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
51
<PAGE> 52

INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in the equity securities of
small capitalization companies, which are companies whose approximate market
capitalizations are greater than $150 million and less than $1.25 billion. These
equities include U.S. and foreign common and preferred stocks, warrants and
rights, and convertible securities. On an industry-by-industry basis, the Fund's
weightings are similar to those of the Russell 2000(R) Growth Index. Within each
industry, the Fund invests in equity securities that the Sub-Adviser's research
and valuation process indicate are undervalued. The greater a company's
estimated worth compared to the current market price of its equity securities,
the more undervalued the company.

The Fund may invest up to 35% of total assets in other equity securities of U.S.
and foreign large and medium capitalization issuers, including those equities
listed above, and the securities of investment companies. Large and medium
capitalization issuers are those companies with total assets of approximately $1
billion or more. See "More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

52
<PAGE> 53

[SMALL CAP GROWTH GRAPHIC] ANNUAL RETURN CLASS A = 62.21%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 42.79%
Worst Quarter: Class A 1st 1999 (0.86)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 2000(R) Growth Index. The Russell 2000(R) Growth Index is a
sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index follows the
3,000 largest U.S. companies, based on total market capitalization. The Russell
2000(R) Growth Index measures the performance of the 2,000 smallest companies in
the Russell 3000(R) Index, focusing on those with higher price-to-book ratios
and higher forecasted growth values. The average total return table shows
returns with the maximum in funds sales charge deducted. No sales charge has
been applied to the index used for comparison in the table. The Fund's past
performance does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: 52.89%
Average Annual Total Return Class
B: 55.86%
Russell 2000(R) Growth Index: 43.09%
</TABLE>

<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(33) 5%-Footnote(34)
Maximum account fee None None
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- -------------------------------------------------------- ---------- ---------------
Management fees 0.85% 0.85%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.34% 0.98%
----- -----
Total annual fund operating expenses 2.44% 2.83%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.04)% (0.68)%
----- -----
Net Expenses 1.40% 2.15%
----- -----
----- -----
</TABLE>

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

(33) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(34) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

54
<PAGE> 54

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<CAPTION>
Class A 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
$709 $993 $1,298 $2,163
</TABLE>

<TABLE>
<CAPTION>
Class B 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
$732 $1,000 $1,270 $2,487
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<CAPTION>
Class B 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
$218 $673 $1,155 $2,487
</TABLE>

- --------------------------------------------------------------------------------
SMALL CAP INDEX FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
The Small Cap Index Fund seeks to provide investment results that are similar to
the total return of the Russell 2000(R) Index. ("Index"). As a group, the
investment results, before expenses, are expected to approximate the total
return (the combination of capital changes and income) of selected common stocks
that statistically reflect the Index. This investment objective can be changed
by the Board of Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY

55
<PAGE> 55

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Index Risk: The Russell 2000(R) Index includes many small U.S. companies. Some
of these companies often do not have the financial strength needed to do well in
difficult times. Also, they often sell limited numbers of products, which can
make it harder for them to compete with medium and large companies. However,
because they are small, their common stock prices may fluctuate more over the
short-term, but they have more potential to grow. This means their common stock
value may offer greater potential for appreciation. An index fund holding a
large sampling of the 2,000 stocks in the Russell 2000(R) Index avoids the risks
of individual stock selection and seeks to provide the return of the
smaller-sized company sector of the market. Because this Fund invests in many of
the common stocks tracked by this Index, your investment will experience similar
changes in value and share similar risks such as market risk.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

56
<PAGE> 56

[SMALL CAP INDEX GRAPH] ANNUAL RETURN CLASS A = 18.35%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 17.15%
Worst Quarter: Class A 3rd 1999 (6.44)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 2000(R) Index. The average total return table shows returns with the
maximum sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return Class A: 11.54%
Average Annual Total Return Class B: 12.63%
Russell 2000(R) Index: 21.26%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.28% 0.28%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.16% 1.09%
----- -----
Total annual fund operating expenses 1.69% 2.37%
----- -----
------- -------
Fee waiver and/or expense reimbursement (0.86)% (0.79)%
----- -----
Net Expenses 0.83% 1.58%
----- -----
------- -------
</TABLE>

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

(35) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(36) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
56
<PAGE> 57

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$655 $825 $1,010 $1,545
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$678 $831 $980 $1,883
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$161 $499 $861 $1,883
</TABLE>

- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Fiduciary Management Associates, Inc. (actively managed portion)

INVESTMENT OBJECTIVE

Seeks maximum long-term return, consistent with reasonable risk to principal, by
investing primarily in equity securities of small capitalization companies in
terms of revenues and/or market capitalization. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGIES
This Fund invests at least 65% of its total assets in equity securities of small
capitalization companies, which are companies whose total market capitalizations
range from approximately $150 million to $1.25 billion and companies included in
the Russell 2000(R) Index ("Index"). One portion of the Fund's investment
portfolio will be actively managed and the other portion will be passively
managed.

Actively Managed Portion (50%): In analyzing and selecting investments for the
actively managed portion of the Fund's investment portfolio, we look for market
themes and changes that signal opportunity. We seek companies with lower
price-to-earnings ratios, strong cash flow, good credit lines and clean or
improving balance sheets. At any given time, this portion of the Fund's
investment portfolio will be invested in a diversified group of small
capitalization equity securities in several industries. The Fund will invest
primarily in U.S. companies with seasoned management or a track record as part
of a larger company.

Passively Managed Portion (50%): This portion of the Fund is comprised of a
sampling of stocks in the Index that, as a group, should reflect its
performance. Since it may not be possible for this Fund to buy every stock
included in the Index or in the same proportions, the Fund will select stocks to
purchase by utilizing a statistical sampling technique known as "optimization."
This process selects stocks for the Fund so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate
those of the Index. The stocks held by the Fund are weighted to make the Fund's
aggregate investment characteristics similar to those of the Index as a whole.

The Fund may invest up to 35% of its total assets in short-term investments,
such as foreign and domestic money market instruments, certificates of deposit,
bankers acceptances, time deposits, U. S. Government obligations, agency
securities, high quality commercial paper, repurchase agreements, and short-term
corporate fixed-income securities. U.S. Government securities are securities
issued or guaranteed by the U.S. Government which are supported by the full
faith and credit of the U.S. Government; the right of the issuer to borrow from
the U.S. Treasury; the credit of the issuing government agency; or the authority
of the U.S. Government to purchase obligations of the agency. See "More About
Portfolio Investments."

57
<PAGE> 58

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

58
<PAGE> 59

[SMALL CAP VALUE GRAPH] ANNUAL RETURN CLASS A = (4.75%)

<TABLE>
<S> <C> <C>
Best Quarter: Class A 2nd 1999 11.72%
Worst Quarter: Class A 1st 1999 (12.69)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 2000(R) Value Index. The Russell 2000(R) Value Index is a sub-index
of the Russell 3000(R) Index. The Russell 3000(R) Index follows the 3,000
largest U.S. companies, based on total market capitalization. The Russell
2000(R) Value Index measures the performance of the 2,000 smallest companies in
the Russell 3000(R) Index, focusing on those with lower price-to-book ratios and
lower forecasted growth values. The average total return table shows returns
with the maximum sales charge deducted. No sales charge has been applied to the
index used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: (10.23)%
Average Annual Total Return Class B: (10.36)%
Russell 2000(R) Value Index: (1.49)%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.75% 0.75%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.61% 1.33%
----- -----
Total annual fund operating expenses 2.61% 3.08%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.38)% (1.10)%
----- -----
Net Expenses 1.23% 1.98%
----- -----
----- -----
</TABLE>

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

(37) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(38) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
59
<PAGE> 60

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$693 $943 $1,213 $1,983
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$716 $950 $1,185 $2,311
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$201 $622 $1,068 $2,311
</TABLE>

- --------------------------------------------------------------------------------
SOCIALLY RESPONSIBLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks to obtain growth of capital through investment, primarily in equity
securities, in companies which meet the social criteria established for the
Fund. This investment objective can be changed by the Board of Trustees, without
the approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund will invest at least 80% of total assets in the equity securities of
companies meeting the Fund's social criteria. To find out which companies meet
the Fund's social criteria, we rely on industry classifications, research
services such as the Investor Responsibility Research Center ("IRRC").

The Fund does not invest in companies that are significantly engaged in:

- - the production of nuclear energy;
- - the manufacture of weapons or delivery systems;
- - the manufacture of alcoholic beverages or tobacco products;
- - the operation of gambling casinos; or
- - business practices or the production of products that significantly pollute
the environment.

At least once a year, the IRRC surveys state laws to see if there are any new or
revised state laws that govern or affect the investments of public funds. If the
survey shows that at least 20 states have adopted laws that restrict public
funds from being invested in a clearly definable category of investments, this
category is automatically added to our social criteria list.

Up to 20% of the Fund's total assets may be invested in high quality money
market securities and warrants, or in other types of equity securities of
companies meeting social criteria, including American Depositary Receipts
("ADRs"), foreign securities, preferred stock, and convertible securities. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. ADRs carry the
same currency, political and economic risks as the underlying foreign shares.
See "More About Portfolio Investments."

60
<PAGE> 61

INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:

Foreign Securities Risk:

A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:

Political risk - the chance of a change in government and the assets of the
company being taken away.

Currency risk - a change in the value of the foreign currency compared to
the dollar. If the foreign currency declines in value, your investment
valued in U.S. dollars will decline even if the value of the foreign stock
or bond is unchanged.

Limited information risk - foreign companies generally are not regulated to
the degree U.S. companies are and may not report all of the information we
are used to getting. To minimize taxes they may not report some income or
they may report higher expenses.

Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Developing Country Risk - the risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.

Settlement and Clearance Risk - the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Social Criteria Risk: If a company stops meeting the Fund's social criteria
after the Fund invested in it, the Fund will sell these investments even if this
means the Fund loses money. Also, if the Fund changes its social criteria and
the companies the Fund has already invested in no longer qualify, the Fund will
sell these investments, even if this means the Fund loses money. Social criteria
screening will limit the availability of investment opportunities for the Fund
more than for funds having no such criteria.

[SOCIALLY RESPONSIBLE GRAPH] ANNUAL RETURN CLASS A = 18.30%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 14.11%
Worst Quarter: Class A 3rd 1999 (6.97)%
</TABLE>

61
<PAGE> 62

The table compares the average annual returns for calendar year 1999 to that of
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum sales charge deducted. No sales charge has
been applied to the index used for comparison in the table. The Fund's past
performance does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: 11.50%
Average Annual Total Return Class
B: 12.38%
S&P 500 Index: 21.05%
</TABLE>

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.

<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(39) 5%-Footnote(40)
Maximum account fee None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.25% 0.25%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.47% 1.24%
----- -----
Total annual fund operating expenses 1.97% 2.49%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.17)% (0.94)%
----- -----
Net Expenses 0.80% 1.55%
----- -----
----- -----
</TABLE>

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

(39) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(40) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$652 $816 $994 $1,512
Class B 1 Year 3 Years 5 Years 10 Years
$675 $822 $964 $1,851
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$158 $490 $846 $1,851
</TABLE>

62
<PAGE> 63

- --------------------------------------------------------------------------------
STOCK INDEX FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
The Stock Index Fund seeks to provide investment results that are similar to the
total return of the S&P 500 Index ("Index"). As a group, the investment results,
before expenses, are expected to approximate the total return (the combination
of capital changes and income) of selected common stocks that statistically
reflect the Index. This investment objective can be changed by the Board of
Trustees, without the approval of the Fund shareholders.

INVESTMENT STRATEGY

INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:

Index Risk: The S&P 500 Index includes the common stock of many large,
well-established companies. These companies usually have the financial strength
to weather difficult financial times. However, the value of any common stock can
rise and fall over short and long periods of time. This Fund, which holds nearly
all of the 500 common stocks in the S&P 500 Index, avoids the risk of individual
stock selection and seeks to provide the return of the large company sector of
the market.

Foreign Securities Risk:

A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:

Political risk - the chance of a change in government and the assets of the
company being taken away.

63
<PAGE> 64

Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

[STOCK INDEX CHART GRAPH] ANNUAL RETURN CLASS A = 20.39%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 14.39%
Worst Quarter: Class A 3rd 1999 (6.38)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The Index approximates the general distribution of
industries in the U.S. economy, and captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum sales charge deducted. No sales charge has
been applied to the index used for comparison in the table. The Fund's past
performance does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: 13.46%
Average Annual Total Return Class
B: 13.72%
S&P 500 Index: 21.05%
</TABLE>

64
<PAGE> 65

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.27% 0.27%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.01% 0.71%
----- -----
Total annual fund operating expenses 1.53% 1.98%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.71)% (0.41)%
----- -----
Net Expenses 0.82% 1.57%
----- -----
----- -----
</TABLE>

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

(41) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(42) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$654 $822 $1,005 $1,534
Class B 1 Year 3 Years 5 Years 10 Years
$677 $828 $975 $1,872
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$160 $496 $856 $1,872
</TABLE>

- --------------------------------------------------------------------------------
STRATEGIC BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
AGIM
65
<PAGE> 66

INVESTMENT OBJECTIVE
Seeks the highest possible total return and income consistent with conservation
of capital through investment in a diversified portfolio of income producing
securities. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.

INVESTMENT STRATEGY
The Fund invests at least 65% of total assets in a broad range of fixed-income
securities, including

- - investment grade bonds (rated Baa or higher by Moody's and BBB or higher by
S&P)
- - U.S. Government and agency obligations
- - mortgage backed securities
- - U.S., Canadian, and foreign high risk, high yield bonds (rated C or higher by
Moody's and CC or higher by S&P, or comparable unrated securities)

Up to 25% of the Fund's total assets may be invested in foreign emerging market
debt, and up to an additional 25% in non-U.S. dollar bonds. The Fund may also
invest up to 20% of total assets in equity securities, such as common and
preferred stocks, convertible securities, and warrants.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

are considered to be below investment grade. Fixed-income securities with a
below investment grade rating present a comparatively greater risk of default in
the timely payment of interest and principal than fixed-income securities rated
as investment grade. These lower rated securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Because investment in lower rated fixed-income securities
(commonly referred to as junk bonds) involves significantly greater credit risk,
market risk and interest rate risk than higher rated fixed-income securities
achievement of the Fund's investment objective is dependent upon the
Sub-Adviser's investment analysis. Accordingly, the Fund's investments may
become worth less than what the Fund paid for them.

[STRATEGIC BOND GRAPH] ANNUAL RETURN CLASS A = 4.53%

<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 3.30%
Worst Quarter: Class A 2nd 1999 (0.84)%
</TABLE>

<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: (0.44)%
Average Annual Total Return Class
B: (1.13)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

67
<PAGE> 68

<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a percentage of offering
price) 5.75% None
Maximum deferred sales charge (load)
(as a percentage of purchase or redemption
proceeds, whichever is lower) Footnote(43) 5%-Footnote(44)
Maximum account fee None None
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- -------------------------------------------------------- ---------- ---------------
Management fees 0.60% 0.60%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.63% 1.48%
----- -----
Total annual fund operating expenses 2.48% 3.08%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.33)% (1.18)%
----- -----
Net Expenses 1.15% 1.90%
----- -----
----- -----
</TABLE>

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

(43) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(44) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$587 $823 $1,079 $1,811
Class B 1 Year 3 Years 5 Years 10 Years
$708 $926 $1,144 $2,227
</TABLE>

Without redemptions, your costs would be:

<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$193 $597 $1,027 $2,227
</TABLE>

- --------------------------------------------------------------------------------
MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------

Each Fund's principal investment strategies and risks are summarized above. More
information about types of portfolio investments is shown below. Funds may
invest in other investments and may use investment techniques not described in
this prospectus. All Money Market Fund investments must comply with Rule 2a-7 of
the 1940 Act, which allows the purchase of only high quality money market
instruments. The Lifestyle Funds invest in other Funds described in this
Prospectus and thus are not specifically mentioned below. Please refer to the
SAI for more information about investments.

Examples of assets supporting asset-backed securities include credit card
receivables, retail installment loans, home equity loans, auto loans, and
manufactured housing loans. All of the Funds except International Growth Fund,
International Value Fund, Large Cap Growth, and Mid Cap Growth may invest in
asset-backed securities.

DEPOSITARY RECEIPTS
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank. ADRs in which a Fund
may invest may be sponsored or unsponsored. There may be less information
available about foreign issuers of unsponsored ADRs. All of the Funds except for
the Money Market Fund, Municipal Bond Fund, Municipal Money Market Fund and the
Strategic Bond Fund may purchase ADRs.

EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank. We
consider ADRs, EDRs and GDRs to be foreign securities. The Balanced Fund, Core
Bond Fund, Domestic Bond Fund, High Yield Bond Fund, International Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Index Fund, Mid Cap
Value Fund, Small Cap Index Fund, Small Cap Growth Fund, Small Cap Value Fund,
Socially Responsible Fund, and the Stock Index Fund may invest in EDRs and GDRs.
The Large Cap Growth Fund may invest in GDRs but may not invest in EDRs.

EQUITY SECURITIES
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. If you own an equity
security, you own a part of the company that issued it. Companies sell equity
securities to get the money they need to grow.

Stocks are one type of equity security. Each share of stock represents a part of
the ownership of the company. The holder of stock participates in the growth of
the company through the stock price and receipt of dividends. All the Funds may
invest in equities except for the Money Market Fund and the Municipal Money
Market Fund, though equities may not be a primary strategy for each Fund.

Generally, there are three types of stocks:

2. Preferred stock -- Each share of preferred stock allows the holder to get a
fixed dividend before the common stock shareholders receive any dividends on
their shares.

3. Convertible preferred stock -- A stock with a fixed dividend which the holder
may exchange for a certain amount of common stock.

Stocks are not the only type of equity security. Other equity securities include
but are not limited to convertible securities, depository receipts, warrants,
rights and partially paid shares, investment company securities, real estate
securities, convertible bonds and foreign equity securities, such as ADRs, GDRs
and EDRs.

FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short-, medium- and long-term
obligations, including notes and bonds. Fixed-income securities may have fixed,
variable, or floating rates of interest, including rates of interest that vary
inversely at a multiple of a designated or floating rate, or that vary according
to changes in relative values of currencies. Fixed-income securities generally
involve an obligation of the issuer to pay interest on either a current basis or
at the maturity of the security and to repay the principal amount of the
security at maturity.

Bonds are one type of fixed-income security and are sold by governments on the
local, state, and federal levels, and by companies. There are many different
kinds of bonds. For example, each bond issue has specific terms. U.S. Government
bonds are guaranteed to pay interest and principal by the federal government.
Revenue bonds are usually only paid from the revenue of the issuer. An example
of that would be an airport revenue bond. Debentures are a very common type of
corporate bond (a bond sold by a company). Payment of interest and return of
principal is subject to the company's ability to pay. Convertible bonds are
corporate bonds that can be exchanged for stock.

The types of bonds that most Funds purchase, for example, includes U.S.
Government bonds and investment grade corporate bonds. VALIC and the
Sub-Advisers will not necessarily dispose of a bond if its ratings are
downgraded to below investment grade. All of the Funds except Mid Cap Growth
Fund and the Money Market Fund may invest in investment grade bonds. Of those
that invest in bonds, only the Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, Mid Cap Value Fund, Municipal Bond Fund, Small Cap
Growth Fund, Small Cap Value, and Strategic Bond Fund may also invest in
below-investment grade bonds.

69
<PAGE> 70

Investing in a bond is like making a loan for a fixed period of time at a fixed
interest rate. During the fixed period, the bond pays interest on a regular
basis. At the end of the fixed period, the bond matures and the investor usually
gets back the principal amount of the bond. Fixed periods to maturity are
categorized as short-term (generally less than 12 months), intermediate (one to
10 years), and long-term (10 years or more). Commercial paper is a specific type
of corporate or short-term note. In fact, it's very short-term, being paid in
less than 270 days, though most commercial paper matures in 50 days or less.

Bonds are not the only type of fixed-income security. Other fixed-income
securities include, for example, U.S. and foreign corporate fixed-income
securities, including convertible securities (bonds, debentures, notes and other
similar instruments) and corporate commercial paper; mortgage-related and other
asset-backed securities; inflation-indexed bonds issued by both governments and
corporations; structured notes, including hybrid or "indexed" securities,
preferred or preference stock, catastrophe bonds, and loan participations; bank
certificates of deposit, fixed time deposits and bankers' acceptances;
repurchase agreements and reverse repurchase agreements; fixed-income securities
issued by states or local governments and their agencies, authorities and other
instrumentalities; obligations of foreign governments or their subdivisions,
agencies and instrumentalities; and obligations of international agencies or
supranational entities. Fixed-income securities may be acquired with warrants
attached.

FOREIGN CURRENCY
Funds buy foreign currencies when they believe the value of the currency will
increase. If it does increase, they sell the currency for a profit. If it
decreases they will experience a loss. Generally, the International Growth Fund
and the International Value Fund may also buy and sell foreign currencies to
settle transactions for foreign securities bought or sold in the Fund. All the
Funds except for the Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Money Market Fund, Municipal Bond Fund, Municipal Money Market Fund and
the Small Cap Value Fund may invest in foreign currency.

FOREIGN SECURITIES
Securities of foreign issuers may be denominated in foreign currencies, except
with respect to the Money Market Fund and the Core Bond Fund which may only
invest in U.S. dollar-denominated securities of foreign issuers. The Large Cap
Growth Fund may only invest in the equity securities of foreign issuers that are
traded in the United States. Generally, all of the Funds may invest in foreign
securities except for Mid Cap Growth Fund, Municipal Bond Fund, and the
Municipal Money Market Fund.

Securities of foreign issuers include obligations of foreign branches of U.S.
banks and of foreign banks, common and preferred stocks, fixed-income securities
issued by foreign governments, corporations and supranational organizations, and
ADRs, EDRs and GDRs. See "Depositary Receipts".

FUTURES AND OPTIONS
Futures and options are considered derivative securities, since the value of the
future or option is derived in part from the value and characteristics of
another security. A "future" is a contract which involves the sale of a security
for future delivery. An "option" gives the buyer the opportunity to buy or sell
a security at a set price on or before a date specified in the contract. A call
option buyer thinks the stock price may go up in the future, while a put option
buyer thinks the stock price may go down. All of the Funds except for
International Growth Fund, Mid Cap Growth Fund, Money Market Fund and Municipal
Money Market Fund may invest in derivatives.

The Funds use stock and bond futures to invest cash and cash equivalents to:

- - Write (sell) exchange traded covered put and call options on securities and
stock indices.
- - Purchase exchange traded put and call options on securities and stock indices.
- - Purchase and sell exchange traded financial futures contracts.
- - Write (sell) covered call options and purchase exchange traded put and call
options on financial futures contracts.
- - Write (sell) covered call options and purchase non-exchange traded call and
put options on financial futures contracts.

ILLIQUID SECURITIES
An illiquid security is one that may not be frequently traded or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Illiquid securities include, but are
not limited to, time deposits and repurchase agreements not maturing within
seven days and restricted securities. Non-money market funds may invest up to
15% in illiquid securities, while money market funds are limited to 10%. This
restriction applies at all times to all assets.

A restricted security is one that has not been registered with the SEC and,
therefore, cannot be sold in the public market. Securities eligible for sale
under Rule 144A and commercial paper offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended, are not deemed by VALIC or the Fund's
Sub-Adviser to be illiquid solely by reason of being restricted. Instead, VALIC
or the Sub-Adviser will determine whether such securities are liquid based on
trading markets and pursuant to guidelines adopted by the Series Company's Board
of Trustees. If VALIC or the Sub-Adviser concludes that a security is not
liquid, that investment will be included within the Fund's limitation on
illiquid securities.

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INVESTMENT COMPANIES
All of the Funds may invest in the securities of other open-end or closed-end
investment companies subject to the limitations imposed by the 1940 Act. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by an investment company in which it invests.

INVESTMENT FUNDS
Some countries have laws and regulations that currently preclude direct foreign
investment in the securities of their companies. However, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. International Growth Fund, International Value
Fund, Large Cap Growth Fund, Mid Cap Index Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Index Fund, and Stock Index Fund may invest in investment
funds.

LOAN PARTICIPATIONS
A loan participation is an investment in a loan made to a U.S. company that is
secured by the company's assets. The assets must be, at all times, worth enough
money to cover the balance due on the loan. Major national and regional banks
make loans to companies and then sell the loans to investors. These banks don't
guarantee the companies will pay the principal and interest due on the loans.
All of the Funds except the Mid Cap Value Fund may invest in loan
participations.

MONEY MARKET SECURITIES
A money market security is high quality when it is rated in one of the two
highest credit categories by Moody's or S&P or another nationally recognized
rating service or if unrated, deemed high quality by VALIC or a Sub-Adviser. All
the Funds may invest in money market securities, though it is not a primary
strategy for all Funds.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.s of high quality money
market securities include:

- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.

MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities. All of the Funds except for International Growth
Fund, International Value Fund, Mid Cap Growth Fund, Mid Cap Index Fund, Money
Market Fund, Small Cap Index Fund, Socially Responsible Fund, and the Stock
Index Fund may invest in mortgage-related securities. Mortgage pass-through
securities are securities representing interests in "pools" of mortgage loans
secured by residential or commercial real property. Payments of interest and
principal on these securities are generally made monthly, in effect "passing
through" monthly payments made by the individual borrowers on the mortgage loans
which underlie the securities. Mortgage-related securities are subject to
interest rate risk and prepayment risk.

Payment of principal and interest on some mortgage pass-through securities may
be guaranteed by the full faith and credit of the U.S. Government (i.e.,
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (i.e., securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, private mortgage insurance companies and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.

Collateralized mortgage obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans or by portfolios
of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity, coupon, and prepayment preference. CMOs that are issued or guaranteed
by the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Funds.

Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities is relatively small compared to
the market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to
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attract and retain tenants. Commercial mortgage-backed securities may be less
liquid and exhibit greater price volatility than other types of mortgage-related
or asset-backed securities.

REAL ESTATE SECURITIES
Real estate securities are securities issued by companies that invest in real
estate or interests therein. All of the Funds except for the Domestic Bond Fund
and the High Yield Bond Fund may invest in real estate securities and real
estate investment trusts ("REITs"). REITs are generally publicly traded on the
national stock exchanges and in the over-the-counter market and have varying
degrees of liquidity.

REPURCHASE AGREEMENTS
A repurchase agreement requires the seller of the security to buy it back at a
set price at a certain time. If a Fund enters into a repurchase agreement, it is
really making a short-term loan (usually for one day to one week). The risk in a
repurchase agreement is the failure of the seller to be able to buy the security
back. If the value of the security declines, the Fund may have to sell at a
loss. A repurchase agreement of more than 7 days duration is illiquid. A Fund
may enter into repurchase agreements only with well-established securities
dealers or banks that are members of the Federal Reserve System. All the Funds
in this Prospectus may invest in repurchase agreements.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
A reverse repurchase agreement involves the sale of a security by a Fund and its
agreement to repurchase the instrument at a specified time and price. Under a
reverse repurchase agreement, the Fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
If a Fund's positions in reverse repurchase agreements or similar transactions
are not covered by liquid assets in a segregated account, such transactions
would be subject to the Funds' limitations on borrowings. The Funds will not
borrow money, except as provided in each Fund's investment restrictions. Reverse
repurchase agreements may be entered into by all Funds except the Mid Cap Growth
Fund.

The Core Bond Fund, High Yield Bond Fund, Large Cap Value Fund, Mid Cap Value
Fund, Small Cap Growth Fund, Small Cap Value Fund, and the Strategic Bond Fund
may enter into dollar rolls. In a dollar roll transaction, a Fund sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date.

STRUCTURED SECURITIES
The value of the principal of and/or interest on such securities is determined
by reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, result in the loss of a Fund's investment. The Balanced
Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond Fund, and the
Strategic Bond Fund may enter into structured securities.

SWAP AGREEMENTS
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value of a specified
index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified index or asset. The Large Cap
Growth Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, and the Strategic Bond Fund may enter into swap
agreements.

U.S. GOVERNMENT SECURITIES
All the Funds may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. The U.S. Government does not guarantee the net
asset value of the Funds' shares. Some U.S. Government securities, such as
Treasury bills, notes and bonds, and securities guaranteed by the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, the Tennessee Valley Authority and the Small
Business Authority are supported only by the credit of the instrumentality. U.S.
Government securities include securities that have no coupons, or have been
stripped of their unmatured interest coupons, individual interest coupons from
such securities that trade separately, and evidences of receipt of such
securities. Such securities may pay no cash income, and are purchased at a deep
discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than
interest-paying securities of similar maturities. Custodial receipts issued in
connection with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are, therefore, not U.S.
Government securities,

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although the underlying bond represented by such receipt is a debt obligation of
the U.S. Treasury. Other zero coupon Treasury securities (STRIPs and CUBEs) are
direct obligations of the U.S. Government.

VARIABLE AMOUNT DEMAND MASTER NOTES
Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated.
These instruments are issued pursuant to written agreements between their
issuers and holders. The agreements permit the holders to increase (subject to
an agreed maximum) and the holders and issuers to decrease the principal amount
of the notes, and specify that the rate of interest payable on the principal
fluctuates according to an agreed formula. The Balanced Fund, Core Bond Fund,
Domestic Bond Fund, High Yield Bond Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Mid Cap Value Fund, Municipal Bond Fund, and the Strategic Bond Fund may
invest in the variable amount demand master notes.

VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund and the Municipal Funds may also may
invest in participation VRDNs, which provide a Fund with an undivided interest
in underlying VRDNs held by major investment banking institutions. All the Funds
may invest in VRDNs.

WARRANTS AND RIGHTS
Warrants and rights are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. Changes in the value
of a warrant do not necessarily correspond to changes in the value of its
underlying securities. All of the Funds except for the Mid Cap Growth Fund,
Money Market Fund, Municipal Bond Fund, and the Municipal Money Market Fund may
invest in warrants and rights.

WHEN-ISSUED SECURITIES
When-issued securities are those investments that have been announced by the
issuer and will soon be on the market. The Funds negotiate the price with a
broker before it goes on the market. If the security ends up selling on the
market at a lower price than negotiated, the Funds may have a loss. If it sells
at a higher price, the Funds may have a profit. All of the Funds except the Mid
Cap Value Fund and the Money Market Fund may invest in when-issued securities.

- --------------------------------------------------------------------------------
WELCOME TO AMERICAN GENERAL CORPORATION
- --------------------------------------------------------------------------------

American General Corporation, with assets of $111 billion and shareholders'
equity of $15 billion as of December 31, 1999, is the parent company of one of
the nation's largest diversified financial services organizations. American
General's operating divisions deliver a wide range of retirement services, life
insurance, and consumer finance products and services to diverse markets through
focused distribution channels. American General, headquartered in Houston, was
incorporated as a general business corporation in Texas in 1980 and is the
successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.

American General Fund Group is the mutual fund division of American General
Corporation. The address of American General Corporation and its subsidiaries,
including VALIC and American General Investment Management, L.P. ("AGIM"), is
2929 Allen Parkway, Houston, Texas 77019.

INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960, and is the investment adviser for all the Funds. VALIC had
approximately $61 billion in assets under management, as of December 31, 1999.
VALIC and AGIM, a Sub-Adviser, are both members of the American General
Corporation group of companies. Each entity is a registered investment adviser
with the SEC. Several of VALIC's principal officers, directors and portfolio
managers hold similar positions with AGIM.

As Investment Adviser, VALIC oversees the Fund's day to day operations,
supervises the purchase and sale of Fund investments, and performs the cash
management function. VALIC employs Investment Sub-Advisers who make investment
decisions for most of the Funds.

In addition to the Funds shown in this prospectus, VALIC serves as investment
adviser to the Science & Technology Fund, which is sub-advised by T. Rowe Price.
The Science & Technology Fund is presented in a separate prospectus, also dated
March 1, 2000.

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Company provides for the Series Company to pay all expenses not specifically
assumed by VALIC. Examples of the expenses paid by the Series Company include
transfer agency fees, custodial fees, the fees of outside legal and auditing
firms, the costs of reports to shareholders and expenses of servicing
shareholder accounts. These expenses are allocated to each Fund in a manner
approved by the Board of Trustees.

Teresa Moro has been the Money Market Fund's portfolio manager and Vice
President and Investment Officer of the Series Company since its inception.
Since 1991, Ms. Moro has served as Vice President and Investment Officer of
American General Series Portfolio Company, a registered investment company
managed by VALIC and as Portfolio Manager of the American General Series
Portfolio Company Money Market Fund.

Magali E. Azema-Barac is responsible for the equity group. She heads the team
making investment decisions for each of the Index Funds, as well as Socially
Responsible Fund and the passively managed portion of the Small Cap Value Fund.
Ms. Azema-Barac joined American General in September, 1999. From 1995 to 1999,
she worked on the equity desk of USWest Investment Management Company in
Englewood, Colorado, where she incepted and managed an enhanced equity
portfolio.

HOW VALIC IS PAID FOR ITS SERVICES
Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments. From time to time VALIC, the Sub-Advisers and/or the
Distributor may voluntarily undertake to reduce a Fund's expenses by reducing
the fees payable to them or bearing certain expenses.

<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
Conservative Growth Lifestyle Fund 0.10%
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Domestic Bond Fund 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% over $300 million
Growth Lifestyle Fund 0.10%
High Yield Bond Fund 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
International Value Fund 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% on assets over $250 million
Large Cap Growth Fund 0.55%
Large Cap Value Fund 0.50%
Mid Cap Growth Fund 0.65% on the first $25 million
0.55% on the next $25 million
0.45% on assets over $50 million
Mid Cap Index Fund 0.28% on the first $500 million
0.27% on assets over $500 million
Mid Cap Value Fund 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets over $750 million
Moderate Growth Lifestyle Fund 0.10%
</TABLE>

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<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Money Market Fund 0.25%
Municipal Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Municipal Money Market Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Small Cap Growth Fund 0.85%
Small Cap Index Fund 0.28% on the first $500 million
0.27% on assets over $500 million
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Stock Index Fund 0.27% on the first $500 million
0.26% on assets over $500 million
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
</TABLE>

INVESTMENT SUB-ADVISERS

For some of the Funds, VALIC works with investment Sub-Advisers through an
agreement each entered into with VALIC. Sub-Advisers are financial service
companies that specialize in certain types of investing. However, VALIC still
retains ultimate responsibility for managing the Funds. The Sub-Adviser's role
is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.

According to the agreements we have with the Sub-Advisers, we will receive
investment advice for each sub-advised Fund. Under these agreements we give the
Sub-Advisers the authority to buy and sell securities for these Funds. We retain
the responsibility for the overall management of these Funds. The Sub-Advisers
may buy and sell securities for each Fund with broker-dealers and other
financial intermediaries that they select. The Sub-Advisers may place orders to
buy and sell securities of these Funds with a broker-dealer affiliated with the
Sub-Adviser as allowed by law. This could include any affiliated futures
commission merchants.

The 1940 Act permits Sub-Advisers, under certain conditions, to place an order
to buy or sell securities with an affiliated broker. One of these conditions is
that the commission received by the affiliated broker cannot be greater than the
usual and customary brokers commission if the sale was completed on a securities
exchange. The Series Company has adopted procedures, as required by the 1940
Act, which provide that any commissions received by a Sub-Adviser's affiliated
broker may be considered reasonable and fair if compared to the commission
received by other brokers for the same type of securities transaction.

The Securities Exchange Act of 1934 prohibits members of national securities
exchanges from effecting exchange transactions for accounts that they or their
affiliates manage, except as allowed under rules adopted by the SEC. The Series
Company and the Sub-Advisers have entered into written contracts, as required by
the 1940 Act, to allow the Sub-Adviser's affiliate to effect these types of
transactions for commissions.

VALIC and the Sub-Advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.

In selecting Sub-Advisers, the Trustees of the Series Company carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-Adviser; (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-Advisers' personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid by VALIC to each Sub-Adviser. The Sub-Advisory
fees are not paid by the Funds.

The Series Company relies upon an exemptive order from the SEC which permits
VALIC, subject to certain conditions, to select new sub-advisers or replace
existing sub-advisers without first obtaining shareholder approval for the
change. The Board of Trustees, including a majority of the "independent"
Trustees, must approve each new sub-advisory agreement. This allows VALIC to act
more quickly to change sub-advisers when it determines that a change is
beneficial to shareholders by avoiding the delay of calling and holding
shareholder meetings to approve each change. In accordance with the exemptive
order, the Series Company will provide investors with information about each new
sub-adviser and its sub-advisory agreement within 90 days of the hiring of a new
sub-adviser. VALIC is responsible for selecting, monitoring, evaluating and
allocating assets to the Sub-advisers and oversees the Sub-advisers' compliance
with the relevant Fund's investment objective, policies and restrictions.
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<PAGE> 76

The Sub-Advisers are:

AGIM
2929 Allen Parkway, Houston, Texas 77015
Founded: 1998

AGIM is the Sub-Adviser for the Core Bond Fund, Domestic Bond Fund, High Yield
Bond Fund, Money Market Fund, Municipal Bond Fund, Municipal Money Market Fund,
and the Strategic Bond Fund. AGIM was formed in 1998 as a successor to the
investment management division of American General Corporation, and is an
indirect wholly-owned subsidiary of American General Corporation. AGIM also
provides investment management and advisory services to pension and profit
sharing plans, financial institutions and other investors. Investment decisions
for the High Yield Bond Fund, Municipal Money Market Fund, Municipal Bond Fund,
and the Strategic Bond Fund are made by teams. Each team meets regularly to
review portfolio holdings and discuss purchase and sale activity.

Robert N. Kase, CFA, has been the Core Bond Fund's Portfolio Manager since
November 1998. He has been Investment Officer of VALIC since September 1998, and
Senior Portfolio Manager of AGIM since September 1998. Previously, Mr. Kase was
Senior Portfolio Manager with CL Capital Management, Inc. from September 1992
until July 1998.

Investment decisions for the Strategic Bond Fund are made by a team, headed by
Steven Guterman. Mr. Guterman, Executive Vice President, joined the Sub-adviser
in June 1998. Previously, Mr. Guterman was with Salomon Brothers, Inc. from 1983
to May 1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.

Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. Mr. Massie, Senior Vice President, joined the Sub-adviser in
April 1998. Previously, Mr. Massie was Director of High Yield Research at
American General Corporation from August 1985 to April 1998.

BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL")
1201 N. Calvert St., Baltimore, Maryland 21202
Founded: 1983

Brown Capital is the Sub-Adviser for the Mid Cap Growth Fund. Brown Capital
served as investment adviser to approximately $4.6 billion in assets as of
December 31, 1999. Investment decisions for the Mid Cap Growth Fund are made by
a team of portfolio managers/analysts organized for that purpose. The team meets
regularly to review portfolio holdings and discuss purchase and sale activity.

CAPITAL GUARDIAN TRUST COMPANY ("CAPITAL GUARDIAN")
333 South Hope Street, Los Angeles, California 90071
Founded: 1931

Capital Guardian is the Sub-Adviser for the International Value Fund, the
Balanced Fund and the Domestic Bond Fund. Capital Guardian provides investment
management services to a limited number of large institutional clients such as
employee benefit funds, foundations and endowment funds. As of September 30,
1999, Capital Guardian had more than $275 billion in assets under management.

The Balanced Fund is managed using a system of multiple portfolio managers.
Under this system, the Fund is divided into segments, which are assigned to
individual managers.

The portfolio managers for the fixed-income portion of the Fund include: (i) Jim
Mulally, Senior Vice President of the Sub-Adviser, who has been an investment
professional for 22 years and has been with the Sub-Adviser or an affiliate for
19 years; and (ii) Jim Baker, Vice President of the Sub-Adviser, who has been an
investment professional for 18 years and has been with the Sub-Adviser or an
affiliate for 11 years.

The portfolio managers for the U.S. large cap equity portion of the Fund
include: (i) David Fisher, Vice Chairman of the Sub-Adviser, who has been an
investment professional for 33 years and has been with the Sub-Adviser or an
affiliate for 29 years; (ii) Gene Stein, Executive Vice President of the
Sub-Adviser, who has been an investment professional for 27 years and has been
with the Sub-Adviser or an affiliate for 26 years; (iii) Michael Ericksen,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 18 years and has been with the Sub-Adviser or an affiliate for
12 years; (iv) Ted Samuels, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 20 years and has been with the Sub-Adviser
or an affiliate for 18 years; and (v) Donnalisa Barnum, Vice President of the
Sub-Adviser, who has been an investment professional for 17 years and has been
with the Sub-Adviser or an affiliate for 13 years.

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<PAGE> 77

(ii) Michael Ericksen, Senior Vice President of the Sub-Adviser, who has been an
investment professional for 17 years and has been with the Sub-Adviser or an
affiliate for 11 years; and (iii) James Kang, Vice President of Capital Guardian
Research Company, an affiliate of the Sub-Adviser, who has been an investment
professional for 11 years and has been with the Sub-Adviser or an affiliate for
10 years.

The International Value Fund's portfolio managers include: (i) Robert Ronus,
President of the Sub-Adviser, who has been an investment professional for 30
years and has been with the Sub-Adviser or an affiliate for 25 years; (ii) David
Fisher, Vice Chairman of the Sub-Adviser, who has been an investment
professional for 33 years and has been with the Sub-Adviser or an affiliate for
29 years; (iii) Harmut Giesecke, Senior Vice President and Director of Capital
International, Inc., an affiliate of the Sub-Adviser, who has been an investment
professional for 27 years and has been with the Sub-Adviser or an affiliate for
26 years; (iv) Nancy Kyle, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 25 years and has been with the Sub-Adviser
or an affiliate for 8 years; (v) Nilly Sikorsky, Director of The Capital Group
of Companies, Inc., the ultimate parent of the Sub-Adviser, who has been an
investment professional for 36 years and has been with the Sub-Adviser or an
affiliate for 36 years; (vi) Lionel Sauvage, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 12 years and has been
with the Sub-Adviser or an affiliate for 12 years; (vii) Richard Havas, Sr.,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 17 years and has been with the Sub-Adviser or an affiliate for
13 years; and (viii) Rudolf Staehelin, Sr., Senior Vice President of Capital
International Research, Inc., an affiliate the Sub-Adviser, who has been an
investment professional for 21 years and has been with the Sub-Adviser or an
affiliate for 17 years.

James S. Baker and James R. Mulally serve as the Domestic Bond Fund's portfolio
managers. Mr. Baker, Vice President and fixed-income portfolio manager of an
affiliate of the Sub-Adviser, has focused on the application of quantitative
valuations to investment grade bonds and portfolios for the Sub-Adviser since
1987. Mr. Mulally, Senior Vice President, Director and Chairman of the
Sub-Adviser's Fixed-income Subcommittee, joined the Sub-Adviser in 1980.

FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
55 West Monroe Street, Suite #2550, Chicago, Illinois 60603
Founded: 1980 (UAM)

FMA is the Sub-Adviser for the actively managed portion of the assets of the
Small Cap Value Fund. FMA is a wholly-owned subsidiary of United Asset
Management Corporation ("UAM"), and provides investment management services to
corporations, foundations, endowments, pension and profit-sharing plans, trusts,
estates and other institutions as well as individuals. As of December 31, 1999,
UAM and its affiliates had over $203 billion in assets under management.

Investment decisions are made by a team that consists of portfolio managers and
analysts who specialize their research by sectors. Kathryn Vorisek is the lead
portfolio manager. The team meets regularly to review portfolio holdings and to
discuss purchase and sale activity.

GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
32 Old Slip, New York, New York 10005
Founded: 1869

GSAM is the Sub-Adviser for the Large Cap Growth Fund. As of September 1, 1999,
the Investment Management Division ("IMD") was established as a new operating
division of Goldman, Sachs & Co. ("Goldman Sachs"). The newly created entity
includes GSAM. GSAM provides a wide range of fully discretionary investment
advisory services, quantitatively driven and actively managed to U.S. and
international equity portfolios, U.S. and global fixed-income portfolios,
commodity and currency products and money market accounts. As of December 31,
1999, GSAM, along with other units of IMD, had assets under management of nearly
$500 billion.

The Large Cap Growth Fund is managed by the following individuals: Robert C.
Jones; Kent A. Clark; Victor H. Pinter; and Melissa Brown. Mr. Jones, Managing
Director, joined the Sub-Adviser in 1989. Mr. Clark, Managing Director, joined
the Sub-Adviser's quantitative equity management team as a portfolio manager in
1992. Mr. Pinter, Vice President, joined the Sub-Adviser as a research analyst
in 1990, and became a portfolio manager in 1992. Ms. Brown, Vice President,
joined the Sub-Adviser in 1998. From 1984 to 1998, Ms. Brown was the director of
Quantitative Equity Research and served on the Investment Policy Committee at
Prudential Securities.

J.P. MORGAN INVESTMENT MANAGEMENT, INC. ("J.P. MORGAN")
522 Fifth Avenue, New York, New York 10036
Founded: 1838

J.P. Morgan is the Sub-Adviser for the Small Cap Growth Fund. Known for its
commitment to proprietary research and its disciplined investment strategies,
J.P. Morgan provides asset management services to corporations, financial
institutions, governments and individuals. As of December 31, 1999, J.P. Morgan
and its affiliates had more than $340 billion in assets under management.

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<PAGE> 78

Investment decisions are made by a team that consists of portfolio managers and
analysts. The team meets regularly to review portfolio holdings and to discuss
purchase and sale activity.

JACOBS ASSET MANAGEMENT
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301
Founded: 1980 (UAM)

Jacobs Asset Management is the Sub-Adviser for the International Growth Fund.
Jacobs Asset Management is a Delaware limited partnership. United Asset
Management Corporation ("UAM") is a limited partner of, and owns a controlling
interest in, Jacobs Asset Management. Jacobs Asset Management provides
investment management and advisory services to corporations, unions, pensions
and profit-sharing plans, trusts and estates and other institutions and
investors. As of December 31, 1999, UAM and its affiliates had over $203 billion
in assets under management.

Investment decisions for the International Growth Fund are made by a team that
consists of portfolio managers and analysts who specialize their research by
region. Dan Jacobs, President, is the lead portfolio manager and has final
approval on purchase and sales. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity.

NEUBERGER BERMAN MANAGEMENT, INC. ("NB MANAGEMENT")
605 Third Avenue, Second Floor, New York, New York 10158-0180
Founded: 1939

NB Management is the Sub-Adviser for the Mid Cap Value Fund. NB Management and
its predecessor firms have specialized in the management of no-load mutual funds
since 1950. As of December 31, 1999, NB Management and its affiliates managed
approximately $54 billion in assets under management.

Robert I. Gendelman and S. Basu Mullick serve as co-managers of the Mid Cap
Value Fund. Messrs. Gendelman and Mullick are Vice Presidents of the Sub-Adviser
and Mr. Gendelman is a managing director of Neuberger Berman, LLC. Messrs.
Gendelman and Mullick have been associated with the Sub-Adviser since 1994 and
1998, respectively. From 1993 to 1998, Mr. Mullick was a portfolio manager for
another investment adviser.

STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
2 International Place, Boston, Massachusetts 02110
Founded: 1792

State Street Global Advisors is the Sub-Adviser for the Large Cap Value Fund.
State Street Global Advisors is an operating division of State Street Bank, a
wholly-owned subsidiary of State Street Corporation, which had more than $667
billion under management as of December 31, 1999.

The Large Cap Value Fund is managed by a team of investment professionals. In
addition to the ongoing activity of portfolio management, the team is
responsible for research focused on enhancing the Sub-Adviser's quantitative
process.

- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------

There are several references below to Customer Service or the Transfer Agent.
Customer Service and all Transfer Agent functions are provided by National
Financial Data Services, Inc., in Kansas City, Missouri.

TYPES OF ACCOUNTS
The different ways you may set up an account are listed below.

Individual
Individual accounts are owned by one person. You can designate a beneficiary for
the account if you choose to have a Transfer on Death account ("TOD").

Joint Tenants
Joint accounts can have two or more owners. You can set the account up as joint
tenants with rights of survival ("JTWROS"), which means that if one owner dies,
the other owner will receive the funds without going through probate court.

You can also choose joint tenants in common ("JTIC"). This means that each
tenant owns a specific portion of the account. We assume 50/50 ownership unless
we are otherwise notified. When one tenant dies, that portion of the account
belongs to the estate of the deceased.

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<PAGE> 79

Retirement Plans
Retirement plans provide individuals with tax-advantaged ways to save for
retirement, either with tax-deductible contributions, or tax-deferred growth.
Retirement accounts require special applications and have a lower initial
purchase requirement. Retirement accounts include:
Traditional Individual Retirement Accounts ("IRAs")
Roth IRAs
Roth Conversion IRAs
Rollover IRAs
Profit-Sharing or Money Purchase Pension Plans
Simplified Employee Pension ("SEP") IRAs
SIMPLE IRAs
401(k) Plans

Transfer or Gift to Minor
You can set up a custodial account for a child under your state's Uniform
Transfer or Gift to Minors Act ("UTMA" or "UGMA"). Any individual can give the
child up to $10,000 each year without paying the federal gift tax. The gift to
the child is irrevocable, meaning that it cannot be taken back. In addition, the
account and all the money in it must be conveyed to the child upon reaching the
age of majority, which is 18-21 in most states.

Trust
The trust must be established before the account is open. We need to know the
date of establishment and the name of the trustee.

Businesses or Organizations
You may open an account for your corporation, association, or partnership. The
application must be accompanied by a corporate resolution so that we know who is
authorized to transact on the account.

INVESTMENT MINIMUMS
The table below illustrates the minimum investment requirements for initial and
subsequent investments for any of the Funds.

<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
TYPE OF ACCOUNT INVESTMENT INVESTMENT
- --------------- ---------- ----------
<S> <C> <C>
Retirement Plans $500 $50
UTMA/UGMA $250 $50
Automatic Investment Program $50 $50
All other accounts $2,000 $50
</TABLE>

AVAILABLE CLASSES OF SHARES
You may choose to purchase either Class A or Class B shares. The decision as to
which class is best for you depends on your investment goals, how much you want
to invest and how long you plan to keep the investment. The fees and expenses
are different for each Class and affect a Fund's total return. The fees and
expenses are shown in the Fee Table and Example of Expenses earlier in this
Prospectus.

Shares of the Money Market Fund and the Municipal Money Market Fund are sold
without a sales charge. You should choose Class A for a money market fund,
unless you intend to exchange the money market shares for Class B shares of
another fund.

Class A features{
- - Front-end sales charge, except for money market funds
- - Reduced sales charges for larger purchases
- - Cumulative purchase discount (see Rights of Accumulation below)
- - No sales charges for purchases of $1 million or more

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<PAGE> 80

CLASS A SALES CHARGE TABLES
If you choose Class A shares, you will pay a sales charge at the time of each
purchase, except for the money market funds. These tables show the charges both
as a percentage of offering price and as a percentage of the amount you invest.
The term "offering price" includes the front-end sales charge. If you invest
more, the sales charge will be lower.

<TABLE>
<S> <C>
Equity Funds
Balanced Mid Cap Index
Conservative Growth Lifestyle Mid Cap Value
Growth Lifestyle Moderate Growth Lifestyle
International Growth Small Cap Growth
International Value Small Cap Index
Large Cap Growth Small Cap Value
Large Cap Value Socially Responsible
Mid Cap Growth Stock Index
</TABLE>

<TABLE>
<CAPTION>
YOUR SALES CHARGE AS A PERCENTAGE OF: MAXIMUM COMMISSION
INVESTMENT NET INVESTMENT OFFERING PRICE TO BROKER-DEALER
- ---------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000 6.10% 5.75% 5.25%
$25,000 - $49,999 5.82% 5.50% 5.00%
$50,000 - $99,999 4.99% 4.75% 4.25%
$100,000 - $249,999 3.90% 3.75% 3.25%
$250,000 - $499,999 2.56% 2.50% 2.00%
$500,000 - $999,999 2.04% 2.00% 1.75%
$1,000,000 or more No sales charge, but subject to See Payments to Broker-Dealers below
CDSC(45)
</TABLE>

<TABLE>
<S> <C>
Fixed-Income (Bond) Funds
Core Bond Municipal Bond
Domestic Bond Strategic Bond
High Yield Bond
</TABLE>

<TABLE>
<CAPTION>
YOUR SALES CHARGE AS A PERCENTAGE OF: MAXIMUM COMMISSION
INVESTMENT NET INVESTMENT OFFERING PRICE TO BROKER-DEALER
- ---------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $49,999 4.99% 4.75% 4.25%
$50,000 - $99,999 4.71% 4.50% 4.00%
$100,000 - $249,999 3.63% 3.50% 3.00%
$250,000 - $499,999 2.56% 2.50% 2.00%
$500,000 - $999,999 2.04% 2.00% 1.75%
$1,000,000 or more No sales charge, but subject to See Payments to Broker-Dealers below
CDSC(45)
</TABLE>

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

(45) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

When the sales charge on Class A Shares will be reduced or waived

- - Rights of Accumulation (cumulative purchase discount): Previous Class A
purchases may help you to qualify for a lower sales charge. The sales charge
is calculated by adding the dollar amount of the new purchase of shares to the
higher of the original cost or current value of Class A Fund shares previously
purchased.
- - Volume Discounts (groups or grouped accounts): Related accounts may be
aggregated for the purposes of receiving a reduced sales charge. You must
contact Customer Service to see if you or your group is eligible for a volume
discount purchase, and notice may be required for each subsequent purchase.
For purposes of determining eligibility for the volume discount, spouses and
their children under 21 years of age are treated as a single purchaser, as is
a trustee or other fiduciary of a single trust estate or a single fiduciary
account. An aggregate investment includes all shares of the Funds owned plus
the shares being purchased.
- - Letter of Intent: If you intend to purchase a specific amount over the next 13
months, it may be to your benefit to sign a Letter of Intent. This allows you
to receive a lower breakpoint for each purchase, based on the total amount you
intend to purchase.

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<PAGE> 81

Up to 5% of the total amount you intend to purchase may be held in escrow to
cover additional sales charges, just in case you do not purchase the total
amount. A Letter of Intent can be obtained by calling Customer Service at
1-877-999-2434.
- - Purchases of Class A Shares without sales charges: Class A Shares may be
purchased without a sales charge by:

1. Current and retired Trustees;

2. Current and retired employees of American General Corporation and its
affiliates;

3. Directors, officers, and employees (and when permitted, registered
representatives and their employees) of financial intermediaries that have
entered into a selling agreement with the Distributor;

4. Immediate family members (spouse, children under 21, grandchildren under 21,
and parents) of 1 through 3 above;

5. Financial institution trust departments investing an aggregate of $1 million
in the Funds;

6. Accounts for which broker-dealers, financial institutions, or financial
planners charge an account management fee (also called a wrap fee);

7. Tax-qualified plans with more than $1 million in plan assets;

8. Tax-qualified plans purchasing shares with loan repayments from participants;
and

9. By a Fund in connection with the acquisition of another investment company.

Class B features{
- - No front-end sales charges
- - Contingent deferred sales charge ("CDSC") on redemptions
- - Keeping the shares longer will reduce the CDSC
- - No CDSC is charged for shares acquired by reinvesting dividends or capital
gains
- - Class B shares automatically convert to Class A shares after 6 years

CLASS B CDSC TABLE
If you choose Class B shares, you will not pay an initial sales charge, but you
will have to pay a CDSC if the shares are sold within the first five years, as
shown below.

<TABLE>
<CAPTION>
YEAR 1 2 3 4 5
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Charge 5% 4% 3% 2% 1%
</TABLE>

Shares not subject to a CDSC will be redeemed first, followed by shares held the
longest during the CDSC period. The amount of the CDSC is calculated as a
percentage of the lesser of the current market value or the original cost of the
shares being redeemed. This means that you do not pay a CDSC on any gain in the
value of the shares sold. The CDSC may be waived under certain circumstances.

When the CDSC will be waived
No CDSC will be charged for:
- - Exchanges of Class B Shares from one Fund to another
- - Required minimum distributions from tax-deferred retirement plans and IRAs
- - Redemptions from tax-deferred retirement plans for termination of employment,
participant loans, or hardship withdrawals
- - The return of an excess contribution or deferral, pursuant to sections
401(k)(8), 401(m)(6), 402(g)(2), or 408(d)(4) or (5) of the Internal Revenue
Code
- - Redemptions due to the death of an individual investor
- - Redemptions due to the deaths of all the investors, for a joint account
- - Redemptions taken due to a disability, as determined by the Social Security
Administration
- - Systematic withdrawals of at least $50, provided that the amounts withdrawn do
not exceed 12% of the account value, on an annual basis (you must have a
minimum balance of $5,000 to be eligible for this program)
- - Redemptions due to the failure to meet the minimum balance requirements

DISTRIBUTION AND SERVICE PLAN (EXCEPT FOR LIFESTYLE FUNDS)
Each Fund (except for the Lifestyle Funds) has adopted a Distribution and
Service Plan ("Plan") under Rule 12b-1 of the 1940 Act. The Plan allows each
Fund to pay distribution fees for the sale and distribution of its shares and
for services provided to shareholders. Each Fund paid service fees of 0.25% for
Class A Shares and 1% for Class B Shares during the most recent fiscal period.
Because these fees are paid out of a Fund's assets on an on-going basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.

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<PAGE> 82

PAYMENTS TO BROKER-DEALERS
The distribution and service fees are paid to the distributor of the Funds,
American General Distributors, Inc., an affiliate of VALIC (the "Distributor").
The Distributor may then pay broker-dealers a commission for selling Fund
Shares. The maximum commission for Class A Shares is shown above, as a
percentage of the offering price. The Distributor may pay a maximum commission
of 4.00% on Class B Shares at the time of purchase.

The Distributor may occasionally pay broker-dealers the full amount of the Class
A front-end sales charge as a special sales incentive. Broker-dealers may also
receive additional compensation and finder's fees, based on assets held through
the broker-dealer firm. Finder's fees may be paid on Class A Share purchases of
$1 million or more, excluding Money Market Funds. The finder's fee is 0.50% on
sales of $1 to $2 million, plus 0.40% on the next $1 million, and 0.25% on the
excess over $3 million.

The Distributor may also provide promotional incentives or payments to its
registered representatives, its affiliated broker-dealer, or to other
broker-dealers in connection with the sales of Fund Shares. These incentives or
payments may include payments for travel and lodging expenses incurred for
meetings and seminars of a business nature. The Distributor makes these payments
at its own expense, in accordance with rules set forth by the National
Association of Securities Dealers, Inc.

HOW SHARES ARE VALUED
The price of each Class of shares for a Fund is based on net asset value
("NAV"). NAV is computed by adding the value of a Fund's holdings plus other
assets, subtracting liabilities, and then dividing the result by the number of
shares outstanding. The NAV of each Class will be different, depending on the
number of Class shares outstanding.

Portfolio securities and other assets are valued based on market price
quotations. If market quotations are not readily available, securities are
valued by a method that reflects fair value. These are reviewed by the Fund's
Board of Trustees. Some Funds hold securities that are primarily listed on
foreign exchanges. Foreign exchanges may trade at times or on days when the New
York Stock Exchange ("NYSE") is closed, such as on weekends or other days. This
will affect the value of the Fund's shares; thus, the value of the Fund's shares
may change on days when you will not be able to buy or sell your shares.

The Money Market Fund and the Municipal Money Market Fund and any securities
maturing within 60 days are valued according to the "amortized cost" method,
which is intended to stabilize the NAV at $1 per share.

The NAV is calculated as of the close of each business day, which coincides with
the closing of the regular session of the NYSE (normally 4:00 p.m. Eastern
Time). Each Fund is open for business each day the NYSE is open. The NYSE is
closed on most federal holidays and Good Friday. Please note that there are some
federal holidays, however, such as Columbus Day and Veterans' Day, when the NYSE
is open and the Funds are open but purchases cannot be made due to the closure
of the banking system.

OPENING YOUR ACCOUNT
You may open an account through a registered representative or by completing the
enclosed application. Please be sure to indicate the Fund and the Class of
shares you wish to purchase.

Please take special care when completing your application that you sign up for
any services you may desire, including telephone privileges. If your bank is a
member of the Automated Clearing House ("ACH"), you may sign up for the
electronic transfer service. To sign up, you MUST include a voided check for a
checking account, or a deposit slip for a savings account. If you wish to add
services at a later date, a signature guarantee may be required.

Send the new account application and your purchase check to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502

If you purchase shares through a registered representative or financial
institution
You should read the program materials together with this Prospectus. Certain
features may be modified in these programs. Investors may be charged a fee if
they effect transactions in Fund shares through a broker or agent.

GENERAL PURCHASE INFORMATION

If your purchase order is received by 3:00 p.m. Central Time, then your purchase
will be processed at the next NAV calculated after your order is received by the
Transfer Agent. Any check purchase received without an investment slip may cause
delayed crediting. All purchases must be made in U.S. dollars and should be
drawn only on U.S. banks. If your check does not clear your bank, you may be
charged a fee by the Transfer Agent. Each Fund reserves the right to reject any
specific purchase order and may suspend the offering of shares in response to
conditions in the securities markets or for other reasons.

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<PAGE> 83

ADDITIONAL ACCOUNT PURCHASES
You may make additional purchases by contacting your registered representative
or by:

Mail
You may use the investment remittance slip attached to your account statement or
confirmations. Make your check payable to the Fund in which you are investing
and mail to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502

Wire
Please call 1-877-999-2434 before you send a wire purchase.
Your financial institution may charge you a fee for wiring funds.

Electronic Transfers -- $50 or more
If you have already signed up for our ACH service, you may call Customer Service
at 1-877-999-2434 to transfer money from your bank to the Fund through our
electronic transfer service. Your bank account will be debited for the desired
amount. Allow one or two business days after you place your request for the
transfer to take place. This ACH service allows you to purchase additional
shares quickly and conveniently without mail delays.

AUTOMATIC INVESTMENT PROGRAMS
Please call 1-877-999-2434 to set up an automatic investment program. You may
change amounts or Funds or discontinue a program at any time.

Automatic Investing
You may request an automatic ACH transfer of $50 or more from your bank to the
Fund. You may choose when you want this to occur, whether monthly, bimonthly,
quarterly, or some other time.

Payroll Deductions
You may make regular investments of $50 or more through automatic payroll
deduction you initiate through your employer. Your employer may have special
forms and other rules for this program.

Systematic Exchanges
If you have a Fund balance of at least $5,000, you may request an automatic
exchange of $25 or more from that Fund account to another Fund account. The
automatic exchange will occur once per month.

EXCHANGES OF SHARES FROM ONE FUND TO ANOTHER

Please call Customer Service at 1-877-999-2434 to make an exchange. You must
have telephone privileges for this service.

An exchange of shares occurs when you sell shares in one Fund and buy shares in
another Fund. Each exchange may produce a taxable gain or loss, unless in a
tax-deferred account.

Exchanges between accounts will only be accepted if the accounts are registered
identically.

Exchanges may be requested by mail or by telephone. Please refer to "Selling
Your Shares" for more details on requests by mail.

If you exchange Class A Shares of the Money Market Fund or the Municipal Money
Market Fund for Class A Shares of any other Fund with a sales charge, you will
pay a sales charge at the time of the exchange.

Shares may only be exchanged for shares of the same class of another Fund.

No CDSC is imposed on exchanges of Class B Shares subject to a CDSC at the time
of the exchange because the shares are still within the American General Fund
Group. The CDSC will be charged for all other sales.

Because excessive trading can increase Fund expenses and hurt performance for
other shareholders, we may refuse any exchange that we believe is due to market
timing or which may otherwise significantly affect a Fund.

We may modify these exchange policies upon 60 days' prior notice to
shareholders.

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<PAGE> 84

into another Fund. We may hold payment of redemptions until your purchase check
has cleared, which may take up to 15 calendar days. The Funds have the right to
redeem shares in assets other than cash for redemption amounts exceeding, in any
90-day period, $250,000 or 1% of the net asset value of the affected Fund,
whichever is less.

When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Funds are open
but redemptions cannot be made due to the closure of the banking system.

You may sell shares by contacting your registered representative or by:

Telephone: Check redemptions, ACH, or bank wires
You may redeem up to $25,000 daily by calling Customer Service at 1-877-999-2434
before 3:00 p.m. Central Time. The proceeds of the sale may be sent only to
pre-authorized destinations, such as your address of record or your bank account
by wire or by ACH.

Bank wires must be for at least $500. You may be charged up to $25 for a wire to
your bank, and your bank may charge to receive the wire. International wires are
more expensive; therefore, the charge to you may be higher.

ACH transfers must be for at least $50. There is no charge for an ACH transfer.
Allow one or two business days after you place your request for the transfer to
take place.

Mail
Your written request should include the following information:
1. Your name, address, and daytime telephone number;
2. Your account number;
3. The name or number of the Fund from which you wish to sell shares;
4. The Class of Shares to be sold, if applicable;
5. The dollar or share amount of the sale; and
6. Your signature, guaranteed (see below).

Send the written request to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502

Special Requirements
A SIGNATURE GUARANTEE is required for any:
1. Redemption when the account address has been listed less than 30 days; or
2. Redemption to an address other than that on the account.

You may obtain a signature guarantee from:
1. A bank which is a member of the FDIC;
2. A trust company;
3. A member firm of a national securities exchange; or
4. Another eligible guarantor institution.

Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "Signature Guaranteed."

A NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE.

Check Writing -- Money Market Fund and Municipal Money Market Fund only
The Money Market Funds offer check writing privileges for Class A Shares. You
can choose this redemption option by completing the appropriate portions of the
account application. The Transfer Agent will provide you with a supply of
checks.

- - Checks may be written for $100 or more.

- - Checks will not be honored if you do not have enough money in your account to
cover the check, or if the money in the account is still on hold from a recent
purchase.

- - If we do not honor a check, you may be charged a fee of $25.
- - You may not completely close your account by writing a check.

84
<PAGE> 85

AUTOMATIC REDEMPTIONS
- - You may request an automatic monthly or quarterly ACH transfer of $50 or more
from the Fund to your bank, provided your account balance is $5,000 or more.
- - You may request a monthly or quarterly automatic check redemption of $50 or
more, provided your account balance is $5,000 or more.

REINSTATEMENT PRIVILEGE
If you redeem some or all of your Fund shares, you have up to 30 days to
reinvest all or part of your redemption proceeds in Class A shares of the Fund
without paying a sales charge. This privilege applies only to redemptions of
Class A shares on which an initial sales charge or CDSC was paid or to
redemptions of Class A shares of the Fund that you purchase by reinvesting
dividends or distributions. You must ask the Transfer Agent to apply this
privilege when you send your purchase.

MINIMUM ACCOUNT BALANCES
If the balance in your account falls below the required minimum initial
investment, you will be notified that you should bring the balance up to the
required minimum amount within 60 days. If your account remains below the
minimum required, it may be closed and the proceeds mailed to the address of
record.

DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses.
Distributions of net short-term capital gains (treated as dividends for tax
purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividend and
distribution payments will vary between classes; dividend payments are
anticipated to be generally higher for Class A shares.

<TABLE>
<S> <C>
Dividends declared and paid daily:
Money Market Fund
Municipal Money Market Fund
Dividends declared daily and paid monthly:
Core Bond Municipal Bond
Domestic Bond Strategic Bond
High Yield Bond
Dividends paid quarterly:
Balanced Mid Cap Value
Conservative Growth Lifestyle Moderate Growth Lifestyle
Growth Lifestyle Small Cap Growth
Large Cap Growth Small Cap Index
Large Cap Value Small Cap Value
Mid Cap Growth Socially Responsible
Mid Cap Index Stock Index
Dividends paid semi-annually:
International Growth
International Value
</TABLE>

DIVIDEND PAYMENT OPTIONS
Dividends and any distributions are automatically reinvested in the same Fund
without a sales charge, unless you elect to have dividends paid in cash or in
shares of the Money Market Fund or the Municipal Money Market Fund. You may make
this election on the account application.

BUYING A DIVIDEND
(Not Applicable to Money Market Funds)
At the time of purchase, the share price of each class may reflect undistributed
income, capital gains or unrealized appreciation of securities. Any income or
capital gains from these amounts which are later distributed to you are fully
taxable. On the record date for a distribution, share value is reduced by the
amount of the distribution. If you buy shares just before the record date
("buying a dividend") you will pay the full price for the shares and then
receive a portion of the price back as a taxable distribution.

FEDERAL TAXES
In January, each Fund will mail you Form 1099-DIV indicating the federal tax
status of dividends and any capital gain distributions paid to you during the
past year. Generally, dividends and distributions are taxable in the year they
are paid.

85
<PAGE> 86

However, any dividends and distributions paid in January but declared during the
prior three months are taxable in the year declared. Dividends and distributions
are taxable to you regardless of whether they are taken in cash or reinvested.
Dividends, including short-term capital gains, are taxable as ordinary income,
except that the Municipal Money Market Fund and Municipal Bond Fund intend to
pay dividends which are tax-exempt on the Federal level. Income exempt from
federal tax may be subject to state and local taxes. Distributions from
long-term capital gains are taxable as long-term capital gains, regardless of
how long you have owned shares.

FOR NON-MONEY MARKET FUNDS
You may realize a capital gain or loss when you sell or exchange shares. This
capital gain or loss will be short- or long-term, depending on how long you have
owned the shares which were sold. In January, these Funds will mail you Form
1099-B indicating the total amount of all sales, including exchanges. You should
keep your account statements to help determine the cost basis of the shares to
report on your tax returns.

TAXPAYER IDENTIFICATION NUMBER
If we do not have your correct Social Security or Taxpayer Identification Number
("TIN") and a signed certified application or Form W-9, Federal law requires us
to withhold 31% of your reportable dividends, and possibly 31% of certain
redemptions. In addition, you may be subject to a fine by the Internal Revenue
Service. We reserve the right to reject any new account or any purchase order
for failure to supply a certified TIN.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------

The line graphs on the following pages reflect how an initial $10,000 investment
made on each Fund's inception date, November 2, 1998, would have changed in
value by the end of the first fiscal year, October 31, 1999.

Each line graph also shows how each Fund's benchmark index performed during that
same period. An investor cannot invest directly in one of the benchmark indices.

Each Fund's average annual total return as of October 31, 1999 is shown after
the line graphs. For Class A, both the line graphs and the average annual total
return information are calculated as though the maximum front-end sales charge
was paid.

AMERICAN GENERAL BALANCED FUND

[GRAPH]

86
<PAGE> 87

AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND

[GRAPH]

AMERICAN GENERAL CORE BOND FUND

[GRAPH]

87
<PAGE> 88

AMERICAN GENERAL DOMESTIC BOND FUND

[GRAPH]

AMERICAN GENERAL GROWTH LIFESTYLE FUND

[GRAPH]

88
<PAGE> 89

AMERICAN GENERAL HIGH YIELD BOND FUND

[GRAPH]

AMERICAN GENERAL INTERNATIONAL GROWTH FUND

[GRAPH]

89
<PAGE> 90

AMERICAN GENERAL INTERNATIONAL VALUE FUND

[GRAPH]

AMERICAN GENERAL LARGE CAP GROWTH FUND

[GRAPH]

90
<PAGE> 91

AMERICAN GENERAL LARGE CAP VALUE FUND

[GRAPH]

AMERICAN GENERAL MID CAP GROWTH FUND

[GRAPH]

91
<PAGE> 92

AMERICAN GENERAL MID CAP INDEX FUND

[GRAPH]

AMERICAN GENERAL MID CAP VALUE FUND

[GRAPH]

92
<PAGE> 93

AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND

[GRAPH]

AMERICAN GENERAL MUNICIPAL BOND FUND

[GRAPH]

93
<PAGE> 94

AMERICAN GENERAL SMALL CAP GROWTH FUND

[GRAPH]

AMERICAN GENERAL SMALL CAP INDEX FUND

[GRAPH]

94
<PAGE> 95

AMERICAN GENERAL SMALL CAP VALUE FUND

[GRAPH]

AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND

[GRAPH]

95
<PAGE> 96

AMERICAN GENERAL STOCK INDEX FUND

[GRAPH]

AMERICAN GENERAL STRATEGIC BOND FUND

[GRAPH]

96
<PAGE> 97

The Funds commenced operations on November 2, 1998. For the fiscal year ended
October 31, 1999, the average annual total returns were:

<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Balanced Fund 9.07% 9.42%
Conservative Growth Lifestyle Fund 5.84% 7.21%
Core Bond Fund (5.24)% (5.99)%
Domestic Bond Fund (6.03)% (6.58)%
Growth Lifestyle Fund 12.80% 14.52%
High Yield Bond Fund (2.58)% (3.18)%
International Growth Fund 8.42% 9.00%
International Value Fund 35.93% 37.70%
Large Cap Growth Fund 28.18% 29.70%
Large Cap Value Fund 8.24% 8.92%
Mid Cap Growth Fund (2.92)% (2.90)%
Mid Cap Index Fund 12.15% 13.05%
Mid Cap Value Fund 13.32% 13.71%
Moderate Growth Lifestyle Fund 8.58% 10.26%
Municipal Bond Fund (10.32)% (11.28)%
Small Cap Growth Fund 33.65% 35.40%
Small Cap Index Fund 4.92% 5.53%
Small Cap Value Fund (11.68)% (11.72)%
Socially Responsible Fund 15.48% 16.50%
Stock Index Fund 17.21% 17.55%
Strategic Bond Fund (2.60)% (3.29)%
</TABLE>

97
<PAGE> 98

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

The financial highlights tables are intended to help you understand each Fund's
financial performance for its period of operations. Certain information reflects
financial results for a single Fund share. The total return numbers 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.
This information has been audited by Ernst & Young LLP, whose reports, along
with the Fund's financial statements, are included in the Annual Report, which
is available upon request and which is incorporated into this document by this
reference.

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS A SHARES

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-------------------------------------------------------------------------------
STOCK MID CAP SMALL CAP INTERNATIONAL LARGE CAP MID CAP
INDEX INDEX INDEX GROWTH GROWTH GROWTH
FUND FUND FUND FUND FUND FUND
--------- ------------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.11 0.10 0.10 0.10 (0.01) (0.03)
Net realized and unrealized gain (loss) on
securities 2.32 1.80 1.03 1.40 3.61 0.33
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 2.43 1.90 1.13 1.50 3.60 0.30
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.11) (0.10) (0.10) -- -- --
Distributions from net realized gain on
securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions (0.11) (0.10) (0.10) -- -- --
------ ------ ------ ------ ------ ------
Net asset value at end of period $12.32 $11.80 $11.03 $11.50 $13.60 $10.30
====== ====== ====== ====== ====== ======
TOTAL RETURN 24.36% 19.00% 11.32% 15.03% 36.00% 3.01%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.82% 0.83% 0.83% 1.40% 1.10% 1.04%
Ratio of expenses to average net assets before
expense reductions 1.53% 1.67% 1.69% 2.68% 2.03% 2.36%
Ratio of net investment income (loss) to
average net assets 1.08% 0.91% 0.97% 1.06% (0.10)% (0.31)%
Portfolio turnover rate 14% 44% 48% 91% 65% 25%
Number of shares outstanding at end of period
(000's) 457 272 263 143 203 172
Net assets at the end of period (000's) $5,634 $3,209 $2,900 $1,650 $2,760 $1,769
</TABLE>

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-------------------------------------------------------------------------------
SMALL CAP INTERNATIONAL LARGE CAP MID CAP SMALL CAP SOCIALLY
GROWTH VALUE VALUE VALUE VALUE RESPONSIBLE
FUND FUND FUND FUND FUND FUND
--------- ------------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) (0.07) 0.04 0.09 0.06 0.11 0.10
Net realized and unrealized gain (loss) on
securities 4.24 4.38 1.39 1.97 (0.73) 2.15
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 4.17 4.42 1.48 2.03 (0.62) 2.25
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income -- -- (0.09) (0.05) (0.11) (0.10)
Distributions from net realized gain on
securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions -- -- (0.09) (0.05) (0.11) (0.10)
------ ------ ------ ------ ------ ------
Net asset value at end of period $14.17 $14.42 $11.39 $11.98 $ 9.27 $12.15
====== ====== ====== ====== ====== ======
TOTAL RETURN 41.80% 44.22% 14.85% 20.23% (6.29)% 22.53%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.40% 1.29% 1.05% 1.29% 1.23% 0.80%
Ratio of expenses to average net assets before
expense reductions 2.44% 2.65% 2.13% 2.43% 2.61% 1.97%
Ratio of net investment income (loss) to
average net assets (0.71)% 0.38% 0.93% 0.51% 1.15% 0.87%
Portfolio turnover rate 128% 32% 66% 177% 91% 24%
Number of shares outstanding at end of period
(000's) 171 134 178 144 148 137
Net assets at the end of period (000's) $2,424 $1,936 $2,028 $1,728 $1,371 $1,663
</TABLE>

98
<PAGE> 99
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS A SHARES CONTINUED

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------
HIGH YIELD STRATEGIC DOMESTIC CORE MUNICIPAL
BALANCED BOND BOND BOND BOND BOND
FUND FUND FUND FUND FUND FUND
-------- ---------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.21 0.81 0.67 0.50 0.50 0.36
Net realized and unrealized gain (loss) on securities 1.36 (0.57) (0.45) (0.63) (0.55) (0.93)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 1.57 0.24 0.22 (0.13) (0.05) (0.57)
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.21) (0.81) (0.67) (0.50) (0.50) (0.36)
Distributions from net realized gain on securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions (0.21) (0.81) (0.67) (0.50) (0.50) (0.36)
------ ------ ------ ------ ------ ------
Net asset value at end of period $11.36 $ 9.43 $ 9.55 $ 9.37 $ 9.45 $ 9.07
====== ====== ====== ====== ====== ======
TOTAL RETURN 15.72% 2.28% 2.26% (1.34)% (0.52)% (5.84)%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.07% 1.25% 1.15% 1.03% 1.05% 1.05%
Ratio of expenses to average net assets before expense
reductions 2.47% 2.01% 2.48% 2.30% 1.59% 1.93%
Ratio of net investment income (loss) to average net
assets 1.98% 5.69% 6.92% 5.21% 4.43% 3.69%
Portfolio turnover rate 62% 72% 183% 98% 469% 9%
Number of shares outstanding at end of period (000's) 159 4 136 208 14 332
Net assets at the end of period (000's) $1,809 $ 34 $1,298 $1,948 $ 130 $3,005
</TABLE>

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
------------------------------------------------------------
MUNICIPAL MODERATE CONSERVATIVE
MONEY MONEY GROWTH GROWTH GROWTH
MARKET MARKET LIFESTYLE LIFESTYLE LIFESTYLE
FUND FUND FUND FUND FUND
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.04 0.02 0.07 0.14 0.21
Net realized and unrealized gain (loss) on securities -- -- 1.91 1.39 1.02
------ ------ ------ ------ ------
Total income (loss) from investment operations 0.04 0.02 1.98 1.53 1.23
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.04) (0.02) (0.06) (0.13) (0.20)
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.04) (0.02) (0.06) (0.13) (0.20)
------ ------ ------ ------ ------
Net asset value at end of period $ 1.00 $ 1.00 $11.92 $11.40 $11.03
====== ====== ====== ====== ======
TOTAL RETURN 4.54% 2.18% 19.65% 15.20% 12.30%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.80% 1.05% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before
expense reductions 1.42% 1.89% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average net
assets 4.58% 2.18% 0.63% 1.33% 2.01%
Portfolio turnover rate N/A N/A 9% 11% 10%
Number of shares outstanding at end of period (000's) 7,549 3,651 162 168 162
Net assets at the end of period (000's) $7,549 $3,651 $1,929 $1,918 $1,790
</TABLE>

99
<PAGE> 100
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS B SHARES

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
--------------------------------------------------------------------------------
STOCK MID CAP SMALL CAP INTERNATIONAL LARGE CAP MID CAP
INDEX INDEX INDEX GROWTH GROWTH GROWTH
FUND FUND FUND FUND FUND FUND
---------- ---------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------- ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.02 0.01 0.02 0.02 (0.05) (0.07)
Net realized and unrealized gain (loss) on
securities 2.23 1.79 1.03 1.38 3.52 0.28
------- ------ ------ ------ ------ ------
Total income (loss) from investment
operations 2.25 1.80 1.05 1.40 3.47 0.21
------- ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.02) (0.01) (0.02) -- -- --
Distributions from net realized gain on
securities -- -- -- -- -- --
------- ------ ------ ------ ------ ------
Total distributions (0.02) (0.01) (0.02) -- -- --
------- ------ ------ ------ ------ ------
Net asset value at end of period $ 12.23 $11.79 $11.03 $11.40 $13.47 $10.21
======= ====== ====== ====== ====== ======
TOTAL RETURN 22.55% 18.05% 10.53% 14.00% 34.70% 2.10%
======= ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.57% 1.58% 1.58% 2.15% 1.85% 1.79%
Ratio of expenses to average net assets
before expense reductions 1.98% 2.29% 2.37% 3.15% 2.34% 2.74%
Ratio of net investment income (loss) to
average net assets 0.37% 0.17% 0.23% 0.24% (0.86)% (1.08)%
Portfolio turnover rate 14% 44% 48% 91% 65% 25%
Number of shares outstanding at end of period
(000's) 1,229 376 305 248 657 357
Net assets at the end of period (000's) $15,040 $4,433 $3,361 $2,826 $8,853 $3,652
</TABLE>

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
--------------------------------------------------------------------------------
SMALL CAP INTERNATIONAL LARGE CAP MID CAP SMALL CAP SOCIALLY
GROWTH VALUE VALUE VALUE VALUE RESPONSIBLE
FUND FUND FUND FUND FUND FUND
----------- ------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) (0.10) (0.03) 0.01 -- 0.03 0.02
Net realized and unrealized gain (loss) on
securities 4.14 4.30 1.38 1.87 (0.74) 2.13
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations 4.04 4.27 1.39 1.87 (0.71) 2.15
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income -- -- (0.01) (0.02) (0.03) (0.02)
Distributions from net realized gain on
securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions -- -- (0.01) (0.02) (0.03) (0.02)
------ ------ ------ ------ ------ ------
Net asset value at end of period $14.04 $14.27 $11.38 $11.85 $ 9.26 $12.13
====== ====== ====== ====== ====== ======
TOTAL RETURN 40.40% 42.70% 13.92% 18.71% (7.09)% 21.50%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 2.15% 2.04% 1.80% 2.04% 1.98% 1.55%
Ratio of expenses to average net assets
before expense reductions 2.83% 3.06% 2.48% 2.77% 3.08% 2.49%
Ratio of net investment income (loss) to
average net assets (1.44)% (0.40)% 0.17% (0.26)% 0.42% 0.09%
Portfolio turnover rate 128% 32% 66% 177% 91% 24%
Number of shares outstanding at end of period
(000's) 368 261 434 384 248 243
Net assets at the end of period (000's) $5,170 $3,731 $4,939 $4,555 $2,296 $2,943
</TABLE>

100
<PAGE> 101
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS B SHARES CONTINUED

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
------------------------------------------------------------------------
HIGH YIELD STRATEGIC DOMESTIC CORE MUNICIPAL
BALANCED BOND BOND BOND BOND BOND
FUND FUND FUND FUND FUND FUND
-------- ---------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.09 0.74 0.59 0.44 0.42 0.28
Net realized and unrealized gain (loss) on securities 1.35 (0.57) (0.45) (0.62) (0.55) (0.94)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 1.44 0.17 0.14 (0.18) (0.13) (0.66)
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.09) (0.74) (0.59) (0.44) (0.42) (0.28)
Distributions from net realized gain on securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions (0.09) (0.74) (0.59) (0.44) (0.42) (0.28)
------ ------ ------ ------ ------ ------
Net asset value at end of period $11.35 $ 9.43 $ 9.55 $ 9.38 $ 9.45 $ 9.06
====== ====== ====== ====== ====== ======
TOTAL RETURN 14.42% 1.53% 1.48% 1.89% (1.27)% (6.75)%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.82% 2.00% 1.90% 1.78% 1.80% 1.80%
Ratio of expenses to average net assets before
expense reductions 2.76% 2.37% 3.08% 2.55% 2.22% 2.56%
Ratio of net investment income (loss) to average net
assets 1.29% 7.30% 6.21% 4.63% 4.10% 2.98%
Portfolio turnover rate 62% 72% 183% 98% 469% 9%
Number of shares outstanding at end of period (000's) 552 69 179 600 31 450
Net assets at the end of period (000's) $6,261 $ 652 $1,704 $5,633 $ 294 $4,074
</TABLE>

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------------------
MUNICIPAL MODERATE CONSERVATIVE
MONEY MONEY GROWTH GROWTH GROWTH
MARKET MARKET LIFESTYLE LIFESTYLE LIFESTYLE
FUND FUND FUND FUND FUND
-------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.04 0.01 0.06 0.12 0.18
Net realized and unrealized gain (loss) on
securities -- -- 1.89 1.41 1.05
------ ------ ------ ------ ------
Total income (loss) from investment operations 0.04 0.01 1.95 1.53 1.23
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.04) (0.01) (0.05) (0.11) (0.17)
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.04) (0.01) (0.05) (0.11) (0.17)
------ ------ ------ ------ ------
Net asset value at end of period $ 1.00 $ 1.00 $11.90 $11.42 $11.06
====== ====== ====== ====== ======
TOTAL RETURN 3.93% 1.42% 19.52% 15.26% 12.21%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.55% 1.80% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before
expense reductions 2.23% 2.69% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average
net assets 3.97% 1.42% 0.66% 1.40% 2.11%
Portfolio turnover rate N/A N/A 9% 11% 10%
Number of shares outstanding at end of period
(000's) 6,058 2,841 413 486 532
Net assets at the end of period (000's) $6,058 $2,841 $4,915 $5,553 $5,880
</TABLE>

101
<PAGE> 102

For investors who want more information about the Funds, the following documents
are available free upon request:

Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.

Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.

You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:

Telephone: 1-877-999-2434

American General Web-Site Address: http://www.agfundgroup.com

You can review the Funds' reports and SAI at the public Reference Room of the
SEC.

You can get text only copies:
- For a fee, by electronic request at [email protected] or by writing to or
calling the Public Reference Room of the Commission, Washington, D.C.
20549-6009, Telephone: 1-202-942-8090.
- Free from the EDGAR database on the Commission's Internet website at
http://www.sec.gov.

Investment Company Act File No. 811-08875 (AGSPC 2)

VA 10856 VER. 3/00
102
<PAGE> 103

American General Series Portfolio Company 2

Institutional Class I Shares

March 1, 2000

The American General Series Portfolio Company 2 (the "Series Company") is an
open-end mutual fund made up of separate Funds (the "Funds"). In this
prospectus, "we", "us", and "our" refers to the American General Fund Group.
Institutional Class I Shares of these Funds are available to you only through an
employer retirement plan. Different employer plans choose different combinations
of funds, so all of the funds discussed in this prospectus may not be available
in your plan. Please check your employer-provided plan documents for available
investments.

BALANCED FUND:
THIS FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS TO ALLOW FOR LONG-TERM
GROWTH WHILE REDUCING MARKET RISKS.
American General Balanced Fund ("Balanced Fund")

MONEY MARKET FUND:
THIS FUND PROVIDES LIQUIDITY AND PRESERVATION OF CAPITAL.
American General Money Market Fund ("Money Market Fund")

TABLE OF CONTENTS

<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE 3
Balanced Fund 3
Conservative Growth Lifestyle Fund 5
Core Bond Fund 8
Domestic Bond Fund 11
Growth Lifestyle Fund 14
High Yield Bond Fund 17
International Growth Fund 20
International Value Fund 22
Large Cap Growth Fund 25
Large Cap Value Fund 27
Mid Cap Growth Fund 29
Mid Cap Value Fund 31
Moderate Growth Lifestyle Fund 33
Money Market Fund 37
Small Cap Growth Fund 39
Small Cap Value Fund 41
Socially Responsible Fund 44
Strategic Bond Fund 46
MORE ABOUT PORTFOLIO INVESTMENTS 49
WELCOME TO AMERICAN GENERAL CORPORATION (ADVISER AND
SUB-ADVISER INFORMATION) 53
ACCOUNT INFORMATION 59
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE 61
FINANCIAL HIGHLIGHTS 70
</TABLE>

2
<PAGE> 105

RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE

- --------------------------------------------------------------------------------
BALANCED FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Balanced

INVESTMENT ADVISER
The Variable Annuity Life Insurance Company ("VALIC")

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

3
<PAGE> 106

Value Investing Risk: The risk that the portfolio manager's judgment that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class I Shares, assuming reinvestment of dividends and
distributions. This information helps to provide some indication of the risks of
investing in the Fund.

[GRAPH]

ANNUAL RETURN CLASS I = 12.13%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 6.75%
Worst Quarter: 3rd 1999 (5.19)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a broad measure of market performance and to a blend of two indices ("Balanced
Blend"). The Balanced Blend is composed of 40% Lehman Brothers Government and
Corporate Index and 60% S&P 500 Index. Each is a widely recognized, unmanaged
index. The Fund's past performance does not necessarily indicate how it will
perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 12.13%
40% Lehman Brothers Government
and Corporate Index/60% S&P
500 Index: 11.40%
</TABLE>

<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None

ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
Management fees 0.80%
Other expenses 1.77%
-----
Total annual fund operating expenses 2.57%
=====
Fee waiver and/or expense reimbursement (1.62)%
-----
Net Expenses 0.95%
=====
</TABLE>

4
<PAGE> 107

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$97 $303 $526 $1,171
</TABLE>

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

<TABLE>
<S> <C>
International Equity Securities 5%-15%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 30%-50%
(These Funds invest in fixed-income securities, at least
65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>

5
<PAGE> 108

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

6
<PAGE> 109

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 13.63%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 10.90%
Worst Quarter: 3rd 1999 (2.96)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a blended index, calculated by including the pro rata portion of each of the
Underlying Fund's respective indices, and the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The S&P 500
Index approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The Fund's past performance does not necessarily indicate how it
will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 13.63%
Conservative Growth Lifestyle
Blended Benchmark: 10.63%
</TABLE>

7
<PAGE> 110

<TABLE>
<CAPTION>
SHAREHOLDER FEES
----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>

<TABLE>
<S> <C>
Total Combined Operating Expenses: 1.00%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
CORE BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
American General Investment Management, L.P. ("AGIM")

8
<PAGE> 111

The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, 469% for the fiscal year ended October 31, 1999.
The rate of portfolio turnover is calculated by dividing the lesser of the
amount of purchases or sales of portfolio securities during the fiscal year by
the average of the value of the portfolio securities. A high rate of portfolio
turnover generally involves correspondingly greater brokerage commission
expenses, thus increasing the Fund's operating expenses. The Fund's active
trading strategy may cause the Fund to have a relatively high amount of
short-term capital gains, which are taxable to you at your ordinary income tax
rate.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

9
<PAGE> 112

achievement of the Fund's investment objective is dependent upon the
Sub-Adviser's investment analysis. Accordingly, the Fund's investments may
become worth less than what the Fund paid for them.

PERFORMANCE INFORMATION

[GRAPH]
ANNUAL RETURN CLASS I = (0.92)%

<TABLE>
<S> <C> <C>
Best Quarter: 3rd 1999 0.42%
Worst Quarter: 2nd 1999 (1.23)%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return: (0.92)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

<TABLE>
<S> <C>
SHAREHOLDER FEES
- ------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
Management fees 0.48%
Other expenses 1.29%
-----
-----
Total annual fund operating expenses 1.77%
-----
Fee waiver and/or expense reimbursement (0.84)%
-----
Net Expenses 0.93%
-----
-----
</TABLE>

10
<PAGE> 113

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$95 $297 $516 $1,147
</TABLE>

- --------------------------------------------------------------------------------
DOMESTIC BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

11
<PAGE> 114

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

12
<PAGE> 115

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = (3.09)%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 (0.24)%
Worst Quarter: 1st 1999 (1.49)%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return: (3.09)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.60%
Other expenses 1.50%
-----
Total annual fund operating expenses 2.10%
=====
Fee waiver and/or expense reimbursement (1.19)%
-----
Net Expenses 0.91%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$93 $290 $505 $1,124
</TABLE>

13
<PAGE> 116

- --------------------------------------------------------------------------------
GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

<TABLE>
<S> <C>
International Equity Securities 25%-35%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 15%-25%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 20%-30%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 5%-15%
(These Funds invest in fixed-income securities, at least
65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
American General High Yield Bond Fund
</TABLE>

The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.

14
<PAGE> 117

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

15
<PAGE> 118

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 28.85%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 20.40%
Worst Quarter: 3rd 1999 (2.26)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a blended index, calculated by including the pro rata portion of each of the
Underlying Fund's respective indices, and the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The S&P 500
Index approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The Fund's past performance does not necessarily indicate how it
will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 28.85%
Growth Lifestyle Blended
Benchmark: 18.43%
</TABLE>

<TABLE>
<S> <C>
SHAREHOLDER FEES
- ------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>

<TABLE>
<S> <C>
Total Combined Operating Expenses: 1.09%
</TABLE>

16
<PAGE> 119

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
AGIM

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

17
<PAGE> 120

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

18
<PAGE> 121

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 4.21%

<TABLE>
<S> <C> <C>
Best Quarter: 1st 1999 3.84%
Worst Quarter: 3rd 1999 (1.48)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney High Yield Market Index, a widely recognized, unmanaged
index covering a significant portion of the below-investment grade U.S.
corporate bond market. The Fund's past performance does not necessarily indicate
how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 4.21%
Salomon Smith Barney High Yield
Market Index: 1.74%
</TABLE>

<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption
proceeds, whichever is lower) None
Maximum account fee None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.70%
Other expenses 1.35%
-----
Total annual fund operating expenses 2.05%
=====
Fee waiver and/or expense reimbursement (0.92)%
-----
Net Expenses 1.13%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$115 $359 $623 $1,379
</TABLE>

19
<PAGE> 122

- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Jacobs Asset Management

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

20
<PAGE> 123

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 55.75%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 44.56%
Worst Quarter: 1st 1999 (0.78)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney Primary Market Index. The Salomon Smith Barney Primary
Market Index is a sub-index of the Salomon Smith Barney Broad Market Index,
which measures the performance of equities from 23 countries and 18 regions
throughout the world. Each company with equity capital of at least $100 million
is tracked by the Salomon Smith Barney Index. The Fund's past performance does
not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 55.75%
Salomon Smith Barney Primary Market
Index: 24.51%
</TABLE>

21
<PAGE> 124

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.90%
Other expenses 1.85%
-----
Total annual fund operating expenses 2.75%
=====
Fee waiver and/or expense reimbursement (1.47)%
-----
Net Expenses 1.28%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$130 $406 $703 $1,550
</TABLE>

- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

22
<PAGE> 125

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

23
<PAGE> 126

PERFORMANCE INFORMATION

[GRAPH]
ANNUAL RETURN CLASS I = 66.11%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 27.28%
Worst Quarter: 3rd 1999 7.78%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney Primary Market Index. The Salomon Smith Barney Primary
Market Index is a sub-index of the Salomon Smith Barney Broad Market Index,
which measures the performance of equities from 23 countries and 18 regions
throughout the world. Each company with equity capital of at least $100 million
is tracked by the Salomon Smith Barney Index. The Fund's past performance does
not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 66.11%
Salomon Smith Barney Primary
Market Index: 24.51%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 1.00%
Other expenses 1.68%
-----
Total annual fund operating expenses 2.68%
=====
Fee waiver and/or expense reimbursement (1.51)%
-----
Net Expenses 1.17%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$119 $372 $645 $1,425
</TABLE>

24
<PAGE> 127

- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management

The Fund will be managed utilizing Goldman Sachs' Quantitative Equity Strategy.
The acronym "CORE" (Computer-Optimized and Research Enhanced) reflects the three
step investment process the team uses to select securities. First, we estimate
the returns of 3000 U.S. stocks and foreign securities using a combination of
research from the Goldman Sachs Global Investment Research Department, other
industry sources and objective quantitative analysis. Next, the Fund's
investment portfolio is constructed by balancing expected returns against
portfolio risk, trading fees and investment objectives. The Fund is intended to
be constructed with minimum deviations from the sector, risk statistics and
macroeconomic sensitivity of the Fund's benchmark, the Russell 1000(R) Growth
Index. A proprietary multi-factor model is used in seeking to ensure risks taken
are both intended and are warranted due to expected return. Lastly, the Fund is
traded regularly and rebalanced in seeking to ensure all positions are in line
with current market outlooks and benchmark weights.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

25
<PAGE> 128

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 36.74%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 23.94%
Worst Quarter: 3rd 1999 (2.57)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 1000(R) Growth Index. The Russell 1000(R) Growth Index is a
sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index follows the
3,000 largest U.S. companies, based on total market capitalization. The Russell
1000(R) Growth Index measures the performance of the 1,000 largest companies in
the Russell 3000(R) Index, focusing on those with higher price-to-book ratios
and higher forecasted growth values. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 36.74%
Russell 1000(R) Growth Index: 33.16%
</TABLE>

26
<PAGE> 129

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.55%
Other expenses 1.63%
-----
Total annual fund operating expenses 2.18%
=====
Fee waiver and/or expense reimbursement (1.20)%
-----
Net Expenses 0.98%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$100 $312 $543 $1,206
</TABLE>

- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/State Street Global Advisers

27
<PAGE> 130

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 5.40%

<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 12.63%
Worst Quarter: 3rd 1999 (9.71)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 1000(R) Value Index. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 5.40%
Russell 1000(R) Value Index: 7.35%
</TABLE>

28
<PAGE> 131

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.50%
Other expenses 1.79%
-----
Total annual fund operating expenses 2.29%
=====
Fee waiver and/or expense reimbursement (1.36)%
-----
Net Expenses 0.93%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$95 $297 $516 $1,147
</TABLE>

- --------------------------------------------------------------------------------
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.

29
<PAGE> 132

appreciation has been achieved or is no longer probable; b) alternative
investments offer superior total return prospects; or c) fundamentals change
adversely.

Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, and convertible securities.
See "More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Management Style Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued relative to its growth potential in the
securities markets may prove incorrect.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 3.39%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 16.84%
Worst Quarter: 3rd 1999 (11.90)%
</TABLE>

<TABLE>
<S> <C> <C>
Average Annual Total Return: 3.39%
Russell Midcap(TM) Growth Index: 51.29%
</TABLE>

30
<PAGE> 133

Management fees 0.65%
Other expenses 1.18%
-----
Total annual fund operating expenses 1.83%
=====
Fee waiver and/or expense reimbursement (0.91)%
-----
Net Expenses 0.92%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$94 $294 $510 $1,136
</TABLE>

- --------------------------------------------------------------------------------
MID CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Neuberger Berman Management Inc.

31
<PAGE> 134

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 23.80%

<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 16.64%
Worst Quarter: 3rd 1999 (11.25)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell Midcap(TM) Value Index. The Russell Midcap(TM) Value Index measures
the performance of the 800 smallest companies in the Russell 1000(R) Index,
focusing on those with lower price-to-book ratios and lower forecasted growth
values. The Russell 1000(R) Index is a sub-index of the Russell 3000(R)Index.
The Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on
total market capitalization. The Fund's past performance does not necessarily
indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 23.80%
Russell Midcap(TM) Value Index: (0.11)%
</TABLE>

32
<PAGE> 135

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75%
Other expenses 1.76%
-----
Total annual fund operating expenses 2.51%
=====
Fee waiver and/or expense reimbursement (1.34)%
-----
Net Expenses 1.17%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

- --------------------------------------------------------------------------------
MODERATE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

33
<PAGE> 136

<TABLE>
<S> <C>
International Equity Securities 10%-20%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 20%-30%
(These Funds invest in fixed-income securities, at least
65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>

The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.

34
<PAGE> 137

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

35
<PAGE> 138

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 18.69%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.22%
Worst Quarter: 3rd 1999 (3.28)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a blended index, calculated by including the pro rata portion of each of the
Underlying Fund's respective indices, and the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The S&P 500
Index approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The Fund's past performance does not necessarily indicate how it
will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 18.69%
Moderate Growth Lifestyle
Blended Benchmark: 13.77%
</TABLE>

<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a None
percentage of offering price)
Maximum deferred sales charge (load) (as a percentage of None
purchase or redemption proceeds, whichever is lower)
Maximum account fee None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>

Including indirect expenses of the Underlying Funds, after expense
reimbursements. This reflects total average weighted combined operating
expenses.

<TABLE>
<S> <C>
Total Combined Operating Expenses: 1.03%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

36
<PAGE> 139

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
MONEY MARKET FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Stability

INVESTMENT ADVISER
VALIC

Because of the following principal risks, the value of your investment may
fluctuate:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

37
<PAGE> 140

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 4.70%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 1.27%
Worst Quarter: 1st 1999 1.04%
</TABLE>

<TABLE>
<S> <C> <C>
February 15, 2000:
7 Day Current Yield 5.23%
7 Day Effective Yield 5.36%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 1.60%
-----
Total annual fund operating expenses 1.85%
=====
Fee waiver and/or expense reimbursement (1.17)%
-----
Net Expenses 0.68%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>

38
<PAGE> 141

- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

39
<PAGE> 142

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 62.47%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 42.91%
Worst Quarter: 1st 1999 (0.77)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 2000(R) Growth Index. The Russell 2000(R) Growth Index is a
sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index follows the
3,000 largest U.S. companies, based on total market capitalization. The Russell
2000(R) Growth Index measures the performance of the 2,000 smallest companies in
the Russell 3000(R) Index, focusing on those with higher price-to-book ratios
and higher forecasted growth values. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 62.47%
Russell 2000(R) Growth Index: 43.09%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.85%
Other expenses 1.57%
-----
Total annual fund operating expenses 2.42%
=====
Fee waiver and/or expense reimbursement (1.14)%
-----
Net Expenses 1.28%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

40
<PAGE> 143

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$130 $406 $703 $1,550
</TABLE>

- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Fiduciary Management Associates, Inc. (actively managed portion)

INVESTMENT OBJECTIVE
Seeks maximum long-term return, consistent with reasonable risk to principal, by
investing primarily in equity securities of small capitalization companies in
terms of revenues and/or market capitalization. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.

The Fund may invest up to 35% of its total assets in short-term investments,
such as foreign and domestic money market instruments, certificates of deposit,
bankers acceptances, time deposits, U.S. Government obligations, agency
securities, high quality commercial paper, repurchase agreements, and short-term
corporate fixed-income securities. U.S. Government securities are securities
issued or guaranteed by the U.S. Government which are supported by the full
faith and credit of the U.S. Government; the right of the issuer to borrow from
the U.S. Treasury; the credit of the issuing government agency; or the authority
of the U.S. Government to purchase obligations of the agency. See "More About
Portfolio Investments."

41
<PAGE> 144

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = (4.72)%%

<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 11.78%
Worst Quarter: 1st 1999 (12.69)%
</TABLE>

42
<PAGE> 145

in the Russell 3000(R) Index, focusing on those with lower price-to-book ratios
and lower forecasted growth values. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: (4.72)%
Russell 2000(R) Value Index: (1.49)%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75%
Other expenses 1.93%
-----
Total annual fund operating expenses 2.68%
=====
Fee waiver and/or expense reimbursement (1.57)%
-----
Net Expenses 1.11%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$113 $353 $612 $1,356
</TABLE>

43
<PAGE> 146

- --------------------------------------------------------------------------------
SOCIALLY RESPONSIBLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

The Fund does not invest in companies that are significantly engaged in:
- - the production of nuclear energy;
- - the manufacture of weapons or delivery systems;
- - the manufacture of alcoholic beverages or tobacco products;
- - the operation of gambling casinos; or
- - business practices or the production of products that significantly pollute
the environment.

INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:

Foreign Securities Risk:

A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:

Political risk - the chance of a change in government and the assets of the
company being taken away.

Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

44
<PAGE> 147

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 18.55%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.23%
Worst Quarter: 3rd 1999 (6.99)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The Fund's past performance
does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 18.55%
S&P 500 Index: 21.05%
</TABLE>

45
<PAGE> 148

<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum account fee None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 1.64%
-----
Total annual fund operating expenses 1.89%
-----
-----
Fee waiver and/or expense reimbursement (1.21)%
-----
Net Expenses 0.68%
-----
-----
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>

- --------------------------------------------------------------------------------
STRATEGIC BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
AGIM

INVESTMENT STRATEGY
The Fund invests at least 65% of total assets in a broad range of fixed-income
securities, including
- - investment grade bonds (rated Baa or higher by Moody's and BBB or higher by
S&P)
- - U.S. Government and agency obligations
- - mortgage backed securities
- - U.S., Canadian, and foreign high risk, high yield bonds (rated C or higher by
Moody's and CC or higher by S&P, or comparable unrated securities)

46
<PAGE> 149

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

47
<PAGE> 150

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS I = 4.67%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 3.32%
Worst Quarter: 2nd 1999 (0.81)%
</TABLE>

<TABLE>
<S> <C> <C>
Average Annual Total Return: 4.67%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.60%
Other expenses 1.90%
-----
Total annual fund operating expenses 2.50%
=====
Fee waiver and/or expense reimbursement (1.47)%
-----
Net Expenses 1.03%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$105 $328 $570 $1,264
</TABLE>

48
<PAGE> 151

- --------------------------------------------------------------------------------
MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------

ASSET-BACKED SECURITIES
Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders. Examples of assets supporting asset-backed
securities include credit card receivables, retail installment loans, home
equity loans, auto loans, and manufactured housing loans. All of the Funds
except International Growth Fund, International Value Fund, Large Cap Growth,
and Mid Cap Growth may invest in asset-backed securities.

EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank. We
consider ADRs, EDRs and GDRs to be foreign securities. The Balanced Fund, Core
Bond Fund, Domestic Bond Fund, High Yield Bond Fund, International Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Value Fund and Socially Responsible Fund may invest in
EDRs and GDRs. The Large Cap Growth Fund may invest in GDRs but may not invest
in EDRs.

Stocks are one type of equity security. Each share of stock represents a part of
the ownership of the company. The holder of stock participates in the growth of
the company through the stock price and receipt of dividends. All the Funds may
invest in equities except for the Money Market Fund, though equities may not be
a primary strategy for each Fund.

Generally, there are three types of stocks:

1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also
gives each owner a share in a company's profits through dividend payments
or the capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get
a fixed dividend before the common stock shareholders receive any
dividends on their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the
holder may exchange for a certain amount of common stock.

49
<PAGE> 152

company). Payment of interest and return of principal is subject to the
company's ability to pay. Convertible bonds are corporate bonds that can be
exchanged for stock.

The types of bonds that most Funds purchase, for example, includes U.S.
Government bonds and investment grade corporate bonds. VALIC and the
Sub-Advisers will not necessarily dispose of a bond if its ratings are
downgraded to below investment grade. All of the Funds except Mid Cap Growth
Fund and the Money Market Fund may invest in investment grade bonds. Of those
that invest in bonds, only the Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, Mid Cap Value Fund, Small Cap Growth Fund, Small Cap
Value, and Strategic Bond Fund may also invest in below-investment grade bonds.

FOREIGN CURRENCY
Funds buy foreign currencies when they believe the value of the currency will
increase. If it does increase, they sell the currency for a profit. If it
decreases they will experience a loss. Generally, the International Growth Fund
and the International Value Fund may also buy and sell foreign currencies to
settle transactions for foreign securities bought or sold in the Fund. All the
Funds except for the Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Money Market Fund and the Small Cap Value Fund may invest in foreign
currency.

The Funds use stock and bond futures to invest cash and cash equivalents to:
- - Write (sell) exchange traded covered put and call options on securities and
stock indices.
- - Purchase exchange traded put and call options on securities and stock indices.
- - Purchase and sell exchange traded financial futures contracts.
- - Write (sell) covered call options and purchase exchange traded put and call
options on financial futures contracts.
- - Write (sell) covered call options and purchase non-exchange traded call and
put options on financial futures contracts.

50
<PAGE> 153

INVESTMENT FUNDS
Some countries have laws and regulations that currently preclude direct foreign
investment in the securities of their companies. However, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. International Growth Fund, International Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund and Small Cap Growth Fund may
invest in investment funds.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of times of high quality money
market securities include:
- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.

MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities. All of the Funds except for International Growth
Fund, International Value Fund, Mid Cap Growth Fund, Money Market Fund and the
Socially Responsible Fund may invest in mortgage-related securities. Mortgage
pass-through securities are securities representing interests in "pools" of
mortgage loans secured by residential or commercial real property. Payments of
interest and principal on these securities are generally made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
mortgage loans which underlie the securities. Mortgage-related securities are
subject to interest rate risk and prepayment risk.

income, and are purchased at a deep discount from their value at maturity.
Because interest on zero coupon securities is not distributed on a current basis
but is, in effect, compounded, zero coupon securities tend to be subject to
greater market risk than interest-paying securities of similar maturities.
Custodial receipts issued in connection with so-called trademark zero coupon
securities, such as CATs and TIGRs, are not issued by the U.S. Treasury, and
are, therefore, not U.S. Government securities, although the underlying bond
represented by such receipt is a debt obligation of the U.S. Treasury. Other
zero coupon Treasury securities (STRIPs and CUBEs) are direct obligations of the
U.S. Government.

VARIABLE AMOUNT DEMAND MASTER NOTES
Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated. These instruments are issued
pursuant to written agreements between their issuers and holders. The agreements
permit the holders to increase (subject to an agreed maximum) and the holders
and issuers to decrease the principal amount of the notes, and specify that the
rate of interest payable on the principal fluctuates according to an agreed
formula. The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond
Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value Fund, and the
Strategic Bond Fund may invest in the variable amount demand master notes.

VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund may also may invest in participation
VRDNs, which provide a Fund with an undivided interest in underlying VRDNs held
by major investment banking institutions. All the Funds may invest in VRDNs.

WARRANTS AND RIGHTS
Warrants and rights are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. Changes in the value
of a warrant do not necessarily correspond to changes in the value of its
underlying securities. All of the Funds except for the Mid Cap Growth Fund and
the Money Market Fund may invest in warrants and rights.

53
<PAGE> 156

In addition to the Funds shown in this prospectus, VALIC serves as investment
adviser to the following Funds which are not described in this Prospectus:
American General Mid Cap Index Fund, American General Small Cap Index Fund,
American General Stock Index Fund, American General Municipal Bond Fund,
American General Municipal Money Market Fund and the American General Science &
Technology Fund. The American General Municipal Bond Fund and American General
Municipal Money Market Fund are sub-advised by AGIM, and the American General
Science & Technology Fund is sub-advised by T. Rowe Price Associates, Inc. These
Funds are presented in separate prospectuses, also dated March 1, 2000.

VALIC makes investment decisions for and is directly responsible for the
day-to-day management of the Lifestyle Funds, the Socially Responsible Fund, and
the Money Market Fund. The investment advisory agreement between VALIC and the
Series Company provides for the Series Company to pay all expenses not
specifically assumed by VALIC. Examples of the expenses paid by the Series
Company include transfer agency fees, custodial fees, the fees of outside legal
and auditing firms, the costs of reports to shareholders and expenses of
servicing shareholder accounts. These expenses are allocated to each Fund in a
manner approved by the Board of Trustees.

Magali E. Azema-Barac is responsible for the equity group. She heads the team
making investment decisions for the Socially Responsible Fund and the passively
managed portion of the Small Cap Value Fund. Ms. Azema-Barac joined American
General in September, 1999. From 1995 to 1999, she worked on the equity desk of
USWest Investment Management Company in Englewood, Colorado, where she incepted
and managed an enhanced equity portfolio.

HOW VALIC IS PAID FOR ITS SERVICES

Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments. From time to time VALIC, the Sub-Advisers and/or the
Distributor may voluntarily undertake to reduce a Fund's expenses by reducing
the fees payable to them or bearing certain expenses.

<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- -------------------------------------
<S> <C>
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
Conservative Growth Lifestyle Fund 0.10%
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Domestic Bond Fund 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% over $300 million
Growth Lifestyle Fund 0.10%
High Yield Bond Fund 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
International Value Fund 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% on assets over $250 million
Large Cap Growth Fund 0.55%
Large Cap Value Fund 0.50%
Mid Cap Growth Fund 0.65% on the first $25 million
0.55% on the next $25 million
0.45% on assets over $50 million
</TABLE>

54
<PAGE> 157

<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- -------------------------------------
<S> <C>
Mid Cap Value Fund 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets over $750 million
Moderate Growth Lifestyle Fund 0.10%
Money Market Fund 0.25%
Small Cap Growth Fund 0.85%
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
</TABLE>

INVESTMENT SUB-ADVISERS

VALIC and the Sub-Advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.

55
<PAGE> 158

The Sub-Advisers are:

AGIM
2929 Allen Parkway, Houston, Texas 77015
Founded: 1998

AGIM is the Sub-Adviser for the Core Bond Fund, Domestic Bond Fund, High Yield
Bond Fund, Money Market Fund, and the Strategic Bond Fund. AGIM was formed in
1998 as a successor to the investment management division of American General
Corporation, and is an indirect wholly-owned subsidiary of American General
Corporation. AGIM also provides investment management and advisory services to
pension and profit sharing plans, financial institutions and other investors.
Investment decisions for the High Yield Bond Fund and the Strategic Bond Fund
are made by teams. Each team meets regularly to review portfolio holdings and
discuss purchase and sale activity.

Investment decisions for the Strategic Bond Fund are made by a team, headed by
Steven Guterman. Mr. Guterman, Executive Vice President, joined the Sub-adviser
in June 1998. Previously, Mr. Guterman was with Salomon Brothers, Inc from 1983
to May 1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.

BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL")
1201 N. Calvert St., Baltimore, Maryland 21202
Founded: 1983

CAPITAL GUARDIAN TRUST COMPANY ("CAPITAL GUARDIAN")
333 South Hope Street, Los Angeles, California 90071
Founded: 1931

The Balanced Fund is managed using a system of multiple portfolio managers.
Under this system, the Fund is divided into segments, which are assigned to
individual managers.

56
<PAGE> 159

been with the Sub-Adviser or an affiliate for 11 years; and (iii) James Kang,
Vice President of Capital Guardian Research Company, an affiliate of the
Sub-Adviser, who has been an investment professional for 11 years and has been
with the Sub-Adviser or an affiliate for 10 years.

FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
55 West Monroe Street, Suite #2550, Chicago, Illinois 60603
Founded: 1980 (UAM)

GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
32 Old Slip, New York, New York 10005
Founded: 1869

J.P. MORGAN INVESTMENT MANAGEMENT, INC. ("J.P. MORGAN")
522 Fifth Avenue, New York, New York 10036
Founded: 1838

57
<PAGE> 160

Investment decisions are made by a team that consists of portfolio managers and
analysts. The team meets regularly to review portfolio holdings and to discuss
purchase and sale activity.

JACOBS ASSET MANAGEMENT
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301
Founded: 1980 (UAM)

NEUBERGER BERMAN MANAGEMENT, INC. ("NB MANAGEMENT")
605 Third Avenue, Second Floor, New York, New York 10158-0180
Founded: 1939

STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
2 International Place, Boston, Massachusetts 02110
Founded: 1792

ADMINISTRATIVE SERVICES
The Series Company has entered into an Administrative Service Agreement
("Service Agreement") with VALIC Retirement Services Company ("Retirement
Services") and the Distributor for the provision of recordkeeping and
shareholder services to retirement and employee benefit plans. Under the terms
of the Service Agreement, the Series Company pays a fee to either Retirement
Services or the Distributor. The annual fee, paid monthly, is 0.25% of the
aggregate net asset value of each Fund, other than the Lifestyle Funds. Under
the Service Agreement, Retirement Services and the Distributor provide
recordkeeping services, including the establishment and maintenance of plan and
participant accounts and records; participant services, including the provision
of customer service representatives to respond to participant inquiries and
process telephone transactions; and plan services, including the production of
plan documentation and summary plan descriptions.

AMERICAN GENERAL DISTRIBUTORS, INC.
American General Distributors, Inc. is the Distributor of the Funds. The
Distributor sells Institutional Class I Shares of the Funds to employer
retirement plans. The Distributor transmits the employer orders to buy, sell or
transfer shares to the Series Company's designated agent daily. The Distributor
is a subsidiary of American General Corporation and acts as distributor of the
Funds' shares under an agreement with the Series Company. The Distributor is not
required to sell a minimum number of shares to employer retirement plans.

58
<PAGE> 161

- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT MINIMUMS
The employer retirement plan may establish a plan account with an initial
purchase of $5 million.

HOW TO BUY SHARES
Institutional Class I shares of each Fund are available to you through your
employer plan. Institutional Class I Shares are available to any qualifying
employer plan once the plan establishes a minimum account balance of $5 million
with the Series Company. A plan's account balance is equal at any time to the
aggregate of all amounts contributed by the plan to the Series Company, less the
cost of all redemptions by such plan from the Series Company. The Distributor
may waive the minimum account balance requirement if it reasonably anticipates
that the size of the plan and/or the anticipated amount of contributions will
present economies of scale.

As a participant in an employer retirement plan, you do not purchase
Institutional Class I Shares of the Funds directly. Rather, Institutional Class
I Shares of a Fund are purchased for you when you elect to allocate your
retirement contributions to a Fund that is available as an investment option in
your retirement or savings plan. You may be permitted to elect different
investment options, alter the amounts contributed to your plan, or change how
contributions are allocated among your investment options in accordance with
your plan's specific provisions. See your plan administrator or employee
benefits office for more details.

Investments by individual participants in employer retirement plans are made
through their plan sponsor or administrator, who is responsible for transmitting
instructions for all orders for the purchase, redemption and exchange of Fund
shares. The availability of an investment by a plan participant in the Funds,
and the procedures for investing, depend upon the provisions of the plan and
whether the plan sponsor or administrator has contracted with the Series Company
or designated agent for special processing services.

For more information on how to participate in the Funds through an employee
retirement plan, please refer to your plan materials or contact your employee
benefits office.

The NAV is calculated as of the close of each business day, which coincides with
the closing of the regular session of the NYSE (normally 4 p.m. Eastern Time).
Each Fund is open for business each day the NYSE is open.

TRANSFER OR EXCHANGE OF BALANCES
An employer retirement plan may allow you to exchange all or part of your
existing plan balance from one investment option to another. Check with your
plan administrator for details on the rules governing exchanges in your plan.
Exchanges will be accepted by the Series Company only as permitted by your plan.
Your plan administrator can explain how frequently exchanges are allowed. The
Series Company reserves the right to refuse any exchange purchase request.

TRANSACTION PROCESSING
Purchases, exchanges or redemptions of the Funds' shares are processed as soon
as they have been received in good order. Good order means that your request
includes complete information on your purchase, exchange or redemption and that
the Distributor has received the appropriate payment. The Series Company and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Series Company also reserves the right to suspend the sale of the Funds'
shares in response to conditions in the securities markets or for other reasons.

When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Funds are open
but purchases and redemptions cannot be made due to the closure of the banking
system.

59
<PAGE> 162

DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses.
Distributions of net short-term capital gains (treated as dividends for tax
purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividends and
any distributions are automatically reinvested in the same Fund.

<TABLE>
<S> <C>
Dividends declared and paid daily:
Money Market Fund
Dividends declared daily and paid
monthly:
Core Bond Strategic Bond
Domestic Bond
High Yield Bond
Dividends paid quarterly:
Balanced Mid Cap Value
Conservative Growth Lifestyle Moderate Growth Lifestyle
Growth Lifestyle Small Cap Growth
Large Cap Growth Small Cap Value
Large Cap Value Socially Responsible
Mid Cap Growth
Dividends paid semi-annually:
International Growth
International Value
</TABLE>

TAXPAYER IDENTIFICATION NUMBER
You are required to give us your correct Social Security or Taxpayer
Identification Number ("TIN") when you make contributions to the employer's
plan. We reserve the right to reject any new account or any purchase order for
failure to supply a certified TIN.

60
<PAGE> 163

- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------

Each line graph also shows how each Fund's benchmark index performed during that
same period. An investor cannot invest directly in one of the benchmark indices.

Each Fund's average annual total return as of October 31, 1999 is shown after
the line graphs.

AMERICAN GENERAL BALANCED FUND
[GRAPH]

61
<PAGE> 164

AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
[GRAPH]

AMERICAN GENERAL CORE BOND FUND
[GRAPH]

62
<PAGE> 165

AMERICAN GENERAL DOMESTIC BOND FUND
[GRAPH]

AMERICAN GENERAL GROWTH LIFESTYLE FUND
[GRAPH]

63
<PAGE> 166

AMERICAN GENERAL HIGH YIELD BOND FUND
[GRAPH]

AMERICAN GENERAL INTERNATIONAL GROWTH FUND
[GRAPH]

64
<PAGE> 167

AMERICAN GENERAL INTERNATIONAL VALUE FUND
[GRAPH]

AMERICAN GENERAL LARGE CAP GROWTH FUND
[GRAPH]

65
<PAGE> 168

AMERICAN GENERAL LARGE CAP VALUE FUND
[GRAPH]

AMERICAN GENERAL MID CAP GROWTH FUND
[GRAPH]

66
<PAGE> 169

AMERICAN GENERAL MID CAP VALUE FUND
[GRAPH]

AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
[GRAPH]

67
<PAGE> 170

AMERICAN GENERAL SMALL CAP GROWTH FUND

[GRAPH]

AMERICAN GENERAL SMALL CAP VALUE FUND
[GRAPH]

68
<PAGE> 171

AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
[GRAPH]

AMERICAN GENERAL STRATEGIC BOND FUND
[GRAPH]

69
<PAGE> 172

The Funds commenced operations on November 2, 1998. For the fiscal year ended
October 31, 1999, the average annual total returns were:

<TABLE>
<CAPTION>
CLASS I
-------
<S> <C>
Balanced Fund 15.92%
Conservative Growth Lifestyle Fund 12.24%
Core Bond Fund (0.38)%
Domestic Bond Fund (1.12)%
Growth Lifestyle Fund 19.71%
High Yield Bond Fund 2.44%
International Growth Fund 15.16%
International Value Fund 44.25%
Large Cap Growth Fund 36.14%
Large Cap Value Fund 15.09%
Mid Cap Growth Fund 3.24%
Mid Cap Value Fund 20.18%
Moderate Growth Lifestyle Fund 15.35%
Small Cap Growth Fund 41.90%
Small Cap Value Fund (6.16)%
Socially Responsible Fund 22.73%
Strategic Bond Fund 2.50%
</TABLE>

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

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS I SHARES

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-------------------------------------------------------------------
INTERNATIONAL LARGE CAP MID CAP SMALL CAP INTERNATIONAL
GROWTH GROWTH GROWTH GROWTH VALUE
FUND FUND FUND FUND FUND
------------- --------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.12 -- (0.01) (0.04) 0.05
Net realized and unrealized gain (loss) on securities 1.39 3.61 0.33 4.23 4.37
------ ------ ------ ------ ------
Total income (loss) from investment operations 1.51 3.61 0.32 4.19 4.42
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income -- -- -- -- --
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions -- -- -- -- --
------ ------ ------ ------ ------
Net asset value at end of period $11.51 $13.61 $10.32 $14.19 $14.42
====== ====== ====== ====== ======
TOTAL RETURN 15.16% 36.14% 3.24% 41.90% 44.25%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.28% 0.98% 0.92% 1.28% 1.17%
Ratio of expenses to average net assets before
expense reductions 2.75% 2.18% 1.83% 2.42% 2.68%
Ratio of net investment income (loss) to average net
assets 1.18% -- (0.14)% (0.58)% 0.48%
Portfolio turnover rate 91% 65% 25% 128% 32%
Number of shares outstanding at end of period (000's) 129 215 680 256 148
Net assets at end of period (000's) $1,487 $2,923 $7,010 $3,626 $2,132
</TABLE>

70
<PAGE> 173

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS I SHARES CONTINUED

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
----------------------------------------------------
SMALL
LARGE CAP MID CAP CAP SOCIALLY
VALUE VALUE VALUE RESPONSIBLE
FUND FUND FUND FUND
--------- ------- ----- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.11 0.07 0.12 0.11
Net realized and unrealized gain (loss) on securities 1.40 1.94 (0.73) 2.16
------ ------ ------ ------
Total income (loss) from investment operations 1.51 2.01 (0.61) 2.27
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.11) (0.06) (0.12) (0.11)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.11) (0.06) (0.12) (0.11)
Net asset value at end of period $11.40 $11.95 $ 9.27 $12.16
====== ====== ====== ======
TOTAL RETURN 15.09% 20.18% (6.16)% 22.73%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.93% 1.17% 1.11% 0.68%
Ratio of expenses to average net assets before
expense reductions 2.29% 2.51% 2.68% 1.89%
Ratio of net investment income (loss) to average net
assets 1.05% 0.64% 1.26% 0.97%
Portfolio turnover rate 66% 177% 91% 24%
Number of shares outstanding at end of period (000's) 155 126 133 173
Net assets at end of period (000's) $1,761 $1,507 $1,234 $2,098
</TABLE>

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------------
BALANCED HIGH YIELD STRATEGIC DOMESTIC CORE
FUND BOND FUND BOND FUND BOND FUND BOND FUND
-------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.22 0.83 0.69 0.51 0.51
Net realized and unrealized gain (loss) on securities 1.37 (0.57) (0.45) (0.62) (0.55)
------ ------ ------ ------ ------
Total income (loss) from investment operations 1.59 0.26 0.24 (0.11) (0.04)
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.22) (0.83) (0.69) (0.51) (0.51)
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.22) (0.83) (0.69) (0.51) (0.51)
------ ------ ------ ------ ------
Net asset value at end of period $11.37 $ 9.43 $ 9.55 $ 9.38 $ 9.45
====== ====== ====== ====== ======
TOTAL RETURN 15.92% 2.44% 2.50% (1.12)% (0.38)%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.95% 1.13% 1.03% 0.91% 0.93%
Ratio of expenses to average net assets before expense
reductions 2.57% 2.05% 2.50% 2.10% 1.77%
Ratio of net investment income (loss) to average net assets 2.09% 5.57% 7.09% 5.43% 4.03%
Portfolio turnover rate 62% 72% 183% 98% 469%
Number of shares outstanding at end of period (000's) 156 1 134 374 5
Net assets at the end of period (000's) $1,777 $ 14 $1,281 $3,509 $ 49
</TABLE>

71
<PAGE> 174

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS I SHARES CONTINUED

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------
MODERATE CONSERVATIVE
GROWTH GROWTH GROWTH
MONEY MARKET LIFESTYLE LIFESTYLE LIFESTYLE
FUND FUND FUND FUND
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.05 0.07 0.15 0.21
Net realized and unrealized gain (loss) on securities -- 1.90 1.38 1.02
------ ------ ------ ------
Total income (loss) from investment operations 0.05 1.97 1.53 1.23
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.05) (0.06) (0.14) (0.20)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.05) (0.06) (0.14) (0.20)
------ ------ ------ ------
Net asset value at end of period $ 1.00 $11.91 $11.39 $11.03
====== ====== ====== ======
TOTAL RETURN 4.63% 19.71% 15.35% 12.24%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.68% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before expense
reductions 1.85% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average net assets 4.64% 0.62% 1.42% 2.01%
Portfolio turnover rate N/A 9% 11% 10%
Number of shares outstanding at end of period (000's) 2,910 130 135 137
Net assets at the end of period (000's) $2,910 $1,547 $1,537 $1,508
</TABLE>

72
<PAGE> 175

For investors who want more information about the Funds, the following documents
are available free upon request:

Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.

Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.

You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:

TELEPHONE: 1-877-999-2434

American General Web-Site Address: http://www.agfundgroup.com

You can review the Funds' reports and SAI at the public Reference Room of the
SEC.

You can get text only copies:
- - For a fee, by electronic request at [email protected] or by writing to or
calling the Public Reference Room of the Commission, Washington, D.C.
20549-6009, Telephone: 1-202-942-8090.
- - Free from the EDGAR database on the Commission's Internet website at
http://www.sec.gov.

Investment Company Act File No. 811-08875 (AGSPC 2)

VA 10856-I VER.3/00

73
<PAGE> 176

American General Series Portfolio Company 2

Institutional Class II Shares

March 1, 2000

The American General Series Portfolio Company 2 (the "Series Company") is an
open-end mutual fund made up of separate Funds (the "Funds"). In this
prospectus, "we", "us", and "our" refers to the American General Fund Group.
Institutional Class II Shares of these Funds are available to you only through
an employer retirement plan. Different employer plans choose different
combinations of funds, so all of the funds discussed in this prospectus may not
be available in your plan. Please check your employer-provided plan documents
for available investments.

BALANCED FUND:
THIS FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS TO ALLOW FOR LONG-TERM
GROWTH WHILE REDUCING MARKET RISKS.
American General Balanced Fund ("Balanced Fund")

MONEY MARKET FUNDS:
THIS FUND PROVIDES LIQUIDITY AND PRESERVATION OF CAPITAL.
American General Money Market Fund ("Money Market Fund")

TABLE OF CONTENTS

<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE 3
Balanced Fund 3
Conservative Growth Lifestyle Fund 5
Core Bond Fund 8
Domestic Bond Fund 11
Growth Lifestyle Fund 13
High Yield Bond Fund 17
International Growth Fund 20
International Value Fund 22
Large Cap Growth Fund 25
Large Cap Value Fund 27
Mid Cap Growth Fund 29
Mid Cap Value Fund 31
Moderate Growth Lifestyle Fund 33
Money Market Fund 37
Small Cap Growth Fund 39
Small Cap Value Fund 41
Socially Responsible Fund 43
Strategic Bond Fund 46
MORE ABOUT PORTFOLIO INVESTMENTS 48
WELCOME TO AMERICAN GENERAL CORPORATION (ADVISER AND
SUB-ADVISER INFORMATION) 53
ACCOUNT INFORMATION 58
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE 59
FINANCIAL HIGHLIGHTS 69
</TABLE>

2
<PAGE> 178

RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE

- --------------------------------------------------------------------------------
BALANCED FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Balanced

INVESTMENT ADVISER
The Variable Annuity Life Insurance Company ("VALIC")

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

3
<PAGE> 179
risk and interest rate risk than higher rated fixed-income securities,
achievement of the Fund's investment objective is dependent upon the
Sub-Adviser's investment analysis. Accordingly, the Fund's investments may be
worth less than what the Fund paid for them.

Value Investing Risk: The risk that the portfolio manager's judgment that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class II Shares, assuming reinvestment of dividends and
distributions. This information helps to provide some indication of the risks of
investing in the Fund.

[GRAPH]

ANNUAL RETURN CLASS II = 12.45%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 6.79%
Worst Quarter: 3rd 1999 (5.12)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a broad measure of market performance and to a blend of two indices ("Balanced
Blend"). The Balanced Blend is composed of 40% Lehman Brothers Government and
Corporate Index and 60% S&P 500 Index. Each is a widely recognized, unmanaged
index. The Fund's past performance does not necessarily indicate how it will
perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return: 12.45%
40% Lehman Brothers Government and
Corporate Index/60% S&P 500: 11.40%
</TABLE>

Management fees 0.80
Other expenses 1.54
----
Total annual fund operating expenses 2.34
====
Fee waiver and/or expense reimbursement (1.64)%
----
Net Expenses 0.70
====
</TABLE>

4
<PAGE> 180

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$72 $224 $390 $874
</TABLE>

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

<TABLE>
<S> <C>
International Equity Securities 5%-15%
(These Funds invest at least 65% in non-U.S.
companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 30%-50%
(These Funds invest in fixed-income securities, at
least 65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>

5
<PAGE> 181

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

The securities that Underlying Funds invest in also involve various risks:

Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

6
<PAGE> 182

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 13.65%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 10.91%
Worst Quarter: 3rd 1999 (2.95)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a blended index, calculated by including the pro rata portion of each of the
Underlying Fund's respective indices, and the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The S&P 500
Index approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The Fund's past performance does not necessarily indicate how it
will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 13.65%
Conservative Growth Lifestyle
Blended Benchmark: 10.63%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
----
Total annual fund operating expenses 0.10%
====
</TABLE>

7
<PAGE> 183

<TABLE>
<S> <C>
Total Combined Operating Expenses: 0.75%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
CORE BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
American General Investment Management, L.P. ("AGIM")

8
<PAGE> 184

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

9
<PAGE> 185

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = (0.86)%

<TABLE>
<S> <C> <C>
Best Quarter: 3rd 1999 0.43%
Worst Quarter: 2nd 1999 (1.27)%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return: (0.86)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
------------------------------
<S> <C>
Management fees 0.48%
Other expenses 0.57%
-------
Total annual fund operating expenses 1.05%
=======
Fee waiver and/or expense reimbursement (0.37)%
-------
Net Expenses 0.68%
=======
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>

10
<PAGE> 186

- --------------------------------------------------------------------------------
DOMESTIC BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

11
<PAGE> 187

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = (2.90)%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 (0.18)%
Worst Quarter: 1st 1999 (1.44)%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return: (2.90)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

12
<PAGE> 188

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.60%
Other expenses 1.63%
------
Total annual fund operating expenses 2.23%
======
Fee waiver and/or expense reimbursement (1.57)%
------
Net Expenses 0.66%
======
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$67 $211 $368 $826
</TABLE>

- --------------------------------------------------------------------------------
GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

13
<PAGE> 189

Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.

<TABLE>
<S> <C>
International Equity Securities 25%-35%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 15%-25%
(These Funds invest in the equities of small capitalization
companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium capitalization
companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 20%-30%
(These Funds invest in the equities of large capitalization
companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 5%-15%
(These Funds invest in fixed-income securities, at least 65% of
which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
American General High Yield Bond Fund
</TABLE>

The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

14
<PAGE> 190

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

15
<PAGE> 191

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 28.86%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 20.40%
Worst Quarter: 3rd 1999 (2.26)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a blended index, calculated by including the pro rata portion of each of the
Underlying Fund's respective indices, and the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The S&P 500
Index approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The Fund's past performance does not necessarily indicate how it
will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 28.86%
Growth Lifestyle Blended Benchmark: 18.43%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>

<TABLE>
<S> <C>
Total Combined Operating Expenses: 0.84%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

16
<PAGE> 192

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
AGIM

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

17
<PAGE> 193

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

18
<PAGE> 194

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 4.58%

<TABLE>
<S> <C> <C>
Best Quarter: 1st 1999 3.93%
Worst Quarter: 3rd 1999 (1.42)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney High Yield Market Index, a widely recognized, unmanaged
index covering a significant portion of the below-investment grade U.S.
corporate bond market. The Fund's past performance does not necessarily indicate
how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 4.58%
Salomon Smith Barney High Yield
Market Index: 1.74%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.70%
Other expenses 0.65%
-----
Total annual fund operating expenses 1.35%
=====
Fee waiver and/or expense reimbursement (0.47)%
-----
Net Expenses 0.88%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$90 $281 $488 $1,089
</TABLE>

19
<PAGE> 195

- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Jacobs Asset Management

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

20
<PAGE> 196

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 56.16%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 44.54%
Worst Quarter: 1st 1999 (0.69)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney Primary Market Index. The Salomon Smith Barney Primary
Market Index is a sub-index of the Salomon Smith Barney Broad Market Index,
which measures the performance of equities from 23 countries and 18 regions
throughout the world. Each company with equity capital of at least $100 million
is tracked by the Salomon Smith Barney Index. The Fund's past performance does
not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return: 56.16%
Salomon Smith Barney Primary
Market Index: 24.51%
</TABLE>

21
<PAGE> 197

<TABLE>
SHAREHOLDER FEES
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
Management fees 0.90%
Other expenses 1.60%
-----
Total annual fund operating expenses 2.50%
=====
Fee waiver and/or expense reimbursement 1.47%
-----
Net Expenses 1.03%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$105 $328 $570 $1.264
</TABLE>

- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

22
<PAGE> 198

Bank") and the International Finance Corporation. The Fund will focus its
emerging market investments on those countries in which the Sub-Adviser believes
the economies are developing and the markets are becoming more sophisticated.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

23
<PAGE> 199

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 66.55%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 27.34%
Worst Quarter: 3rd 1999 7.84%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Salomon Smith Barney Primary Market Index. The Salomon Smith Barney Primary
Market Index is a sub-index of the Salomon Smith Barney Broad Market Index,
which measures the performance of equities from 23 countries and 18 regions
throughout the world. Each company with equity capital of at least $100 million
is tracked by the Salomon Smith Barney Index. The Fund's past performance does
not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 66.55%
Salomon Smith Barney Primary
Market Index: 24.51%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 1.00%
Other expenses 1.48%
-----
Total annual fund operating expenses 2.48%
=====
Fee waiver and/or expense reimbursement (1.56)%
-----
Net Expenses 0.92%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$94 $294 $510 $1,136
</TABLE>

24
<PAGE> 200

- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

25
<PAGE> 201

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 37.05%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 24.04%
Worst Quarter: 3rd 1999 (2.58)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 1000(R) Growth Index. The Russell 1000(R) Growth Index is a
sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index follows the
3,000 largest U.S. companies, based on total market capitalization. The Russell
1000(R) Growth Index measures the performance of the 1,000 largest companies in
the Russell 3000(R) Index, focusing on those with higher price-to-book ratios
and higher forecasted growth values. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 37.05%
Russell 1000(R) Growth Index: 33.16%
</TABLE>

26
<PAGE> 202

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.55%
Other expenses 1.48%
-----
Total annual fund operating expenses 2.03%
=====
Fee waiver and/or expense reimbursement (1.30)%
-----
Net Expenses 0.73%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$75 $234 $407 $910
</TABLE>

- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/State Street Global Advisers

27
<PAGE> 203

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 5.73%

<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 12.78%
Worst Quarter: 3rd 1999 (9.63)%
</TABLE>

<TABLE>
<S> <C> <C>
Average Annual Total Return: 5.73%
Russell 1000(R) Value Index: 7.35%
</TABLE>

28
<PAGE> 204

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.50%
Other expenses 1.57%
-----
Total annual fund operating expenses 2.07%
=====
Fee waiver and/or expense reimbursement (1.39)%
-----
Net Expenses 0.68%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>

- --------------------------------------------------------------------------------
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.

appreciation has been achieved or is no longer probable; b) alternative
investments offer superior total return prospects; or c) fundamentals change
adversely.

Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, and convertible securities.
See "More About Portfolio Investments."

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Management Style Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued relative to its growth potential in the
securities markets may prove incorrect.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 3.56%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 16.93%
Worst Quarter: 3rd 1999 (11.89)%
</TABLE>

<TABLE>
<S> <C> <C>
Average Annual Total Return: 3.56%
Russell Midcap(TM) Growth Index: 51.29%
</TABLE>

30
<PAGE> 206

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.65%
Other expenses 1.60%
-----
Total annual fund operating expenses 2.25%
=====
Fee waiver and/or expense reimbursement (1.58)%
-----
Net Expenses 0.67%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$68 $215 $374 $838
</TABLE>

- --------------------------------------------------------------------------------
MID CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Neuberger Berman Management Inc.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 24.21%

<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 16.71%
Worst Quarter: 3rd 1999 (11.19)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell Midcap(TM) Value Index. The Russell Midcap(TM) Value Index measures
the performance of the 800 smallest companies in the Russell 1000(R) Index,
focusing on those with lower price-to-book ratios and lower forecasted growth
values. The Russell 1000(R) Index is a sub-index of the Russell 3000(R) Index.
The Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on
total market capitalization. The Fund's past performance does not necessarily
indicate how it will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return: 24.21%
Russell Midcap(TM) Value Index: (0.11)%
</TABLE>

32
<PAGE> 208

<TABLE>
<CAPTION>
SHAREHOLDERS FEES
- -----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a None
percentage of offering price)
Maximum deferred sales charge (load) (as a percentage of None
purchase or redemption proceeds, whichever is lower)
Maximum account fee None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75%
Other expenses 1.52%
-----
Total annual fund operating expenses 2.27%
=====
Fee waiver and/or expense reimbursement (1.35)%
-----
Net Expenses 0.92%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$94 $294 $510 $1,136
</TABLE>

- --------------------------------------------------------------------------------
MODERATE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
VALIC

33
<PAGE> 209

<TABLE>
<S> <C> <C>
International Equity Securities 10%-20%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of small capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 20%-30%
(These Funds invest in fixed-income securities, at least 65% of which are investment
grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>

The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.

34
<PAGE> 210

Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

35
<PAGE> 211

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 18.71%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.33%
Worst Quarter: 3rd 1999 (3.36)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
a blended index, calculated by including the pro rata portion of each of the
Underlying Fund's respective indices, and the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The S&P 500
Index approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The Fund's past performance does not necessarily indicate how it
will perform in the future.

<TABLE>
<S> <C>
Average Annual Total Return: 18.71%
Moderate Growth Lifestyle
Blended Benchmark: 13.77%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>

<TABLE>
<S> <C>
Total Combined Operating Expenses: 0.78%
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

36
<PAGE> 212

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>

- --------------------------------------------------------------------------------
MONEY MARKET FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Stability

INVESTMENT ADVISER
VALIC

Because of the following principal risks, the value of your investment may
fluctuate:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

37
<PAGE> 213

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 4.88%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 1.34%
Worst Quarter: 1st 1999 1.09%
</TABLE>

<TABLE>
<S> <C> <C>
February 15, 2000:
7 Day Current Yield 5.48%
7 Day Effective Yield 5.63%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 0.85%
-----
Total annual fund operating expenses 1.10%
=====
Fee waiver and/or expense reimbursement (0.67)%
-----
Net Expenses 0.43%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$44 $138 $241 $545
</TABLE>

38
<PAGE> 214

- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

39
<PAGE> 215

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 63.35%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 43.01%
Worst Quarter: 1st 1999 (0.43)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 2000(R) Growth Index. The Russell 2000(R) Growth Index is a
sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index follows the
3,000 largest U.S. companies, based on total market capitalization. The Russell
2000(R) Growth Index measures the performance of the 2,000 smallest companies in
the Russell 3000(R) Index, focusing on those with higher price-to-book ratios
and higher forecasted growth values. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 63.35%
Russell 2000(R) Growth Index: 43.09%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.85%
Other expenses 1.49%
------
Total annual fund operating expenses 2.34%
======
Fee waiver and/or expense reimbursement (1.31)%
------
Net Expenses 1.03%
======
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

40
<PAGE> 216

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$105 $328 $570 $1,264
</TABLE>

- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Fiduciary Management Associates, Inc. (actively managed portion)

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

41
<PAGE> 217

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = (4.56)%

<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 11.75%
Worst Quarter: 1st 1999 (12.61)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the Russell 2000(R) Value Index. The Russell 2000(R) Value Index is a sub-index
of the Russell 3000(R) Index. The Russell 3000(R) Index follows the 3,000
largest U.S. companies, based on total market capitalization. The Russell
2000(R) Value Index measures the performance of the 2,000 smallest companies in
the Russell 3000(R) Index, focusing on those with lower price-to-book ratios and
lower forecasted growth values. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: (4.56)%
Russell 2000(R) Value Index: (1.49)%
</TABLE>

42
<PAGE> 218

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75%
Other expenses 1.69%
-----
Total annual fund operating expenses 2.44%
=====
Fee waiver and/or expense reimbursement (1.58)%
-----
Net Expenses 0.86%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$88 $275 $478 $1,065
</TABLE>

- --------------------------------------------------------------------------------
SOCIALLY RESPONSIBLE FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
VALIC

43
<PAGE> 219

INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:

Foreign Securities Risk:
A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:

Political risk - the chance of a change in government and the assets of the
company being taken away.

Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

44
<PAGE> 220

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 18.76%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.19%
Worst Quarter: 3rd 1999 (6.87)%
</TABLE>

The table compares the average annual returns for calendar year 1999 to that of
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The Fund's past performance
does not necessarily indicate how it will perform in the future.

<TABLE>
<S> <C> <C>
Average Annual Total Return: 18.76%
S&P 500 Index: 21.05%
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 1.52%
-------
Total annual fund operating expenses 1.77%
=======
Fee waiver and/or expense reimbursement (1.34)%
-------
Net Expenses 0.43%
=======
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$44 $138 $241 $545
</TABLE>

45
<PAGE> 221

- --------------------------------------------------------------------------------
STRATEGIC BOND FUND
- --------------------------------------------------------------------------------

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
AGIM

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:

Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.

Foreign Securities Risks:

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

46
<PAGE> 222

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

PERFORMANCE INFORMATION

[GRAPH]

ANNUAL RETURN CLASS II = 4.93%

<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 3.39%
Worst Quarter: 2nd 1999 (0.75)%
</TABLE>

<TABLE>
<S> <C>
Average Annual Total Return: 4.93%
Lehman Brothers Aggregate Bond Index: (0.83)%
</TABLE>

47
<PAGE> 223

<TABLE>
<S> <C>
SHAREHOLDER FEES
- ------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
Management fees 0.60%
Other expenses 1.65%
-----
Total annual fund operating expenses 2.25%
=====
Fee waiver and/or expense reimbursement (1.47)%
-----
Net Expenses 0.78%
=====
</TABLE>

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$80 $249 $434 $970
</TABLE>

- --------------------------------------------------------------------------------
MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------

EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank. We
consider ADRs, EDRs and GDRs to be foreign securities. The Balanced Fund, Core
Bond Fund, Domestic Bond Fund, High Yield Bond Fund, International Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Value Fund and Socially Responsible Fund may invest in
EDRs and GDRs. The Large Cap Growth Fund may invest in GDRs but may not invest
in EDRs.

48
<PAGE> 224

Stocks are one type of equity security. Each share of stock represents a part of
the ownership of the company. The holder of stock participates in the growth of
the company through the stock price and receipt of dividends. All the Funds may
invest in equities except for the Money Market Fund, though equities may not be
a primary strategy for each Fund.

Generally, there are three types of stocks:

1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also gives
each owner a share in a company's profits through dividend payments or the
capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get a
fixed dividend before the common stock shareholders receive any dividends on
their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the holder
may exchange for a certain amount of common stock.

The types of bonds that most Funds purchase, for example, includes U.S.
Government bonds and investment grade corporate bonds. VALIC and the
Sub-Advisers will not necessarily dispose of a bond if its ratings are
downgraded to below investment grade. All of the Funds except Mid Cap Growth
Fund and the Money Market Fund may invest in investment grade bonds. Of those
that invest in bonds, only the Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, Mid Cap Value Fund, Small Cap Growth Fund, Small Cap
Value, and Strategic Bond Fund may also invest in below-investment grade bonds.

except for the Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth Fund,
Money Market Fund and the Small Cap Value Fund may invest in foreign currency.

INVESTMENT FUNDS
Some countries have laws and regulations that currently preclude direct foreign
investment in the securities of their companies. However, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. International Growth Fund, International Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund and Small Cap Growth Fund may
invest in investment funds.

VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.s of high quality money
market securities include:
- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.

MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities. All of the Funds except for International Growth
Fund, International Value Fund, Mid Cap Growth Fund, Money Market Fund and the
Socially Responsible Fund may invest in mortgage-related securities. Mortgage
pass-through securities are securities representing interests in "pools" of
mortgage loans secured by residential or commercial real property. Payments of
interest and principal on these securities are generally made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
mortgage loans which underlie the securities. Mortgage-related securities are
subject to interest rate risk and prepayment risk.

51
<PAGE> 227

on borrowings. The Funds will not borrow money, except as provided in each
Fund's investment restrictions. Reverse repurchase agreements may be entered
into by all Funds except the Mid Cap Growth Fund.

VARIABLE AMOUNT DEMAND MASTER NOTES
Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated. These instruments are issued
pursuant to written agreements between their issuers and holders. The agreements
permit the holders to increase (subject to an agreed maximum) and the holders
and issuers to decrease the principal amount of the notes, and specify that the
rate of interest payable on the principal fluctuates according to an agreed
formula. The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond
Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value Fund, and the
Strategic Bond Fund may invest in the variable amount demand master notes.

VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund may also may invest in participation
VRDNs, which provide a Fund with an undivided interest in underlying VRDNs held
by major investment banking institutions. All the Funds may invest in VRDNs.

52
<PAGE> 228

underlying securities. All of the Funds except for the Mid Cap Growth Fund and
the Money Market Fund may invest in warrants and rights.

53
<PAGE> 229

From time to time VALIC, the Sub-Advisers and/or the Distributor may voluntarily
undertake to reduce a Fund's expenses by reducing the fees payable to them or
bearing certain expenses.

<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
Conservative Growth Lifestyle Fund 0.10%
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Domestic Bond Fund 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% over $300 million
Growth Lifestyle Fund 0.10%
High Yield Bond Fund 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
International Value Fund 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% on assets over $250 million
Large Cap Growth Fund 0.55%
Large Cap Value Fund 0.50%
Mid Cap Growth Fund 0.65% on the first $25 million
0.55% on the next $25 million
0.45% on assets over $50 million
Mid Cap Value Fund 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets over $750 million
Moderate Growth Lifestyle Fund 0.10%
Money Market Fund 0.25%
Small Cap Growth Fund 0.85%
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
</TABLE>

INVESTMENT SUB-ADVISERS
For some of the Funds, VALIC works with investment Sub-Advisers through an
agreement each entered into with VALIC. Sub-Advisers are financial service
companies that specialize in certain types of investing. However, VALIC still
retains ultimate responsibility for managing the Funds. The Sub-Adviser's role
is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.

54
<PAGE> 230

other financial intermediaries that they select. The Sub-Advisers may place
orders to buy and sell securities of these Funds with a broker-dealer affiliated
with the Sub-Adviser as allowed by law. This could include any affiliated
futures commission merchants.

VALIC and the Sub-Advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.

The Sub-Advisers are:

AGIM
2929 Allen Parkway, Houston, Texas 77015
Founded: 1998

Investment decisions for the Strategic Bond Fund are made by a team, headed by
Steven Guterman. Mr. Guterman, Executive Vice President, joined the Sub-adviser
in June 1998. Previously, Mr. Guterman was with Salomon Brothers, Inc from 1983
to May 1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.

BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL")
1201 N. Calvert St., Baltimore, Maryland 21202
Founded: 1983

CAPITAL GUARDIAN TRUST COMPANY ("CAPITAL GUARDIAN")
333 South Hope Street, Los Angeles, California 90071
Founded: 1931

The Balanced Fund is managed using a system of multiple portfolio managers.
Under this system, the Fund is divided into segments, which are assigned to
individual managers.

The portfolio managers for the U.S. small cap equity portion of the Fund
include: (i) Bob Kirby, Chairman Emeritus of the Sub-Adviser, who has been an
investment professional for 46 years and has been with the Sub-Adviser or an
affiliate for 33 years; (ii) Michael Ericksen, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 17 years and has been
with the Sub-Adviser or an affiliate for 11 years; and (iii) James Kang, Vice
President of Capital Guardian Research Company, an affiliate of the Sub-Adviser,
who has been an investment professional for 11 years and has been with the
Sub-Adviser or an affiliate for 10 years.

FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
55 West Monroe Street, Suite #2550, Chicago, Illinois 60603
Founded: 1980 (UAM)
FMA is the Sub-Adviser for the actively managed portion of the assets of the
Small Cap Value Fund. FMA is a wholly-owned subsidiary of United Asset
Management Corporation ("UAM"), and provides investment management services to
corporations, foundations, endowments, pension and profit-sharing plans, trusts,
estates and other institutions as well as individuals. As of December 31, 1999,
UAM and its affiliates had over $203 billion in assets under management.

56
<PAGE> 232

GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
32 Old Slip, New York, New York 10005
Founded: 1869

J.P. MORGAN INVESTMENT MANAGEMENT, INC. ("J.P. MORGAN")
522 Fifth Avenue, New York, New York 10036
Founded: 1838

Investment decisions are made by a team that consists of portfolio managers and
analysts. The team meets regularly to review portfolio holdings and to discuss
purchase and sale activity.

JACOBS ASSET MANAGEMENT
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301
Founded: 1980 (UAM)

NEUBERGER BERMAN MANAGEMENT, INC. ("NB MANAGEMENT")
605 Third Avenue, Second Floor, New York, New York 10158-0180
Founded: 1939

STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
2 International Place, Boston, Massachusetts 02110
Founded: 1792

AMERICAN GENERAL DISTRIBUTORS, INC.
American General Distributors, Inc. is the Distributor of the Funds. The
Distributor sells Institutional Class II Shares of the Funds to employer
retirement plans. The Distributor transmits the employer orders to buy, sell or
transfer shares to the Series Company's designated agent daily. The Distributor
is a subsidiary of American General Corporation and acts as distributor of the
Funds' shares under an agreement with the Series Company. The Distributor is not
required to sell a minimum number of shares to employer retirement plans.

- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT MINIMUMS
The employer retirement plan may establish a plan account with an initial
purchase of $5 million.

HOW TO BUY SHARES
Institutional Class II shares of each Fund are available to you through your
employer plan. Institutional Class II Shares are available to any qualifying
employer plan once the plan establishes a minimum account balance of $5 million
with the Series Company. A plan's account balance is equal at any time to the
aggregate of all amounts contributed by the plan to the Series Company, less the
cost of all redemptions by such plan from the Series Company. The Distributor
may waive the minimum account balance requirement if it reasonably anticipates
that the size of the plan and/or the anticipated amount of contributions will
present economies of scale.

As a participant in an employer retirement plan, you do not purchase
Institutional Class I Shares of the Funds directly. Rather, Institutional Class
II Shares of a Fund are purchased for you when you elect to allocate your
retirement contributions to a Fund that is available as an investment option in
your retirement or savings plan. You may be permitted to elect different
investment options, alter the amounts contributed to your plan, or change how
contributions are allocated among your investment options in accordance with
your plan's specific provisions. See your plan administrator or employee
benefits office for more details.

For more information on how to participate in the Funds through an employee
retirement plan, please refer to your plan materials or contact your employee
benefits office.

58
<PAGE> 234

When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Funds are open
but purchases and redemptions cannot be made due to the closure of the banking
system.

DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses.
Distributions of net short-term capital gains (treated as dividends for tax
purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividends and
any distributions are automatically reinvested in the same Fund.

<TABLE>
<S> <C>
Dividends declared and paid daily:
Money Market Fund
Dividends declared daily and paid monthly:
Core Bond
Domestic Bond Strategic Bond
High Yield Bond
Dividends paid quarterly:
Balanced Mid Cap Value
Conservative Growth Lifestyle Moderate Growth Lifestyle
Growth Lifestyle Small Cap Growth
Large Cap Growth Small Cap Value
Large Cap Value Socially Responsible
Mid Cap Growth
Dividends paid semi-annually:
International Growth
International Value
</TABLE>

Each line graph also shows how each Fund's benchmark index performed during the
same period. An investor cannot invest directly in one of the benchmark indices.

Each Fund's average annual total return as of October 31, 1999 is shown after
the line graphs.

59
<PAGE> 235
AMERICAN GENERAL BALANCED FUND

[GRAPH]

AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND

[GRAPH]

60
<PAGE> 236
AMERICAN GENERAL CORE BOND FUND

[GRAPH]

AMERICAN GENERAL DOMESTIC BOND FUND

[GRAPH]

61
<PAGE> 237
AMERICAN GENERAL GROWTH LIFESTYLE FUND

[GRAPH]

AMERICAN GENERAL HIGH YIELD BOND FUND

[GRAPH]

62
<PAGE> 238
AMERICAN GENERAL INTERNATIONAL GROWTH FUND

[GRAPH]

AMERICAN GENERAL INTERNATIONAL VALUE FUND

[GRAPH]

63
<PAGE> 239
AMERICAN GENERAL LARGE CAP GROWTH FUND

[GRAPH]

AMERICAN GENERAL LARGE CAP VALUE FUND

[GRAPH]

64
<PAGE> 240
AMERICAN GENERAL MID CAP GROWTH FUND

[GRAPH]

AMERICAN GENERAL MID CAP VALUE FUND

[GRAPH]

65
<PAGE> 241

AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND

[GRAPH]

AMERICAN GENERAL SMALL CAP GROWTH FUND

[GRAPH]

66
<PAGE> 242
AMERICAN GENERAL SMALL CAP VALUE FUND

[GRAPH]

AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND

[GRAPH]

67
<PAGE> 243
AMERICAN GENERAL STRATEGIC BOND FUND

[GRAPH]

The Funds commenced operations on November 2, 1998. For the fiscal year ended
October 31, 1999, the average annual total returns were:

<TABLE>
<CAPTION>
CLASS II
--------
<S> <C>
Balanced Fund 16.22%
Conservative Growth Lifestyle Fund 12.27%
Core Bond Fund (0.25)%
Domestic Bond Fund (0.92)%
Growth Lifestyle Fund 19.72%
High Yield Bond Fund 2.74%
International Growth Fund 15.41%
International Value Fund 44.61%
Large Cap Growth Fund 36.40%
Large Cap Value Fund 15.35%
Mid Cap Growth Fund 3.39%
Mid Cap Value Fund 20.53%
Moderate Growth Lifestyle Fund 15.17%
Small Cap Growth Fund 42.30%
Small Cap Value Fund (5.92)%
Socially Responsible Fund 22.99%
Strategic Bond Fund 2.67%
</TABLE>

68
<PAGE> 244

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

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS II SHARES

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------
INTERNATIONAL
GROWTH LARGE CAP MID CAP SMALL CAP INTERNATIONAL
FUND GROWTH FUND GROWTH FUND GROWTH FUND VALUE FUND
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.15 0.04 0.01 (0.04) 0.10
Net realized and unrealized gain (loss) on
securities 1.39 3.60 0.33 4.27 4.36
------ ------ ------ ------ ------
Total income (loss) from investment operations 1.54 3.64 0.34 4.23 4.46
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.01) (0.04) (0.01) -- (0.01)
Distributions from net realized gain on
securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.01) (0.04) (0.01) -- (0.01)
------ ------ ------ ------ ------
Net asset value at end of period $11.53 $13.60 $10.33 $14.23 $14.45
====== ====== ====== ====== ======
TOTAL RETURN 15.41% 36.40% 3.39% 42.30% 44.61%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.03% 0.73% 0.67% 1.03% 0.92%
Ratio of expenses to average net assets before
expense reductions 2.50% 2.03% 2.25% 2.34% 2.48%
Ratio of net investment income (loss) to average
net assets 1.44% 0.29% 0.07% (0.33)% 0.75%
Portfolio turnover rate 91% 65% 25% 128% 32%
Number of shares outstanding at end of period
(000's) 128 118 126 122 120
Net assets at end of period (000's) $1,474 $1,601 $1,300 $1,731 $1,739
</TABLE>

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
--------------------------------------------------
SOCIALLY
LARGE CAP MID CAP SMALL CAP RESPONSIBLE
VALUE FUND VALUE FUND VALUE FUND FUND
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.14 0.11 0.14 0.14
Net realized and unrealized gain (loss) on securities 1.39 1.94 (0.73) 2.15
------ ------ ------ ------
Total income (loss) from investment operations 1.53 2.05 (0.59) 2.29
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.14) (0.10) (0.14) (0.14)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.14) (0.10) (0.14) (0.14)
------ ------ ------ ------
Net asset value at end of period $11.39 $11.95 $ 9.27 $12.15
====== ====== ====== ======
TOTAL RETURN 15.35% 20.53% (5.92)% 22.99%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.68% 0.92% 0.86% 0.43%
Ratio of expenses to average net assets before expense
reductions 2.07% 2.27% 2.44% 1.77%
Ratio of net investment income (loss) to average net
assets 1.32% 0.88% 1.53% 1.25%
Portfolio turnover rate 66% 177% 91% 24%
Number of shares outstanding at end of period (000's) 124 122 132 127
Net assets at end of period (000's) $1,416 $1,457 $1,228 $1,537
</TABLE>

69
<PAGE> 245
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------

Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.

CLASS II SHARES CONTINUED

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------------
BALANCED HIGH YIELD STRATEGIC DOMESTIC CORE
FUND BOND FUND BOND FUND BOND FUND BOND FUND
-------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $ 10.00 $10.00 $10.00 $ 10.00
------ ------- ------ ------ --------
Income (loss) from investment operations:
Net investment income (loss) 0.26 0.86 0.71 0.53 0.52
Net realized and unrealized gain (loss) on securities 1.36 (0.57) (0.45) (0.62) (0.55)
------ ------- ------ ------ --------
Total income (loss) from investment operations 1.62 0.29 0.26 (0.09) (0.03)
------ ------- ------ ------ --------
Distributions:
Distributions from net investment income (0.26) (0.86) (0.71) (0.53) (0.52)
Distributions from net realized gain on securities -- -- -- -- --
------ ------- ------ ------ --------
Total distributions (0.26) (0.86) (0.71) (0.53) (0.52)
------ ------- ------ ------ --------
Net asset value at end of period $11.36 $ 9.43 $ 9.55 $ 9.38 $ 9.45
====== ======= ====== ====== ========
TOTAL RETURN 16.22% 2.74% 2.67% (0.92)% (0.25)%
====== ======= ====== ====== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.70% 0.88% 0.78% 0.66% 0.68%
Ratio of expenses to average net assets before expense
reductions 2.34% 1.35% 2.25% 2.23% 1.05%
Ratio of net investment income (loss) to average net
assets 2.36% 8.84% 7.26% 5.51% 5.45%
Portfolio turnover rate 62% 72% 183% 98% 469%
Number of shares outstanding at end of period (000's) 128 6,630 134 153 34,645
Net assets at the end of period (000's) $1,452 $62,506 $1,283 $1,432 $327,384
</TABLE>

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
----------------------------------------------------------
GROWTH MODERATE CONSERVATIVE
MONEY MARKET LIFESTYLE GROWTH GROWTH
FUND FUND LIFESTYLE FUND LIFESTYLE FUND
------------ --------- -------------- --------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.05 0.07 0.13 0.21
Net realized and unrealized gain (loss) on securities -- 1.90 1.38 1.02
------ ------ ------ ------
Total income (loss) from investment operations 0.05 1.97 1.51 1.23
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.05) (0.06) (0.12) (0.20)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.05) (0.06) (0.12) (0.20)
------ ------ ------ ------
Net asset value at end of period $ 1.00 $11.91 $11.39 $11.03
====== ====== ====== ======
TOTAL RETURN 4.79% 19.72% 15.17% 12.27%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.43% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before expense
reductions 1.10% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average net
assets 4.68% 0.62% 1.25% 2.01%
Portfolio turnover rate N/A 9% 11% 10%
Number of shares outstanding at end of period (000's) 4,669 126 126 127
Net assets at the end of period (000's) $4,669 $1,496 $1,440 $1,404
</TABLE>

70
<PAGE> 246

For investors who want more information about the Funds, the following documents
are available free upon request:

Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.

Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.

You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:

Telephone: 1-877-999-2434

American General Web-Site Address: http://www.agfundgroup.com

You can review the Funds' reports and SAI at the public Reference Room of the
SEC.

Investment Company Act File No. 811-08875 (AGSPC 2)

VA 10856-II VER. 3/00
71
<PAGE> 247

Prospectus

American General Series Portfolio Company 2

SCIENCE & TECHNOLOGY FUND
Class A Shares
Class B Shares

March 1, 2000

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

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

<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
Risk/Return Summaries: Investments, Risks, and
Performance............................................... 2
More About Principal Strategies............................. 4
Welcome to American General Corporation (Advisor and
Sub-Advisor Information).................................. 5
Shareholder Account Information............................. 7
</TABLE>

<PAGE> 248

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

RISK/RETURN SUMMARY: INVESTMENTS, RISKS, AND PERFORMANCE
- --------------------------------------------------------------------------------

SCIENCE & TECHNOLOGY FUND

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISOR
VALIC

INVESTMENT SUB-ADVISOR
T. Rowe Price Associates, Inc.

INVESTMENT OBJECTIVE
Seeks long-term growth of capital through investment primarily in the common
stocks and equity-related securities of companies that are expected to benefit
from the development, advancement and use of science and technology. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.

INVESTMENT STRATEGY
At least 65% of the Fund is invested in the common stocks of companies that are
expected to benefit from scientific breakthroughs and advancements in
technology. Some of the industries that are likely to be included in the
portfolio are:
- - Chemicals and synthetic materials, including pharmaceuticals
- - Computers, including hardware and software
- - Defense and aerospace
- - E-Commerce
- - Electronics
- - Media and information services
- - Telecommunications

The Fund may invest up to 30% of its assets in foreign securities, including
American Depositary Receipts ("ADRs") and other dollar-denominated foreign
securities. ADRs are certificates issued by a U.S. depositary bank, representing
foreign shares held by the bank. ADRs carry the same currency, political and
economic risks as the underlying foreign shares.

The Fund may invest up to 25% in other equity-related securities of science and
technology companies, including convertible debt securities and convertible
preferred stock. In addition, the Fund may invest in money market securities in
order to have cash available for redemptions.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:

Currency Risk: The risk that fluctuations in foreign exchange rates will
decrease the value of a fund's investment.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

2
<PAGE> 249

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Science & Technology Company Volatility and Risk: Companies in the rapidly
changing fields of science and technology often face unusually high price
volatility, both in terms of gains and losses. The potential for wide variation
in performance is based on the special risks common to these stocks. For
example, products or services that at first appear promising may not prove
commercially successful or may become obsolete quickly. Earnings disappointments
can result in sharp price declines. A portfolio focused primarily on these
stocks is, therefore, likely to be much more volatile than one with broader
diversification that includes investments in more economic sectors.

Young Company Risk: Smaller companies or companies that are less than three
years old may have new products that are not established in the market place, or
less-experienced management.

PERFORMANCE INFORMATION

The Fund has no investment performance record at this time.

<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- --------- --------------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of 5%
purchase or redemption proceeds, whichever is lower) Footnote(1) -Footnote(2)
Maximum account fee None None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.90% 0.90%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses(3) 1.00% 1.00%
----- -----
Total annual fund operating expenses 2.15% 2.90%
Fee waiver and/or expense reimbursement(4) (0.70)% (0.70)%
Net Expenses 1.45% 2.20%
===== =====
</TABLE>

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

(1)Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.

(2)A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.

(3)Other operating expenses are based on estimates for the Fund's current fiscal
period.

3
<PAGE> 250

(4)VALIC has agreed to waive or reimburse expenses as shown above. This
contractual arrangement will extend through at least October 31, 2000, the end
of the fiscal year.

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
CLASS A 1 YEAR 3 YEARS
- ------- ------ -------
<S> <C> <C>
$714 $1,008
</TABLE>

<TABLE>
<CAPTION>
CLASS B 1 YEAR 3 YEARS
- ------- ------ -------
<S> <C> <C>
$737 $1,015
</TABLE>

Without redemptions, your costs would be:

<TABLE>
<CAPTION>
CLASS B 1 YEAR 3 YEARS
- ------- ------ -------
<S> <C> <C>
$223 $688
</TABLE>

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

MORE ABOUT PRINCIPAL STRATEGIES

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

The Fund's principal investment strategies and risks are summarized above. The
section below explains more about certain types of investments and the Fund's
strategies that are key strategies. Please refer to the SAI for more information
about investments.

EQUITY SECURITIES

Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. If you own an equity
security, you own a part of the company that issued it. Companies sell equity
securities to get the money they need to grow.

Generally, there are three types of stocks:
1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also gives
each owner a share in a company's profits through dividend payments or the
capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get a
fixed dividend before the common stock shareholders receive any dividends on
their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the holder
may exchange for a certain amount of common stock.

MONEY MARKET SECURITIES

A money market security is high quality when it is rated in one of the two
highest credit categories by Moody's or S&P or another nationally recognized
rating service or if unrated, deemed high quality by VALIC or a Sub-Advisor.

Examples of high quality money market securities include:
- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities

4
<PAGE> 251

- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.

American General Corporation, with assets of $111 billion and market
capitalization of $15 billion as of December 31, 1999, is the parent company of
one of the nation's largest diversified financial services organizations.
American General's operating divisions deliver a wide range of retirement
services, life insurance, and consumer finance products and services to diverse
markets through focused distribution channels. American General, headquartered
in Houston, was incorporated as a general business corporation in Texas in 1980
and is the successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.

American General Fund Group is the mutual fund division of American General
Corporation. The address of American General Corporation and its subsidiaries,
including VALIC, is 2929 Allen Parkway, Houston, Texas 77019.

INVESTMENT ADVISOR
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960, and is the investment advisor for American General Fund
Group. VALIC had approximately $61 billion in assets under management, as of
December 31, 1999. VALIC is a member of the American General Corporation group
of companies, and is a registered investment advisor with the SEC. In addition
to the Fund shown in this prospectus, VALIC serves as investment advisor to 23
other funds, presented in a separate prospectus.

As Investment Advisor, VALIC oversees the Fund's day to day operations,
supervises the purchase and sale of Fund investments, and performs the cash
management function. VALIC employs Investment Sub-Advisors who make investment
decisions for several of the Funds.

HOW VALIC IS PAID FOR ITS SERVICES
The Fund pays VALIC an annual advisory fee of 0.90%, based on its average daily
net assets. From time to time VALIC, the Sub-Advisors and/or the Distributor may
voluntarily undertake to reduce a Fund's expenses by reducing the fees payable
to them or bearing certain expenses.

INVESTMENT SUB-ADVISOR
The Sub-Advisor for the Science & Technology Fund is T. Rowe Price Associates,
Inc.

T. ROWE PRICE ASSOCIATES, INC. ("T. ROWE PRICE")
Founded in 1937 by Thomas Rowe Price, Jr., the Baltimore-based investment
management firm is one of the nation's leading providers of no-load mutual funds
for individual investors and corporate retirement programs. As of September 30,
1999, T. Rowe Price and its affiliates served as investment advisor to more than
75 stock, bond, and money market funds and managed about $157.4 billion.

The Fund is managed by an investment advisory committee, chaired by Charles A.
Morris. Mr. Morris has been with T. Rowe Price since 1987. He has day-to-day
responsibility for managing the portfolio and works with the committee to
develop and execute the Fund's investment program. Mr. Morris has been chairman
of the AGSPC 1 Science & Technology Fund committee since 1994, and has chaired
the AGSPC 2 Science & Technology Fund committee since its inception.

PRIOR PERFORMANCE OF SIMILAR ACCOUNTS

Because this is a new Fund for American General Series Portfolio Company
("AGSPC") 2, the Fund has no investment performance record. The Fund's
investment objective, policies, and strategies are substantially similar to
those employed by T. Rowe Price Associates, Inc. for the AGSPC (1) Science &
Technology Fund, and for the T. Rowe Price Science & Technology Fund. These are
the only substantially similar funds for which T. Rowe Price is the investment
advisor or sub-advisor.

5
<PAGE> 252

The performance information shown below is for the AGSPC 1 Science & Technology
Fund and the T. Rowe Price Science & Technology Fund, and not that of the new
Fund, AGSPC 2 Science & Technology Fund. The AGSPC 1 Science & Technology Fund
is sold as an annuity only to registered and unregistered separate accounts of
VALIC and its affiliates or employee thrift plans maintained by VALIC or
American General Corporation. The returns shown reflect investment management
fees and other Fund expenses, and do not reflect any charges included in the
annuity contract or variable life insurance policy for mortality and expenses
guarantees, administrative fees or surrender charges. The T. Rowe Price Science
& Technology Fund is sold to the general public.

Investments made by the new Fund, AGSPC 2 Science & Technology Fund, may not be
the same as those made by the AGSPC 1 Science & Technology Fund or the T. Rowe
Price Science & Technology Fund. Each of the Funds will have different
performance results, due to factors such as the cash flow in and out, different
fees and expenses, and diversity in portfolio size and positions. Past
performance shown below is no guarantee of similar future performance for the
AGSPC 2 Science & Technology Fund.

The bar charts below show the annual returns and performance for each full
calendar year since inception of the AGSPC 1 Science & Technology Fund, and for
the past ten years for the T. Rowe Price Science & Technology Fund, assuming
reinvestment of dividends and distributions.

[AGSPC1 SCIENCE & TECHNOLOGY FUND GRAPH]

<TABLE>
<S> <C> <C>
1995 61.66%
1996 13.81%
1997 2.61%
1998 42.13%
1999 100.95%

Best Quarter: 4th 1998 48.04%
Worst Quarter: 3rd 1998 (17.28)%
</TABLE>

[T. ROWE PRICE SCIENCE & TECHNOLOGY FUND GRAPH]

<TABLE>
<S> <C> <C>
1990 (1.33)%
1991 60.17%
1992 18.76%
1993 24.25%
1994 15.79%
1995 55.53%
1996 14.23%
1997 1.71%
1998 42.35%
1999 100.99%

Best Quarter: 4th 1998 47.89%
Worst Quarter: 3rd 1998 (29.53)%
</TABLE>

The table below compares the performance of the AGSPC 1 Science & Technology
Fund and the T. Rowe Price Science & Technology Fund for calendar year 1999 to
that of the S&P 500 Index (the "Index"). The Index is composed of 500 common
stocks which are chosen by Standard & Poor's Corporation. It approximates the
general distribution of industries in the U.S. economy and captures the price
performance of a large cross-section of the publicly traded stock market. No
sales charges
6
<PAGE> 253

have been applied to the Index, and an investor cannot invest directly in it. As
noted above, past performance is no guarantee of similar future performance for
the AGSPC 2 Science & Technology Fund.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
------ ------- -------- ----------------
<S> <C> <C> <C> <C>
AGSPC 1 Science & Technology Fund 100.95% 40.07% N/A 40.13% (4/29/94)
T. Rowe Price Science & Technology Fund 100.99% 38.90% 30.16% 38.73% (9/30/87)
S&P 500 Index 21.05% 28.56% 18.21% --
</TABLE>

MORE ABOUT INVESTMENT SUB-ADVISORS
For some of the Funds in the American General Fund Group, VALIC works with
investment Sub-Advisors through an agreement each entered into with VALIC.
Sub-Advisors are financial service companies that specialize in certain types of
investing. However, VALIC still retains ultimate responsibility for managing the
Funds. The Sub-Advisor's role is to make investment decisions for the Funds
according to each Fund's investment objectives and restrictions.

According to the agreements we have with the Sub-Advisors, we will receive
investment advice for each sub-advised Fund. Under these agreements we give the
Sub-Advisors the authority to buy and sell securities for these Funds. We retain
the responsibility for the overall management of these Funds. The Sub-Advisors
may buy and sell securities for each Fund with broker-dealers and other
financial intermediaries that they select. The Sub-Advisors may place orders to
buy and sell securities of these Funds with a broker-dealer affiliated with the
Sub-Advisor as allowed by law. This could include any affiliated futures
commission merchants.

The 1940 Act permits Sub-Advisors, under certain conditions, to place an order
to buy or sell securities with an affiliated broker. One of these conditions is
that the commission received by the affiliated broker cannot be greater than the
usual and customary brokers commission if the sale was completed on a securities
exchange. The Series Company has adopted procedures, as required by the 1940
Act, which provide that any commissions received by a Sub-Advisor's affiliated
broker may be considered reasonable and fair if compared to the commission
received by other brokers for the same type of securities transaction.

VALIC and the Sub-Advisors may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.

In selecting Sub-Advisors, the Trustees of the Series Company carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-Advisor; (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-Advisors' personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid by VALIC to each Sub-Advisor. The Sub-Advisory
fees are not paid by the Funds.

The Series Company relies upon an exemptive order from the SEC which permits
VALIC, subject to certain conditions, to select new sub-advisors or replace
existing sub-advisors without first obtaining shareholder approval for the
change. The Board of Trustees, including a majority of the "independent"
Trustees, must approve each new sub-advisory agreement. This allows VALIC to act
more quickly to change sub-advisors when it determines that a change is
beneficial to shareholders by avoiding the delay of calling and holding
shareholder meetings to approve each change. In accordance with the exemptive
order, the Series Company will provide investors with information about each new
sub-advisor and its sub-advisory agreement within 90 days of the hiring of a new
sub-advisor. VALIC is responsible for selecting, monitoring, evaluating and
allocating assets to the Sub-Advisors and oversees the Sub-Advisors' compliance
with the relevant Fund's investment objective, policies and restrictions.

- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------

TYPES OF ACCOUNTS
The different ways you may set up an account are listed below.

Individual
Individual accounts are owned by one person. You can designate a beneficiary for
the account if you choose to have a Transfer on Death account ("TOD").

7
<PAGE> 254

Trust
The trust must be established before the account is open. We need to know the
date of establishment and the name of the trustee.

INVESTMENT MINIMUMS
The table below illustrates the minimum investment requirements for initial and
subsequent investments for any of the Funds.

<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
TYPE OF ACCOUNT INVESTMENT INVESTMENT
- --------------- ---------- ----------
<S> <C> <C>
Retirement Plans $ 500 $50
UTMA/UGMA $ 250 $50
Automatic Investment Program $ 50 $50
All other accounts $2,000 $50
</TABLE>

8
<PAGE> 255

Class A features . . .
- - Front-end sales charge, except for money market funds
- - Reduced sales charges for larger purchases
- - Cumulative purchase discount (see Rights of Accumulation below)
- - No sales charges for purchases of $1 million or more

Class A Sales Charge Tables
If you choose Class A shares, you will pay a sales charge at the time of each
purchase. These tables show the charges both as a percentage of offering price
and as a percentage of the amount you invest. The term "offering price" includes
the front-end sales charge. If you invest more, the sales charge will be lower.

<TABLE>
<CAPTION>
YOUR SALES CHARGE AS A PERCENTAGE OF: MAXIMUM COMMISSION
INVESTMENT NET INVESTMENT OFFERING PRICE TO BROKER-DEALER
- ---------- --------------- --------------- -----------------------
<S> <C> <C> <C>
Less than $25,000.......................................... 6.10% 5.75% 5.25%
$25,000-$49,999............................................ 5.82% 5.50% 5.00%
$50,000-$99,999............................................ 4.99% 4.75% 4.25%
$100,000-$249,999.......................................... 3.90% 3.75% 3.25%
$250,000-$499,999.......................................... 2.56% 2.50% 2.00%
$500,000-$999,999.......................................... 2.04% 2.00% 1.75%
$1,000,000 or more......................................... No sales charge, but See Payments to Broker-
subject to CDSC(3) Dealers below
</TABLE>

When the sales charge on Class A Shares will be reduced or waived
- - Rights of Accumulation (cumulative purchase discount): Previous Class A
purchases may help you to qualify for a lower sales charge. The sales charge
is calculated by adding the dollar amount of the new purchase of shares to the
higher of the original cost or current value of Class A Fund shares previously
purchased.
- - Volume Discounts (groups or grouped accounts): Related accounts may be
aggregated for the purposes of receiving a reduced sales charge. You must
contact Customer Service to see if you or your group is eligible for a volume
discount purchase, and notice may be required for each subsequent purchase.
For purposes of determining eligibility for the volume discount, spouses and
their children under 21 years of age are treated as a single purchaser, as is
a trustee or other fiduciary of a single trust estate or a single fiduciary
account. An aggregate investment includes all shares of the Funds owned plus
the shares being purchased.
- - Letter of Intent: If you intend to purchase a specific amount over the next 13
months, it may be to your benefit to sign a Letter of Intent. This allows you
to receive a lower breakpoint for each purchase, based on the total amount you
intend to purchase. Up to 5% of the total amount you intend to purchase. Up to
5% of the total amount you intend to purchase may be held in escrow to cover
additional sales charges, just in case you do not purchase the total amount. A
Letter of Intent can be obtained by calling Customer Service at
1-877-999-2434.
- - Purchases of Class A Shares without sales charges: Class A Shares may be
purchased without a sales charge by:
1. Current and retired Trustees;
2. Current and retired employees of American General Corporation and its
affiliates;
3. Directors, officers, and employees (and when permitted, registered
representatives and their employees) of financial intermediaries that have
entered into a selling agreement with the Distributor;
4. Immediate family members (spouse, children under 21, grandchildren under
21, and parents) of 1 through 3 above;

5. Financial institution trust departments investing an aggregate of $1
million in the Funds;

6. Accounts for which broker-dealers, financial institutions, or financial
planners charge an account management fee (also called a wrap fee);

7. Tax-qualified plans with more than $1 million in plan assets;

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

(3) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of
0.50%.
9
<PAGE> 256

8. Tax-qualified plans purchasing shares with loan repayments from
participants; and

9. By a Fund in connection with the acquisition of another investment company.

Class B features . . .
- - No front-end sales charges
- - Contingent deferred sales charge ("CDSC") on redemptions
- - Keeping the shares longer will reduce the CDSC
- - No CDSC is charged for shares acquired by reinvesting dividends or capital
gains
- - Class B shares automatically convert to Class A shares after 6 years

Class B CDSC Table
If you choose Class B shares, you will not pay an initial sales charge, but you
will have to pay a CDSC if the shares are sold within the first five years, as
shown below.

<TABLE>
<CAPTION>
YEAR 1 2 3 4 5 6
- ---- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Charge 5% 4% 3% 2% 1% 0%
</TABLE>

DISTRIBUTION AND SERVICE PLAN
The Fund has adopted a Distribution and Service Plan ("Plan") under Rule 12b-1
of the 1940 Act. The Plan allows the Fund to pay distribution fees for the sale
and distribution of its shares and for services provided to shareholders. The
Fund will pay service fees of 0.25% for Class A Shares and 1% for Class B Shares
during each fiscal period.

PAYMENTS TO BROKER-DEALERS
The distribution and service fees are paid to the distributor of the Funds,
American General Distributors, Inc. (the "Distributor"), a subsidiary of
American General Corporation. The Distributor may then pay broker-dealers a
commission for selling Fund Shares. The maximum commission for Class A Shares is
shown above, as a percentage of the offering price. The Distributor may pay a
maximum commission of 4.00% on Class B Shares at the time of purchase.

10
<PAGE> 257

travel and lodging expenses incurred for meetings and seminars of a business
nature. The Distributor makes these payments at its own expense, in accordance
with rules set forth by the National Association of Securities Dealers, Inc.

Portfolio securities and other assets are valued based on market price
quotations or information provided by a market pricing service. If price
quotations are not readily available, securities are valued by a method that
reflects fair value. These are reviewed by the Fund's Board of Trustees. The
Fund holds some securities that may be primarily listed on foreign exchanges.
Foreign exchanges may trade at times or on days when the New York Stock Exchange
("NYSE") is closed, such as on weekends or other days. This will affect the
value of the Fund's shares; thus, the value of the Fund's shares may change on
days when you will not be able to buy or sell your shares.

The NAV is calculated as of the close of each business day, which coincides with
the closing of the regular session of the NYSE (normally 4:00 p.m. Eastern
Time). American General Fund Group is open for business each day the NYSE is
open. The NYSE is closed on most federal holidays and Good Friday. Please note
that there are some federal holidays, however, such as Columbus Day and
Veterans' Day, when the NYSE is open and the Fund Group is open but purchases
cannot be made due to the closure of the banking system.

Send the new account application and your purchase check to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502

If you purchase shares through a registered representative or financial
institution

You should read the program materials together with this Prospectus. Certain
features may be modified in these programs. Investors may be charged a fee if
they effect transactions in Fund shares through a broker or agent.

GENERAL PURCHASE INFORMATION

If the Transfer Agent receives your purchase order by 3:00 p.m. Central Time,
then your purchase will be processed at the next NAV calculated after your order
is received by the Transfer Agent. Any check purchase received without an
investment slip may cause delayed crediting. All purchases must be made in U.S.
dollars and should be drawn only on U.S. banks. If your check does not clear
your bank, you may be charged a fee by the Transfer Agent. The Fund reserves the
right to reject any specific purchase order and may suspend the offering of
shares in response to conditions in the securities markets or for other reasons.

ADDITIONAL ACCOUNT PURCHASES
You may make additional purchases by contacting your registered representative
or by:

Wire
Please call 1-877-999-2434 before you send a wire purchase.
Your financial institution may charge you a fee for wiring funds.

AUTOMATIC INVESTMENT PROGRAMS
Please call 1-877-999-2434 to set up an automatic investment program. You may
change amounts or Funds or discontinue a program at any time.

EXCHANGES OF SHARES FROM ONE FUND TO ANOTHER
Please call Customer Service at 1-877-999-2434 to make an exchange. You must
have telephone privileges for this service.

An exchange of shares occurs when you sell shares in one Fund and buy shares in
another Fund. Each exchange may produce a taxable gain or loss.

Exchanges between accounts will only be accepted if the accounts are registered
identically.

Exchanges may be requested by mail or by telephone. Please refer to "Selling
Your Shares" for more details on requests by mail.

Shares may only be exchanged for shares of the same class of another Fund.

We may modify these exchange policies upon 60 days' prior notice to
shareholders.

SELLING YOUR SHARES
When you request a redemption by 3:00 p.m. Central Time, the proceeds of the
sale will normally be mailed, wired, or sent by electronic transfer (ACH) the
next business day, provided all necessary documents have been received by the
Transfer Agent, and the funds are available for redemption. If your recent
purchase is on hold and not available for redemption, you may exchange it into
another Fund. We may hold payment of redemptions until your purchase check has
cleared, which may take up to 15 calendar days. The Funds have the right to
redeem shares in assets other than cash for redemption amounts exceeding, in any
90-day period, $250,000 or 1% of the net asset value of the affected Fund,
whichever is less.

12
<PAGE> 259

When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Fund Group is
open but redemptions cannot be made due to the closure of the banking system.

You may sell shares by contacting your registered representative or by:

ACH transfers must be for at least $50. There is no charge for an ACH transfer.
Allow one or two business days after you place your request for the transfer to
take place.

Send the written request to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502

Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "Signature Guaranteed."

A NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE.
Automatic Redemptions
- - You may request an automatic monthly or quarterly ACH transfer of $50 or more
from the Fund to your bank, provided your account balance is $5,000 or more.
- - You may request a monthly or quarterly automatic check redemption of $50 or
more, provided your account balance is $5,000 or more.

13
<PAGE> 260

REINSTATEMENT PRIVILEGE
If you redeem some or all of your Fund shares, you have up to 30 days to
reinvest all or part of your redemption proceeds in Class A Shares of the Fund
without paying a sales charge. This privilege applies only to redemptions of
Class A Shares on which an initial sales change or CDSC was paid or to
redemptions of Class A shares of the Fund that you purchased by reinvesting
dividends or distributions. You must ask the Transfer Agent to apply this
privilege when you send your payment.

DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund pays quarterly dividends from its net investment income. Net investment
income consists of interest income, net short-term capital gains, if any, and
dividends declared and paid on investments, less expenses. Distributions of net
short-term capital gains (treated as dividends for tax purposes) and net
long-term capital gains, if any, are normally paid once a year; however, the
Fund does not anticipate making any such distributions unless available capital
loss carryovers have been used or have expired. Dividend and distribution
payments will vary between classes; dividend payments are anticipated to be
generally higher for Class A shares.

BUYING A DIVIDEND
At the time of purchase, the share price of each class may reflect undistributed
income, capital gains or unrealized appreciation of securities. Any income or
capital gains from these amounts which are later distributed to you are fully
taxable. On the record date for a distribution, share value is reduced by the
amount of the distribution. If you buy shares just before the record date
("buying a dividend") you will pay the full price for the shares and then
receive a portion of the price back as a taxable distribution.

FEDERAL TAXES
In January, the Fund will mail you Form 1099-DIV indicating the federal tax
status of dividends and any capital gain distributions paid to you during the
past year. Generally, dividends and distributions are taxable in the year they
are paid. However, any dividends and distributions paid in January but declared
during the prior three months are taxable in the year declared. Dividends and
distributions are taxable to you regardless of whether they are taken in cash or
reinvested. Dividends, including short-term capital gains, are taxable as
ordinary income. Distributions from long-term capital gains are taxable as long-
term capital gains, regardless of how long you have owned shares.

CAPITAL GAINS OR LOSSES
You may realize a capital gain or loss when you sell or exchange shares. This
capital gain or loss will be short- or long-term, depending on how long you have
owned the shares which were sold. In January, the Fund will mail you Form 1099-B
indicating the total amount of all sales, including exchanges. You should keep
your account statements to help determine the cost basis of the shares to report
on your tax returns.

14
<PAGE> 261

For investors who want more information about the Funds, the following documents
are available free upon request:

Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.

Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.

You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:

Telephone: 1-877-999-2434

American General Web-Site Address: http://www.agfundgroup.com

You can review the Funds' reports and SAI at the public Reference Room of the
SEC.

You can get text only copies:

- - For a fee, by electronic request at [email protected] or by writing to or
calling the Public Reference Room of the Commission, Washington, D.C.
20549-6009, Telephone: 1-202-942-8090.

- - Free from the EDGAR database on the Commission's Internet website at
http://www.sec.gov.

Investment Company Act File No. 811-08875 (AGSPC 2)

VA 12103 VER. 3/00
<PAGE> 262

Prospectus

American General Series Portfolio Company 2

SCIENCE & TECHNOLOGY FUND
Institutional Class I Shares

March 1, 2000

In this prospectus, "we", "us", and "our" refers to the American General Fund
Group. Institutional Class I Shares are available to you only through an
employer retirement plan.

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

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

<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
Risk/Return Summaries: Investments, Risks, and
Performance............................................... 2
More About Principal Strategies............................. 4
Welcome to American General Corporation (Advisor and
Sub-Advisor Information).................................. 4
Account Information......................................... 7
</TABLE>

<PAGE> 263

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

RISK/RETURN SUMMARY: INVESTMENTS, RISKS, AND PERFORMANCE
- --------------------------------------------------------------------------------

SCIENCE & TECHNOLOGY FUND

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISOR
VALIC

INVESTMENT SUB-ADVISOR
T. Rowe Price Associates, Inc.

INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:

Foreign Securities Risks:

Currency Risk: The risk that fluctuations in foreign exchange rates will
decrease the value of a fund's investment.

Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.

2
<PAGE> 264

Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.

Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.

Young Company Risk: Smaller companies or companies that are less than three
years old may have new products that are not established in the market place, or
less-experienced management.

PERFORMANCE INFORMATION

The Fund has no investment performance record at this time.

FEES AND EXPENSES

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.90%
Other expenses(1) 1.25%
-------
Total annual fund operating expenses 2.15%
Fee waiver and/or expense reimbursement(2) (0.82)%
Net Expenses 1.33%
-------
-------
</TABLE>

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

(1)Other operating expenses are based on estimates for the Fund's current fiscal
period.

(2)VALIC has agreed to waive or reimburse expenses as shown above. This
contractual arrangement will extend through at least October 31, 2000, the end
of the fiscal year.

3
<PAGE> 265

Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- ------ -------
<S> <C>
$135 $422
</TABLE>

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

MORE ABOUT PRINCIPAL STRATEGIES

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

EQUITY SECURITIES

MONEY MARKET SECURITIES

Examples of high quality money market securities include:
- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.

4
<PAGE> 266

through focused distribution channels. American General, headquartered in
Houston, was incorporated as a general business corporation in Texas in 1980 and
is the successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.

INVESTMENT SUB-ADVISOR
The Sub-Advisor for the Science & Technology Fund is T. Rowe Price Associates,
Inc.

PRIOR PERFORMANCE OF SIMILAR ACCOUNTS

5
<PAGE> 267

positions. Past performance shown below is no guarantee of similar future
performance for the AGSPC 2 Science & Technology Fund.

[AGSPC1 SCIENCE & TECHNOLOGY FUND GRAPH]

<TABLE>
<S> <C> <C>
1995 61.66%
1996 13.81%
1997 2.61%
1998 42.13%
1999 100.95%

Best Quarter: 4th 1998 48.04%
Worst Quarter: 3rd 1998 (17.28)%
</TABLE>

[T. ROWE PRICE SCIENCE & TECHNOLOGY FUND GRAPH]

<TABLE>
<S> <C> <C>
1990 (1.33)%
1991 60.17%
1992 18.76%
1993 24.25%
1994 15.79%
1995 55.53%
1996 14.23%
1997 1.71%
1998 42.35%
1999 100.99%

Best Quarter: 4th 1998 47.89%
Worst Quarter: 3rd 1998 (29.53)%
</TABLE>

6
<PAGE> 268

VALIC and the Sub-Advisors may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.

- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT MINIMUMS
The employer retirement plan may establish a plan account with an initial
purchase of $5 million.

HOW TO BUY SHARES
Institutional Class I shares of the Fund are available to you through your
employer plan. Institutional Class I Shares are available to any qualifying
employer plan once the plan establishes a minimum account balance of $5 million
with the Series Company. A plan's account balance is equal at any time to the
aggregate of all amounts contributed by the plan to the Series Company, less the
cost of all redemptions by such plan from the Series Company. The Distributor
may waive the minimum account balance requirement if it reasonably anticipates
that the size of the plan and/or the anticipated amount of contributions will
present economies of scale.

As a participant in an employer retirement plan, you do not purchase
Institutional Class I Shares of the Fund directly. Rather, Institutional Class I
Shares of the Fund are purchased for you when you elect to allocate your
retirement contributions to the Fund that is available as an investment option
in your retirement or savings plan. You may be permitted to elect different
investment options, alter the amounts contributed to your plan, or change how
contributions are allocated among your investment options in accordance with
your plan's specific provisions. See your plan administrator or employee
benefits office for more details.

7
<PAGE> 269

of an investment by a plan participant in the Fund, and the procedures for
investing, depend upon the provisions of the plan and whether the plan sponsor
or administrator has contracted with the Series Company or designated agent for
special processing services.

For more information on how to participate in the Fund through an employee
retirement plan, please refer to your plan materials or contact your employee
benefits office.

HOW SHARES ARE VALUED
The price of shares for each class of the Fund is based on net asset value
("NAV"). NAV is computed by adding the value of the Fund's holdings plus other
assets, subtracting liabilities, and then dividing the result by the number of
shares outstanding.

Portfolio securities and other assets are valued based on market price
quotations. If market quotations are not readily available, securities are
valued by a method that reflects fair value. These are reviewed by the Fund's
Board of Trustees. The Fund may hold securities that are primarily listed on
foreign exchanges. Foreign exchanges may trade at times or on days when the New
York Stock Exchange ("NYSE") is closed, such as on weekends or other days. This
will affect the value of the Fund's shares; thus, the value of the Fund's shares
may change on days when you will not be able to buy or sell your shares.

The NAV for each class of shares is calculated as of the close of each business
day, which coincides with the closing of the regular session of the NYSE
(normally 4 p.m. Eastern Time). The Fund is open for business each day the NYSE
is open.

TRANSACTION PROCESSING
Purchases, exchanges or redemptions of the Fund's shares are processed as soon
as they have been received in good order. Good order means that your request
includes complete information on your purchase, exchange or redemption and that
the Distributor has received the appropriate payment. The Series Company and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Series Company also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.

When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Fund are open
but purchases and redemptions cannot be made due to the closure of the banking
system.

DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund pays quarterly dividends from its net investment income. Net investment
income consists of interest income, net short-term capital gains, if any, and
dividends declared and paid on investments, less expenses. Distributions of net
short-term capital gains (treated as dividends for tax purposes) and net
long-term capital gains, if any, are normally paid once a year; however, the
Fund do not anticipate making any such distributions unless available capital
loss carryovers have been used or have expired. Dividends and any distributions
are automatically reinvested in the same Fund.

8
<PAGE> 270

For investors who want more information about the Fund, the following documents
are available free upon request:

Annual/Semi-Annual Reports: Additional information about the Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.

Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Fund and is incorporated into this prospectus by
reference.

You can get free copies of reports and SAIs, request other information and
discuss your questions about the Fund by contacting your broker, or the Fund at:

Telephone: 1-877-999-2434

American General Web-Site Address: http://www.agfundgroup.com

You can review the Fund's reports and SAI at the public Reference Room of the
SEC.

You can get text only copies:

- For a fee, by electronic request at [email protected] or by writing to or
calling the Public Reference Room of the Commission, Washington, D.C.
20549-6009, Telephone: 1-202-942-8090.

- Free from the EDGAR database on the Commission's Internet website at
http://www.sec.gov.

Investment Company Act File No. 811-08875 (AGSPC 2)

VA 12103-I VER. 3/00
<PAGE> 271

AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2

AMERICAN GENERAL BALANCED FUND
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
AMERICAN GENERAL CORE BOND FUND
AMERICAN GENERAL DOMESTIC BOND FUND
AMERICAN GENERAL GROWTH LIFESTYLE FUND
AMERICAN GENERAL HIGH YIELD BOND FUND
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
AMERICAN GENERAL INTERNATIONAL VALUE FUND
AMERICAN GENERAL LARGE CAP GROWTH FUND
AMERICAN GENERAL LARGE CAP VALUE FUND
AMERICAN GENERAL MID CAP GROWTH FUND
AMERICAN GENERAL MID CAP INDEX FUND
AMERICAN GENERAL MID CAP VALUE FUND
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
AMERICAN GENERAL MONEY MARKET FUND
AMERICAN GENERAL MUNICIPAL BOND FUND
AMERICAN GENERAL MUNICIPAL MONEY MARKET FUND
AMERICAN GENERAL SCIENCE & TECHNOLOGY FUND
AMERICAN GENERAL SMALL CAP GROWTH FUND
AMERICAN GENERAL SMALL CAP INDEX FUND
AMERICAN GENERAL SMALL CAP VALUE FUND
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
AMERICAN GENERAL STOCK INDEX FUND
AMERICAN GENERAL STRATEGIC BOND FUND

- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

PART B

MARCH 1, 2000

This Statement of Additional Information is not a prospectus and contains
information in addition to that in the Prospectuses for American General Series
Portfolio Company 2 (the "Series Company"). It should be read in conjunction
with the Prospectuses. The Statement of Additional Information and the related
Prospectuses are dated March 1, 2000. Please call 1-877-999-2434 to request
copies of the Prospectuses.

VA 10856-1 REV 3/00

<PAGE> 272

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History 2
Performance and Yield Information 2
Investment Restrictions 6
Investment Practices 29
Investment Adviser 57
Investment Sub-Advisers 59
Other Service Providers 62
Portfolio Transactions and Brokerage 63
Distribution and Service Plan 65
Determination of Net Asset Value 67
Purchasing and Selling Fund Shares 68
Taxation 69
Trustees and Officers 72
Control Persons and Principal Holders of Securities 75
Marketing Information 80
Endorsements and Published Rankings 81
Other Information 81
</TABLE>

GENERAL INFORMATION AND HISTORY

American General Series Portfolio Company 2 (the "Series Company") was
organized as a Delaware business trust on March 16, 1998 by The Variable Annuity
Life Insurance Company ("VALIC") and is registered under the Investment Company
Act of 1940, as amended, (the "1940 Act") as an open-end management investment
company. The Series Company consists of twenty-four separate investment
portfolios (hereinafter collectively referred to as the "Funds" or individually
as a "Fund"), each of which issues its own separate classes of shares of
beneficial interest.

The Series Company and VALIC have Codes of Ethics which establish for
their officers, directors or trustees and certain employees procedures and
restrictions as to those individuals' personal investment trading activities.

PERFORMANCE AND YIELD INFORMATION

This section explains how performance and yield information is calculated,
per federal law.

AVERAGE ANNUAL TOTAL RETURN

Average Annual Total Returns for periods of 1, 5 and 10 years (or since
inception) are calculated according to the following formula:

P (1+T)(n) = ERV

Where:

P = A hypothetical initial payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the first period.

Average Annual Total Return reflects the deduction of the sales charges
and expenses and assumes that all dividends and distributions are reinvested
when paid.

2
<PAGE> 273

The Funds commenced operations on November 2, 1998. For the fiscal year
ended October 31, 1999, the average annual total returns were:

<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Balanced Fund 9.07% 9.42%
Conservative Growth Lifestyle Fund 5.84% 7.21%
Core Bond Fund (5.24)% (5.99)%
Domestic Bond Fund (6.03)% (6.58)%
Growth Lifestyle Fund 12.80% 14.52%
High Yield Bond Fund (2.58)% (3.18)%
International Growth Fund 8.42% 9.00%
International Value Fund 35.93% 37.70%
Large Cap Growth Fund 28.18% 29.70%
Large Cap Value Fund 8.24% 8.93%
Mid Cap Growth Fund (2.92)% (2.90)%
Mid Cap Index Fund 12.15% 13.05%
Mid Cap Value Fund 13.32% 13.71%
Moderate Growth Lifestyle Fund 8.58% 10.26%
Money Market Fund 4.54% (1.07)%
Municipal Bond Fund (10.32)% (11.28)%
Municipal Money Market Fund 2.18% (3.58)%
Small Cap Growth Fund 33.65% 35.40%
Small Cap Index Fund 4.92% 5.53%
Small Cap Value Fund (11.68)% (11.72)%
Socially Responsible Fund 15.48% 16.50%
Stock Index Fund 17.21% 17.55%
Strategic Bond Fund (2.60)% (3.29)%
</TABLE>

<TABLE>
<CAPTION>
CLASS I CLASS II
------- --------
<S> <C> <C>
Balanced Fund 15.92% 16.22%
Conservative Growth Lifestyle Fund 12.24% 12.27%
Core Bond Fund (0.38)% (0.25)%
Domestic Bond Fund (1.12)% (0.92)%
Growth Lifestyle Fund 19.71% 19.72%
High Yield Bond Fund 2.44% 2.74%
International Growth Fund 15.16% 15.41%
International Value Fund 44.25% 44.61%
Large Cap Growth Fund 36.14% 36.40%
Large Cap Value Fund 15.09% 15.35%
Mid Cap Growth Fund 3.24% 3.39%
Mid Cap Index Fund N/A N/A
Mid Cap Value Fund 20.18% 20.53%
Moderate Growth Lifestyle Fund 15.35% 15.17%
Money Market Fund 4.63% 4.79%
Municipal Bond Fund N/A N/A
Municipal Money Market Fund N/A N/A
Small Cap Growth Fund 41.90% 42.30%
Small Cap Index Fund N/A N/A
Small Cap Value Fund (6.16)% (5.92)%
Socially Responsible Fund 22.73% 22.99%
Stock Index Fund N/A N/A
Strategic Bond Fund 2.50% 2.67%
</TABLE>

3
<PAGE> 274

SEVEN DAY YIELDS

The American General Money Market Fund and the American General Municipal
Money Market Fund may quote a Seven Day Current Yield and a Seven Day Effective
Yield. The Seven Day Current Yield is calculated by determining the total return
for the current seven day period ("based period return") and annualizing the
base period return by dividing by seven days, then multiplying the result by 365
days. The Seven Day Effective Yield annualizes the base period return while
compounding weekly the base period return according to the following formula:

Seven Day Effective Yield = [(Base Period Return + 1)(365/7)]-1

As of October 31, 1999, the seven day yields were:

<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
Money Market Fund Class A 4.80% 4.92%
Money Market Fund Class B 4.05% 4.13%
Money Market Fund Class I 4.93% 5.05%
Money Market Fund Class II 5.17% 5.30%
Municipal Money Market Fund Class A 2.39% 2.41%
Municipal Money Market Fund Class B 1.62% 1.64%
</TABLE>

30 DAY CURRENT YIELD

The American General Domestic Bond Fund, the American General High Yield
Bond Fund, the American General Strategic Bond Fund, the American General Core
Bond Fund and the American General Municipal Bond Fund may quote a 30 Day
Current Yield which is determined according to the following standardized
formula:

Yield = 2[(a-b/cd + 1)(6) -1]

Where:

a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.

As of October 31, 1999, the 30 day current yields were:

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS I CLASS II
------- ------- ------- --------
<S> <C> <C> <C> <C>
Core Bond Fund 5.91% 5.42% 6.41% 6.57%
Domestic Bond Fund 5.55% 5.04% 5.90% 6.21%
High Yield Bond Fund 9.37% 9.10% 9.97% 10.22%
Municipal Bond Fund 4.22% 3.64% -- --
Strategic Bond Fund 7.57% 7.19% 8.09% 8.35%
</TABLE>

TAX EQUIVALENT YIELDS

The Municipal Bond Fund and the Municipal Money Market Fund (each referred
to as the "Fund") may also quote a tax equivalent yield and a tax equivalent
effective yield that show the before tax yield that would have to be earned from
a taxable investment to equal the Fund's yield. These yields are computed by
dividing the portion of the Fund's yield that is tax-exempt by one minus the
stated federal income tax rate and adding the product to the portion of the
Fund's yield that is not tax-exempt, if any.
As of December 31, 1999, the federal income tax rate upon which the Fund's
tax equivalent yield quotations are based was 39.6%.

4
<PAGE> 275

The tax equivalent yields as of December 31, 1999 were:

<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Municipal Bond Fund 6.72% 5.81%
Municipal Money Market Fund 6.26% 5.02%
</TABLE>

DISTRIBUTION RATE CALCULATION

The Funds may advertise a non-standardized distribution rate. The
distribution rate may be calculated as frequently as daily, based on the latest
normal dividend paid. The latest normal dividend is annualized by multiplying
the dividend by a factor based on the dividend frequency (12 for monthly or 4
for quarterly). The result is then divided by the higher of the current net
asset value or the maximum offering price. For example, a bond fund may pay a
monthly dividend of 0.04536. This is multiplied by 12 since it is a monthly
dividend. The result, 0.54432, is divided by the offering price of $9.89. That
equals a distribution rate of 5.50%.
The distribution rate measures the level of the ordinary income, including
short-term capital gains, that is actually paid out to investors. This is
different from fund yield, which is a measure of the income earned by a fund's
investments, but which may not be directly paid out to investors. Total return
measures the income earned, as does the yield, but also measures the effect of
any realized or unrealized appreciation or depreciation of the fund's
investments. The distribution rate will be calculated separately for each class
of shares. The calculation assumes that no CDSC is paid for Class B shares.

PORTFOLIO TOTAL RETURN

Portfolio Total Return quotations for periods of 1, 5 and 10 years or
since inception, are calculated by adding to the Average Total Annual Return
(described above) the expenses of the mutual fund, discretionary account or
composite. Expenses of the Fund are calculated at the end of each mutual fund,
discretionary account or composite fiscal year and are expressed as a percentage
of average net assets. Expenses as a percentage of average net assets are
prorated equally over the months in the fiscal year in which the ratio was
calculated when determining expenses for periods crossing over fiscal years.
The Series Company may compare Portfolio Total Return to the total return
of the mutual fund, discretionary account or composite benchmark index ("Index
Total Return"). The difference between Portfolio Total Return and Index Total
Return is referred to as "tracking difference." Tracking difference represents
the amount that the return on the investment portfolio (which results from VALIC
or the Sub-adviser's investment selection) deviates from its benchmark's Index
Total Return.

INDEX TOTAL RETURN

Index Total Return quotations for periods 1, 5 and 10 years, or since
inception, are calculated by determining the percentage change in value of the
benchmark index over the applicable period including reinvestment of dividends
and interest as applicable. Index Total Return is calculated according to the
formula described above for Average Annual Total Return, however it does not
include an expense component. If an expense component were included the return
would be lower.

5
<PAGE> 276

INVESTMENT RESTRICTIONS

The Funds have each adopted certain fundamental investment restrictions
which, unlike the investment objectives, policies, and investment program of
each Fund, may only be changed with the consent of a majority of the outstanding
voting securities of the particular Fund. The 1940 Act defines such a majority
as the lesser of (1) 67% or more of the voting securities present in person or
by proxy at a shareholders' meeting, if the holders of more than 50% of the
outstanding voting securities of a Fund are present or represented by proxy, or
(2) more than 50% of a Fund's outstanding voting securities. Also, certain of
the Funds have non-fundamental investment restrictions which may be changed by
the Series Company's Board of Trustees without shareholder approval.
The fundamental and, if applicable, non-fundamental, investment
restrictions of each Fund are listed below. The percentage limitations
referenced in some of the restrictions are to be determined at the time of
purchase. However, percentage limitations for illiquid securities and borrowings
apply at all times. Calculation of each Fund's total assets for compliance with
any of the investment restrictions will not include cash collateral held in
connection with securities lending activities.

AMERICAN GENERAL BALANCED FUND ("BALANCED FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Balanced Fund may not:

(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the Securities and Exchange
Commission ("SEC") under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes of
this restriction, all outstanding debt securities of an issuer are considered as
one class, and all preferred stock of an issuer is considered as one class. This
restriction does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities. As a matter of operating policy,
the Series Company will not consider repurchase agreements subject to the 5%
limitation if the collateral underlying the repurchase agreements are U.S.
Government securities.

(2)(a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow money, enter into reverse repurchase
agreements, or employ similar investment techniques and pledge its assets in
connection therewith, except to the extent permitted by applicable law, and
provided that the Fund will not purchase additional securities if borrowings
exceed 5% of total assets.

(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.

(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.

(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.

(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.

(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.

6
<PAGE> 277

(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.

As a matter of non-fundamental policy, the Balanced Fund may not:

(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.

(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.

(4) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. The Fund may use
short-term credits when necessary to clear transactions.

AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND ("CONSERVATIVE GROWTH
LIFESTYLE FUND")
AMERICAN GENERAL GROWTH LIFESTYLE FUND ("GROWTH LIFESTYLE FUND"); AND
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND ("MODERATE GROWTH LIFESTYLE
FUND")

INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Conservative Growth Lifestyle Fund,
the Growth Lifestyle Fund and the Moderate Growth Lifestyle Fund may not:

(1) Issue senior securities.

(2) Borrow money, except to the extent permitted by applicable law, and provided
that the Fund may not purchase additional securities if borrowings exceed 5% of
total assets.

(3) Underwrite the securities of other issuers.

(4) Purchase real estate or real estate mortgage loans, although the underlying
mutual funds in which a Fund will invest may purchase marketable securities of
companies which deal in real estate, real estate mortgage loans or interests
therein.

(5) Purchase or sell commodities or commodity contracts.

(6) Make loans except by purchasing bonds, debentures or similar obligations
which are either publicly distributed or customarily purchased by institutional
investors.

(7) Invest more than 25% of its assets in any one industry, other than Funds
that are part of the Series Company.

As a matter of non-fundamental policy, the Growth Lifestyle Fund, the
Moderate Growth Lifestyle Fund and the Conservative Growth Lifestyle Fund may
not:

(1) Purchase any securities on margin, make short sales of securities or
purchase or sell puts and calls, or combinations thereof.

7
<PAGE> 278

(2) Invest directly in oil, gas, or other mineral exploration or development
programs; provided, however, that the underlying mutual funds in which the Fund
will invest may purchase the securities of companies engaged in such activities.

(3) Purchase or retain any security other than shares of the underlying Series
Company Funds if (i) one or more officers or trustees of the Series Company
individually own or would own, directly or beneficially, more than 1/2 of 1
percent of the securities of such issuer and (ii) in the aggregate such persons
own or would own more than 5% of such securities.

(4) Invest in companies for the purpose of exercising control of management.

AMERICAN GENERAL CORE BOND FUND ("CORE BOND FUND")
AMERICAN GENERAL DOMESTIC BOND FUND ("DOMESTIC BOND FUND")
AMERICAN GENERAL HIGH YIELD BOND FUND ("HIGH YIELD BOND FUND");
AMERICAN GENERAL MUNICIPAL BOND FUND ("MUNICIPAL BOND FUND"); AND
AMERICAN GENERAL STRATEGIC BOND FUND ("STRATEGIC BOND FUND")

INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Core Bond Fund, Domestic Bond Fund,
High Yield Bond Fund, Municipal Bond Fund, and Strategic Bond Fund may not:

(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that a Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities or securities issued by state or municipal governments and
their political subdivisions. As a matter of operating policy, the Series
Company will not consider repurchase agreements subject to the 5% limitation if
the collateral underlying the repurchase agreements are U.S. Government
securities.

(2) (a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, unless immediately after each borrowing there is asset
coverage of 300%.

(3) Acquire real estate or real estate contracts, although a Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.

(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.

(5) Lend money, except by purchasing debt obligations in which a Fund may invest
consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.

(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of a Fund's total
assets.

8
<PAGE> 279

(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities and with respect to the Municipal Bond Fund, obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or by any state, territory or any possession of the United States, the District
of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions, or with respect to repurchase agreements collateralized
by any such obligations), provided, however, that this limitation excludes
shares of other open-end investment companies owned by a Fund but includes a
Fund's pro rata portion of the securities and other assets owned by any such
company.

As a matter of non-fundamental policy, the Core Bond Fund, Domestic Bond
Fund, High Yield Fund, Municipal Bond Fund, and Strategic Bond Fund may not:

(1) Invest more than 15% of a Fund's net assets in illiquid and restricted
securities.

(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that a Fund may purchase securities
of other investment companies without regard to such limitation to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

(4) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. A Fund may use
short-term credits when necessary to clear transactions.

For the purposes of the investment limitations applicable to the Municipal
Bond Fund, the identification of the issuer of a municipal obligation depends on
the terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality, or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision
would be regarded as the sole issuer. Similarly, in the case of a private
activity bond, if the bond is backed only by the assets and revenues of the non-
governmental user, such non-governmental user would be regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be considered a separate security and treated
as an issue of such government or entity.

AMERICAN GENERAL INTERNATIONAL GROWTH FUND ("INTERNATIONAL GROWTH FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the International Growth Fund may not:

(1) With respect to 75% of its total assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer (other
than obligations issued or guaranteed as to principal and interest by the U.S.
Government or any of its agencies or instrumentalities); except that the Fund
may purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.

(2) With respect to 75% of its total assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.

(3) Invest more than 25% of its total assets in companies within a single
industry, provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Fund but includes the Fund's
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pro rata portion of the securities and other assets owned by any such company.
There are no limitations on investments made in instruments issued or guaranteed
by the U.S. Government and its agencies.

(4) Make loans except by purchasing debt securities in accordance with its
investment objective and policies or entering into repurchase agreements, or by
lending its portfolio securities to banks, brokers, dealers and other financial
institutions so long as the loans are made in compliance with the 1940 Act, as
amended, or the rules and regulations or interpretations of the SEC.

(5) Borrow, except (i) from banks; (ii) to enter into reverse repurchase
agreements or to employ similar investment techniques, and pledge its assets in
connection therewith; and (iii) as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 33 1/3% of the Fund's
total assets valued at the lower of market or cost. If borrowings exceed 5% of
the Fund's total assets, the Fund will not purchase additional securities.

(6) Invest in physical commodities or contracts on physical commodities.

(7) Purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate and may purchase and sell securities
which are secured by interests in real estate.

(8) Underwrite the securities of other issuers.

(9) Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.

As a matter of non-fundamental policy, the International Growth Fund may
not:

(1) Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history of
less than 3 years.

(2) Invest in futures and/or options on futures.

(3) Purchase on margin or sell short.

(4) Invest more than an aggregate of 15% of the Fund's net assets in illiquid or
restricted securities.

(5) Invest for the purpose of exercising control over management of any company;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.

(6) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

AMERICAN GENERAL INTERNATIONAL VALUE FUND ("INTERNATIONAL VALUE FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the International Value Fund may not:

(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. As a matter

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of operating policy, the Series Company will not consider repurchase agreements
subject to the 5% limitation if the collateral underlying the repurchase
agreements are U.S. Government securities.

(2)(a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow money, enter into repurchase agreements, or
employ similar investment techniques, and pledge its assets in connection
therewith, except to the extent permitted by applicable law, and provided that
the Fund will not purchase additional securities if borrowings exceed 5% of
total assets.

(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.

(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.

As a matter of non-fundamental policy, the International Value Fund may
not:

(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.

AMERICAN GENERAL LARGE CAP GROWTH FUND ("LARGE CAP GROWTH FUND") INVESTMENT
RESTRICTIONS

As a matter of fundamental policy, the Large Cap Growth Fund may not:

(1) Make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act.

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instrumentalities), provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.

(3) Borrow money, except (a) the Fund may borrow from banks (as defined in the
1940 Act) or through reverse repurchase agreements in amounts up to 33 1/3% of
its total assets (including the amount borrowed), (b) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, (c) the Fund may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of portfolio
securities, (d) the Fund may purchase securities on margin to the extent
permitted by applicable law and (e) the Fund may engage in transactions in
mortgage dollar rolls which are accounted for as financings.

(4) Make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b) repurchase
agreements with banks, brokers, dealers and other financial institutions, and
(c) loans of securities as permitted by applicable laws but not to exceed
33 1/3% of the Fund's total assets.

(5) Underwrite securities issued by others, except to the extent that the sale
of portfolio securities by the Fund may be deemed to be an underwriting.

(6) Purchase, hold or deal in real estate, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, securities
of real estate investment trusts and mortgage-related securities and may hold
and sell real estate acquired by a Fund as a result of the ownership of
securities.

(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.

(8) Issue senior securities to the extent such issuance would violate applicable
law.

As a matter of non-fundamental policy, the Large Cap Growth Fund may not:

(1) Invest in companies for the purpose of exercising control or management;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.

(2) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.

(3) Purchase additional securities if the Fund's borrowings (excluding covered
mortgage dollar rolls) exceed 5% of its net assets.

(4) Make short sales of securities, except short sales against the box.

(5) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

AMERICAN GENERAL LARGE CAP VALUE FUND ("LARGE CAP VALUE FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Large Cap Value Fund may not:

(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the U.S. Government,
its agencies and instrumentalities), provided, however, that this

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limitation excludes shares of other open-end investment companies owned by the
Fund but includes the Fund's pro rata portion of the securities and other assets
owned by any such company.

(2) Borrow money, except to enter into reverse repurchase agreements and employ
similar investment techniques and pledge its assets in connection therewith, and
as a temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33 1/3% of the current value of the Fund's total
assets taken at market value, less liabilities other than borrowings. If at any
time the Fund's borrowings exceed this limitation due to a decline in net
assets, such borrowings will within three days be reduced to the extent
necessary to comply with this limitation. The Fund will not purchase investments
once borrowed funds (including reverse repurchase agreements) exceed 5% of its
total assets.

(3) With respect to 75% of its total assets, invest in securities of any one
issuer (other than securities issued by the U.S. Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.

(4) Make loans to any person or firm; provided, however, that the making of a
loan shall not include (i) the acquisition for investment of bonds, debentures,
notes or other evidences of indebtedness of any corporation or government which
are publicly distributed or of a type customarily purchased by institutional
investors, or (ii) the entry into repurchase agreements or reverse repurchase
agreements. The Fund may lend its portfolio securities to broker-dealers or
other institutional investors if the aggregate value of all securities loaned
does not exceed 33 1/3% of the value of the Fund's total assets.

(5) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.

(6) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.

(7) Engage in the business of underwriting securities issued by others, except
that the Fund will not be deemed to be an underwriter or to be underwriting on
account of the purchase of securities subject to legal or contractual
restriction on disposition.

(8) Issue senior securities, except as permitted by its investment objective,
policies and restrictions, and except as permitted by the 1940 Act.

As a matter of non-fundamental policy, the Large Cap Value Fund may not:

(1) Purchase from or sell portfolio securities to its officers or trustees or
other interested persons (as defined in the 1940 Act) of the Fund, including
their investment advisers and affiliates, except as permitted by the 1940 Act
and exemptive rules or orders thereunder.

(2) Invest more than 15% of the Fund's net assets in illiquid securities or
restricted securities.

(3) Make investments for the purpose of gaining control of an issuer's
management.

(4) Pledge, mortgage or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding 33 1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above under fundamental policies.

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<PAGE> 284

(5) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.

(6) Make short sales of securities or purchase any securities on margin, except
for such short-term credits as are necessary for the clearance of transactions.
The Fund may make initial margin deposits and variation margin payments in
connection with transactions in futures contracts and related options.

(7) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

AMERICAN GENERAL MID CAP GROWTH FUND ("MID CAP GROWTH FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Mid Cap Growth Fund may not:

(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities or
of any class of securities of any one issuer (except that securities of the U.S.
Government, its agencies and instrumentalities are not subject to these
limitations); except that the Fund may purchase securities of other investment
companies without regard to such limitation to the extent permitted by (i) the
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.

(2) Invest 25% or more of the value of its total assets in any one industry or
group of industries (except that securities of the U.S. Government, its agencies
and instrumentalities are not subject to these limitations); provided, however,
that this limitation excludes shares of other open-end investment companies
owned by the Fund but includes the Fund's pro rata portion of the securities and
other assets owned by any such company.

(3) Invest in interests in real estate, real estate mortgage loans, real estate
limited partnerships, oil, gas or other mineral exploration or development
programs or leases, except that the Fund may invest in the readily marketable
securities of companies which own or deal in such things.

(4) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter under the federal securities laws, in connection
with the disposition of portfolio securities.

(5) Make loans of money, except that the Fund may invest in repurchase
agreements.

(6) Issue senior securities as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.

(8) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.

(9) Borrow money, enter into reverse repurchase agreements, or employ similar
investment techniques, and pledge, assets in connection therewith, except to the
extent permitted by applicable law, and provided that the Fund will not purchase
additional securities if borrowings exceed 5% of total assets.

14
<PAGE> 285

As a matter of non-fundamental policy, the Mid Cap Growth Fund may not:

(1) Invest in the securities of any issuer if any of the officers, directors or
trustees of the Series Company, VALIC or the Sub-adviser own beneficially more
than 1/2 of 1% of the outstanding securities of such issuer or together own more
than 5% of the outstanding securities of such issuer.

(2) Invest for the purpose of exercising control or management of another
issuer; except that the Fund may purchase securities of other investment
companies without regard to such limitation to the extent permitted by (i) the
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.

(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions).

(4) Make short sales of securities or maintain a short position, except short
sales "against the box"; (A short sale is made by selling a security the Fund
does not own. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no additional cost
securities identical to those sold short.)

(5) Participate on a joint or joint and several basis in any trading account in
securities.

(6) Invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of bonds,
guarantors), if more than 5% of its total assets would be invested in such
securities.

(7) Invest more than 10% of the value of its net assets in illiquid securities.

(8) Purchase foreign securities, except the Fund may invest up to 10% of total
assets in foreign securities sold as American Depositary Receipts.

(9) Invest in restricted securities.

(10) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

AMERICAN GENERAL MID CAP INDEX FUND ("MID CAP INDEX FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Mid Cap Index Fund may not:

(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer. However, the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. As a matter of operating policy, the Series Company will not
consider repurchase agreements subject to the 5% limitation if the collateral
underlying the repurchase agreements are U.S. Government securities.

(2)(a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow, except from banks and as a temporary
measure for extraordinary or emergency purposes and then, in no event, in excess
of 33 1/3% of the Fund's total assets valued at the lower of market or cost. If
borrowings exceed 5% of the Fund's total assets, the Fund will not purchase
additional securities.

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(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.

(5) Lend money, except by purchasing debt obligations in which a Fund may invest
consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.

(6) Purchase or sell commodities (except in connection with investments in
options and futures contracts) or invest in oil, gas or mineral exploration
programs.

(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.

(8) Enter into a financial futures contract (by exercise of any option or
otherwise) or acquire any options thereon, if, immediately thereafter, the total
of the initial margin deposits required with respect to all open futures
positions, at the time such positions were established, plus the sum of the
premiums paid for all unexpired options on futures contracts would exceed 5% of
the value of its total assets.

(9) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry. This limitation excludes shares
of other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.

As a matter of non-fundamental policy, the Mid Cap Index Fund may not:

(1) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

(2) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.

(3) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. Each Fund may use
short-term credits when necessary to clear transactions.

(4) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.

AMERICAN GENERAL MID CAP VALUE FUND ("MID CAP VALUE FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Mid Cap Value Fund may not:

(1) Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes and not for leveraging or investment and (ii)
enter into reverse repurchase agreements and employ similar investment
techniques, and pledge its assets in connection therewith, for any purpose;
provided that (i) and (ii) in combination do not exceed 33 1/3% of the value of
its total assets (including the amount borrowed) less liabilities (other than
borrowings). If borrowings exceed 33 1/3% of the value of the Fund's total
assets, the Fund will reduce its borrowings within three days (excluding Sundays
and holidays) to the extent necessary to comply with the 33 1/3% limitation.

(2) Purchase physical commodities or contracts thereon, unless acquired as a
result of the ownership of securities or instruments, but this restriction shall
not prohibit the Fund from purchasing futures contracts or options (including
options on futures contracts, but excluding options or futures contracts on
physical commodities) or from investing in securities of any kind. For purposes
of the limitations on commodities, the Fund does not consider foreign currencies
or forward contracts to be physical commodities.
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(3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities) if, as a result, (i)
more than 5% of the value of the Fund's total assets would be invested in the
securities of that issuer or (ii) the Fund would hold more than 10% of the
outstanding voting securities of that issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.

(4) Purchase any security if, as a result, 25% or more of its total assets
(taken at current value) would be invested in the securities of issuers having
their principal business activities in the same industry, provided, however,
that this limitation excludes shares of other open-end investment companies
owned by the Fund but includes the Fund's pro rata portion of the securities and
other assets owned by any such company. This limitation does not apply to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.

(5) Lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets (taken at current value) would be lent to other parties,
except, in accordance with its investment objective, policies, and limitations,
(i) through the purchase of a portion of an issue of debt securities or (ii) by
engaging in repurchase agreements.

(6) Purchase real estate unless acquired as a result of the ownership of
securities or instruments, but this restriction shall not prohibit the Fund from
purchasing securities issued by entities or investment vehicles that own or deal
in real estate or interests therein or instruments secured by real estate or
interests therein.

(7) Issue senior securities, except as permitted under the 1940 Act.

(8) Underwrite securities of other issuers, except to the extent that the Fund,
in disposing of portfolio securities, may be deemed to be an underwriter within
the meaning of the 1933 Act.

As a matter of non-fundamental policy, the Mid Cap Value Fund may not:

(1) Purchase securities if outstanding borrowings, including any reverse
repurchase agreements, exceed 5% of its total assets.

(2) Purchase securities on margin from brokers or other lenders, except that the
Fund may obtain such short-term credits as are necessary for the clearance of
securities transactions. Margin payments in connection with transactions in
futures contracts and options on futures contracts shall not constitute the
purchase of securities on margin and shall not be deemed to violate the
foregoing limitation.

(3) Invest more than 10% of the value of its total assets in securities of
foreign issuers, provided that the limitation shall not apply to foreign
securities denominated in U.S. dollars, including American Depositary Receipts
("ADRs").

(4) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.

AMERICAN GENERAL MONEY MARKET FUND ("MONEY MARKET FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Money Market Fund may not:

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<PAGE> 288

permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
For purposes of this restriction, all outstanding debt securities of an issuer
are considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.

(2) (a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow money, enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, except to the extent permitted by applicable law, and
provided that the Fund will not purchase additional securities if borrowings
exceed 5% of total assets.

(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.

(6) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.

(7) Purchase or sell commodity contracts.

(8) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry, except investments in obligations
issued or guaranteed by the U.S. Government, its agencies, or instrumentalities,
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.

As a matter of non-fundamental policy, the Money Market Fund may not:

(1) Invest more than 10% of the Fund's net assets in illiquid and restricted
securities.

(4) Purchase any security which matures, after giving effect to any demand
features, more than 13 months from the date of purchase.

(5) Invest in warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof.

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AMERICAN GENERAL MUNICIPAL MONEY MARKET FUND
("MUNICIPAL MONEY MARKET FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Municipal Money Market Fund may
not:

(1) Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities, or securities which are backed by the full faith
and credit of the U.S. or securities issued by state or municipal governments
and their political subdivisions) if, as a result, more than 5% of its total
assets would be invested in the securities of such issuer or more than 10% of
the outstanding voting securities of any class of any issuer would be held by
the Fund.

The Fund may purchase securities of other investment companies without regard to
such limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.

(2) Borrow money, except from a bank for temporary or emergency purposes and not
for investment purposes, and then in an amount not exceeding 10% of the value of
the Fund's total assets at the time of borrowing. (No new investments will be
made by the Fund while any outstanding borrowings exceed 5% of its total
assets.) Secured temporary borrowings may take the form of reverse repurchase
agreements, pursuant to which the Fund would sell portfolio securities for cash
and simultaneously agree to repurchase them at a specified date for the same
amount of cash plus an interest component.

(3) Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations in accordance with the Fund's investment objectives,
policies, and restrictions, either directly from the issuer, or from an
underwriter for an issuer, may be deemed to be underwriting.

(4) Purchase or sell real estate, but this shall not prevent the Fund from
investing in municipal fixed income securities secured by real estate or
interests therein.

(5) Purchase or sell commodities or commodity contracts or invest in oil, gas or
other mineral exploration or development programs.

(6) Make loans, except (i) by the purchase of a portion of an issue of debt
securities in accordance with its investment objectives, policies, and
restrictions, (ii) by engaging in repurchase transactions, and (iii) by making
loans of portfolio securities not in excess of 10% of the value of the Fund's
total assets.

(7) Write, purchase or sell puts, calls, or combinations thereof, except that it
may obtain rights to resell municipal bonds and notes.

(8) Purchase securities (other than municipal bonds, notes and other fixed
income securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 25% of total Fund assets would be
invested in any one industry.

As a matter of non-fundamental policy, the Municipal Money Market Fund may
not:

(1) Pledge, mortgage, or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (2) above, it may pledge securities having
a market value at the time of pledge not exceeding 10% of the value of the
Fund's total assets.

(2) Invest more than 10% of the Fund's net assets in illiquid or restricted
securities.

(3) Make short sales of securities or purchase any securities on margin, except
for such short-term credits as are necessary for the clearance of transactions.

(4) Purchase or retain the securities of any issuer other than the securities of
the Fund, if, to the Fund's knowledge, those Trustees and officers of the Series
Company, or of the investment manager, who individually own beneficially more
than 1/2 of 1% of the outstanding securities of such issuer together own
beneficially more than 5% of such outstanding securities.

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<PAGE> 290

(5) Invest for the purpose of exercising control or management of another
company.

(6) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

(7) Purchase an industrial revenue bond if, as a result of such purchase, more
than 5% of total Fund assets would be invested in industrial revenue bonds where
the payment of principal and interest are the responsibility of companies with
less than three years of operating history.

For the purposes of the investment limitations applicable to the Municipal
Money Market Fund, the identification of the issuer of a municipal obligation
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality, or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the subdivision,
such subdivision would be regarded as the sole issuer. Similarly, in the case of
a private activity bond, if the bond is backed only by the assets and revenues
of the non-governmental user, such non-governmental user would be regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guarantee would be considered a separate security
and treated as an issue of such government or entity.

AMERICAN GENERAL SCIENCE & TECHNOLOGY FUND ("SCIENCE & TECHNOLOGY FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Science & Technology Fund may not:

1. Make any investment inconsistent with its classification as a diversified
investment company under the 1940 Act.
2. Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or instrumentalities),
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata
portion of the securities and other assets owned by any such company.
3. Issue senior securities or borrow money, except from banks or other persons
for non-leveraging, temporary or emergency purposes, and then only in an
amount up to 33 1/3% of the value of its total assets or as permitted by law
and except by engaging in reverse repurchase agreements, where allowed. In
order to secure any permitted borrowings and reverse repurchase agreements
under this section, the Fund may pledge, mortgage or hypothecate its assets.
4. Make loans, although the Fund may lend portfolio securities, purchase of
money market instruments and repurchase agreements or bonds, debentures or
other debt securities, or as permitted by law. The purchase of all or a
portion of an issue of publicly distributed or privately placed debt
obligations and purchase debt in accordance with the Fund's investment
objective, policies and restrictions, shall not constitute the making of a
loan.
5. Underwrite the securities of other issuers, except as allowed by law or to
the extent that the purchase of obligations in accordance with its investment
objective and policies, either directly from the issuer, or from an
underwriter for an issuer, may be deemed an underwriting.
6. Invest directly in commodities or real estate, unless acquired as a result of
ownership of securities or other instruments, or as permitted by law.
However, the Fund may invest in securities which are secured by real estate
or real estate mortgages and securities of issuers which invest or deal in
commodities, commodity futures, real estate or real estate mortgages.

The Board of Trustees has adopted the following non-fundamental investment
restrictions, which may be changed at any time without a shareholder vote. The
Fund may not:

1. Effect short sales of securities or purchase securities on margin, except in
connection with investments in options and futures contracts. Each Fund may
use short-term credits when necessary to clear transactions.

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<PAGE> 291

2. Purchase illiquid securities if more than 15% of the value of its net assets
would be invested in such securities, or as permitted by the 1940 Act.
3. Enter into reverse repurchase agreements if the aggregate proceeds from
outstanding reverse repurchase agreements, when added to other outstanding
borrowings permitted by the 1940 Act, would exceed 33 1/3% of its total
assets. The Fund does not intend to make any purchases of securities if
borrowing exceeds 5% of its total assets.
4. Invest in securities issued by other investment companies except as part of a
merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
5. Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.

AMERICAN GENERAL SMALL CAP GROWTH FUND ("SMALL CAP GROWTH FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Small Cap Growth Fund may not:

(1) Make any investment inconsistent with the Fund's classification as a
diversified investment company under the 1940 Act; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.

(2) Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or instrumentalities);
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.

(3) Issue senior securities, except as permitted under the 1940 Act or any rule,
order or interpretation thereunder.

(4) Borrow money, enter into reverse repurchase agreements, or employ similar
investment techniques, and pledge, assets in connection therewith, except to the
extent permitted by applicable law, and provided that the Fund will not purchase
additional securities if borrowings exceed 5% of total assets.

(5) Underwrite securities of other issuers, except to the extent that the Fund,
in disposing of portfolio securities may be deemed an underwriter within the
meaning of the 1933 Act.

(6) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in (a) securities directly or indirectly
secured by real estate, or (b) securities issued by issuers that invest in real
estate.

(8) Make loans to other persons, except in accordance with the Fund's investment
objectives and policies and to the extent permitted by applicable law.

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<PAGE> 292

As a matter of non-fundamental policy, the Small Cap Growth Fund may not:

(1) Purchase securities on margin, make short sales of securities, or maintain a
short position, except in the course of the Fund's hedging activities, provided
that this restriction shall not be deemed to be applicable to the purchase or
sale of when-issued securities or delayed delivery securities.

(2) Invest more than 15% of the Fund's net assets in illiquid securities.

(3) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

AMERICAN GENERAL SMALL CAP INDEX FUND ("SMALL CAP INDEX FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Small Cap Index Fund may not:

(1) Borrow money or mortgage or hypothecate assets of the Fund, except that in
an amount not to exceed 1/3 of the current value of the Fund's total assets, it
may borrow money as a temporary measure for extraordinary or emergency purposes
and enter into reverse repurchase agreements or dollar roll transactions, and
except that it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would be borrowed
only from banks and only either to accommodate requests for the withdrawal of
beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute. If borrowings exceed 5% of the
Fund's total assets, the Fund will not purchase additional securities.

(2) Underwrite securities issued by other persons except insofar as the Series
Company (or the Fund) may technically be deemed an underwriter under the 1933
Act in selling a portfolio security.

(3) Make loans to other persons except: (a) through the lending of the Fund's
portfolio securities and provided that any such loans not exceed 30% of the
Fund's total assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately.

(4) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (except that the Series
Company may hold and sell, for the Fund's portfolio, real estate acquired as a
result of the Fund's ownership of securities). This limitation excludes shares
of other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.

(5) Concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of a
Fund's investment objective(s), up to 25% of its total assets may be invested in
any one industry, provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.

(6) Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction.

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<PAGE> 293

As a matter of non-fundamental policy, the Small Cap Index Fund may not:

(1) Pledge, mortgage or hypothecate for any purpose in excess of 10% of the
Fund's total assets (taken at market value), provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, and reverse repurchase agreements are not
considered a pledge of assets for purposes of this restriction.

(2) Purchase any security or evidence of interest therein on margin, except that
such short-term credit as may be necessary for the clearance of purchases and
sales of securities may be obtained and except that deposits of initial deposit
and variation margin may be made in connection with the purchase, ownership,
holding or sale of futures.

(3) Sell securities it does not own such that the dollar amount of such short
sales at any one time exceeds 25% of the net equity of the Fund, and the value
of securities of any one issuer in which the Fund is short exceeds the lesser of
2.0% of the value of the Fund's net assets or 2.0% of the securities of any
class of any U.S. issuer and, provided that short sales may be made only in
those securities which are fully listed on a national securities exchange or a
foreign exchange (This provision does not include the sale of securities of the
Fund contemporaneously owns or has the right to obtain securities equivalent in
kind and amount to those sold, i.e., short sales against the box.) (The Fund has
no current intention to engage in short selling).

(4) Invest for the purpose of exercising control or management; except that the
Fund may purchase securities of other investment companies without regard to
such limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.

(5) Invest more than 10% of the Fund's total assets (taken at the greater of
cost or market value) in securities that are restricted as to resale under the
1933 Act (other than Rule 144A securities deemed liquid by the Fund's Board of
Trustees).

(6) Invest more than 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable not
including (a) Rule 144A securities that have been determined to be liquid by the
Board of Trustees; and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to interest or
principal; and (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and the Board of
Trustees have determined the commercial paper to be liquid; or (iii) is rated in
one of the two highest categories by one nationally recognized statistical
rating agency and the Board of Trustees have determined that the commercial
paper is equivalent quality and is liquid.

(7) Invest more than 5% of the Fund's total assets in securities issued by
issuers which (including predecessors) have been in operation less than three
years.

(8) With respect to 75% of the Fund's total assets, purchase securities of any
issuer if such purchase at the time thereof would cause the Fund to hold more
than 10% of any class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all preferred stock
of an issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction. The Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.

(9) Invest more than 5% of its total assets in the securities (excluding U.S.
government securities) of any one issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.

(10) Invest in securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Series Company, or
is an officer or partner of the VALIC or of the Subadviser, if after
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<PAGE> 294

the purchase of the securities of such issuer for the Fund one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value.

(11) Invest in warrants (other than warrants acquired by the Fund as part of a
unit or attached to securities at the time of purchase) if, as a result, the
investments (valued at the lower of cost or market) would exceed 5% of the value
of the Fund's net assets or if, as a result, more than 2% of the Fund's net
assets would be invested in warrants not listed on a recognized United States or
foreign stock exchange, to the extent permitted by applicable state securities
laws.

(12) Write puts and calls on securities unless each of the following conditions
are met: (a) the security underlying the put or call is within the Investment
Practices of the Fund and the option is issued by the Options Clearing
Corporation, except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges; (b) the aggregate value
of the obligations underlying the puts determined as of the date the options are
sold shall not exceed 5% of the Fund's net assets; (c) the securities subject to
the exercise of the call written by the Fund must be owned by the Fund at the
time the call is sold and must continue to be owned by the Fund until the call
has been exercised, has lapsed, or the Fund has purchased a closing call, and
such purchase has been confirmed, thereby extinguishing the Fund's obligation to
deliver securities pursuant to the call it has sold; and (d) at the time a put
is written, the Fund establishes a segregated account with its custodian
consisting of cash or short-term U.S. government securities equal in value to
the amount the Fund will be obligated to pay upon exercise of the put (this
account must be maintained until the put is exercised, has expired, or the Fund
has purchased a closing put, which is a put of the same series as the one
previously written).

(13) Buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial futures
unless such options are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities association or are
listed on a national securities or commodities exchange, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all, such options
which are held at any time do not exceed 20% of the Fund's total net assets; and
(c) the aggregate margin deposits required on all such or options thereon held
at any time do not exceed 5% of the Fund's total assets.

(14) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

AMERICAN GENERAL SMALL CAP VALUE FUND ("SMALL CAP VALUE FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Small Cap Value Fund may not:

(1) Borrow money or mortgage or hypothecate assets of the Fund, except that in
an amount not to exceed 1/3 of the current value of the total Fund's assets, it
may borrow money as a temporary measure for extraordinary or emergency purposes
and enter into reverse repurchase agreements or dollar roll transactions, and
except that it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would be borrowed
only from banks and only either to accommodate requests for the withdrawal of
beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute. If borrowings exceed 5% of the
Fund's total assets, the Fund will not purchase additional securities.

24
<PAGE> 295

(2) Underwrite securities issued by other persons except insofar as the Series
Company (or the Fund) may technically be deemed an underwriter under the 1933
Act in selling a portfolio security.

(3) Make loans to other persons except: (a) through the lending of the Fund's
portfolio securities and provided that any such loans not exceed 33 1/3% of the
Fund's total assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately.

(4) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), in the
ordinary course of business (except that the Series Company may hold and sell,
for the Fund's portfolio, real estate acquired as a result of the Fund's
ownership of securities and the securities of companies that deal in real
estate).

(5) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.

As a matter of non-fundamental policy, the Small Cap Value Fund may not:

(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.

AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND ("SOCIALLY RESPONSIBLE FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Socially Responsible Fund may not:

(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. As a matter of operating policy, the Series Company will not
consider repurchase agreements subject to the 5% limitation if the collateral
underlying the repurchase agreements are U.S. Government securities.

25
<PAGE> 296

pledge its assets in connection therewith, except to the extent permitted by
applicable law, and provided that the Fund will not purchase additional
securities if borrowings exceed 5% of total assets.

(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.

(5) Lend money, except by purchasing debt obligations in which a Fund may invest
consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.

(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.

(8) Enter into financial futures contracts (by exercise of any option or
otherwise) or acquire any options thereon, if, immediately thereafter, the total
of the initial margin deposits required with respect to all open futures
positions at the time such positions were established plus the sum of the
premiums paid for all unexpired options on futures contracts would exceed 5% of
the value of its total assets.

(9) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry (excluding the U.S. Government or
any of its agencies or instrumentalities), provided, however, that this
limitation excludes shares of other open-end investment companies owned by the
Fund but includes the Fund's pro rata portion of the securities and other assets
owned by any such company.

As a matter of non-fundamental policy, the Socially Responsible Fund may
not:

(1) Invest more than 10% of the Fund's net assets in illiquid and restricted
securities.

AMERICAN GENERAL STOCK INDEX FUND ("STOCK INDEX FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Stock Index Fund may not:

beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute. If borrowings exceed 5% of the
Fund's total assets the Fund will not purchase additional securities.

(2) Underwrite securities issued by other persons except insofar as the Series
Company (or the Fund) may technically be deemed an underwriter under the
Securities Act of 1933 ("1933 Act") in selling a portfolio security.

(5) Concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of
the Fund's investment objective, up to 25% of its total assets may be invested
in any one industry. This limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.

As a matter of non-fundamental policy, the Stock Index Fund may not:

(1) Pledge, mortgage or hypothecate for any purpose in excess of 10% of the Fund
total assets (taken at market value), provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of this
restriction.

(3) Sell any security which it does not own unless by virtue of its ownership of
other securities it has at the time of sale a right to obtain securities,
without payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is made
upon the same conditions.

(4) Invest for the purpose of exercising control or management.

(5) Invest more than 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable not
including (a) Rule 144A securities that have been determined to be liquid by the
Board of Trustees, and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to interest or
principal: and (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and the Series
Company's Board of Trustees have determined the commercial paper to be liquid:
or (iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and the Board of Trustees has determined
that the commercial paper is equivalent quality and is liquid.

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(6) Invest more than 10% of the Fund's total assets (taken at the greater of
cost or market value) in securities that are restricted as to resale under the
1933 Act (other than Rule 144A securities deemed liquid by the Board of
Trustees.)

(7) Invest more than 5% of the Fund's total assets in securities issued by
issuers which (including predecessors) have been in operation less than three
years.

(9) With respect to 75% of its assets, invest more than 5% of its total assets
in the securities (excluding U.S. government securities) of any one issuer;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.

(10) Purchase or retain in the Fund's portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Series Company, or is an officer or partner of VALIC
or the Sub-adviser, if after the purchase of the securities of such issuer for
the Fund one or more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
all taken at market value.

(11) Invest more than 5% of the Fund's net assets in warrants (valued at the
lower of cost or market) (other than warrants acquired by the Fund as part of a
unit or attached to securities at the time of purchase), but not more than 2% of
the Fund's net assets may be invested in warrants not listed on the New York
Stock Exchange Inc. (the "NYSE") or the American Stock Exchange.

(12) 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 and equal in amount to, the
securities sold short and unless not more than 10% of the Fund's net assets
(taken at market value) is represented by such securities, or securities
convertible into or exchangeable for such securities, at any one time. The Fund
has no current intention to engage in short selling.

(13) Write puts and calls on securities unless each of the following conditions
are met: (a) the security underlying the put or call is within the investment
policies of the Fund and the option is issued by the Options Clearing
Corporation, except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges: (b) the aggregate value
of the obligations underlying the puts determined as of the date the options are
sold shall not exceed 50% of the Fund's net assets; (c) the securities subject
to the exercise of the call written by the Fund must be owned by the Fund at the
time the call is sold and must continue to be owned by the Fund until the call
has been exercised, has lapsed, or the Fund has purchased a closing call, and
such purchase has been confirmed, thereby extinguishing the Fund's obligation to
deliver securities pursuant to the call it has sold: and (d) at the time a put
is written, the Fund establishes a segregated account with its custodian
consisting of cash or short-term U.S. government securities equal in value to
the amount the Fund will be obligated to pay upon exercise of the put (this
account must be maintained until the put is exercised, has expired, or the Fund
has purchased a closing put, which is a put of the same series as the one
previously written).

(14) Buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial futures
unless such options are written by other persons and: (a) the options or
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futures are offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Fund's total net assets; and (c)
the aggregate margin deposits required on all such futures or options thereon
held at any time do not exceed 5% of the Fund's total assets.

(15) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.

INVESTMENT PRACTICES

This discussion of investment practices supplements that in the
Prospectus. All principal strategies are described in the Prospectus. The
Lifestyle Funds may not be specifically discussed below, since each Lifestyle
Fund actually invests in other American General Funds mentioned in the
Prospectus.

REPURCHASE AGREEMENTS

Each Fund may hold commercial paper, certificates of deposits, and
government obligations (including government guaranteed obligations) subject to
repurchase agreements with certain well established domestic banks and certain
broker-dealers, including primary government securities dealers, approved as
creditworthy by the Board of Trustees. The underlying security must be a U.S.
Government security or a security rated in the highest rating category by the
requisite Nationally Recognized Statistical Rating Organization ("NRSRO")
(except for the International Growth Fund, the International Value Fund, the
Science & Technology Fund, the Strategic Bond Fund, the Municipal Bond Fund, and
the High Yield Bond Fund which may utilize foreign money market securities) and
the seller must be a well established securities dealer or bank that is a member
of the Federal Reserve System. For the Money Market Fund and the Municipal Money
Market Fund, the underlying security must be a U.S. Government security or a
security rated in the highest rating category by the requisite NRSROs and must
be determined to present minimal credit risk. Repurchase agreements are
generally for short periods, often less than a week. Repurchase agreements
typically obligate a seller, at the time it sells securities to a Fund, to
repurchase the securities at a specific future time and price. The price for
which the Fund resells the securities is calculated to exceed the price the Fund
initially paid for the same securities, thereby determining the yield during the
Fund's holding period. This result is a fixed market rate of interest, agreed
upon by that Fund and the seller, which is accrued as ordinary income. Most
repurchase agreements mature within seven days although some may have a longer
duration. The underlying securities constitute collateral for these repurchase
agreements, which are considered loans under the 1940 Act.

The Funds do not intend to sell the underlying securities subject to a
repurchase agreement (except to the seller upon maturity of the agreement).
During the term of the repurchase agreement, the Funds (i) retain the securities
subject to the repurchase agreement as collateral securing the seller's
obligation to repurchase the securities, (ii) monitor on a daily basis the
market value of the securities subject to the repurchase agreement, and (iii)
require the seller to deposit with the Series Company's custodian collateral
equal to any amount by which the market value of the securities subject to the
repurchase agreement falls below the resale amount provided under the repurchase
agreement. In the event that a seller defaults on its obligation to repurchase
the securities, the Funds must hold the securities until they mature or may sell
them on the open market, either of which may result in a loss to a Fund if, and
to the extent that, the values of the securities decline. Additionally, the
Funds may incur disposition expenses when selling the securities. Bankruptcy
proceedings by the seller may also limit or delay realization and liquidation of
the collateral by a Fund and may result in a loss to that Fund. The Board of
Trustees of the Series Company will evaluate the creditworthiness of all banks
and broker-dealers with which the Series Company proposes to enter into
repurchase agreements. Repurchase agreement's that do not mature in seven days
are considered illiquid.

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LENDING PORTFOLIO SECURITIES

For purposes of realizing additional income, each Fund, except the
Lifestyle Funds, may make secured loans of its portfolio securities. Securities
loans are made to broker-dealers and other financial institutions approved by
State Street Bank and Trust Company (the "Custodian"), custodian to the Funds
and pursuant to agreements requiring that the loans be continuously secured by
collateral at least equal at all times to the loaned securities marked to market
on a daily basis. VALIC will monitor the activities of the Custodian as
authorized by the Board of Trustees. The collateral received will consist of
cash, U.S. government securities, letters of credit or such other collateral as
permitted by interpretations or rules of the SEC. While the securities are on
loan, the Funds will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower.
Any loan of portfolio securities by any Fund will be callable at any time
by the lending Fund upon notice of five business days. When voting or consent
rights which accompany loaned securities pass to the borrower, the lending Fund
will call the loan, in whole or in part as appropriate, to permit the exercise
of such rights if the matters involved would have a material effect on that
Fund's investment in the securities being loaned. If the borrower fails to
maintain the requisite amount of collateral, the loan will automatically
terminate, and the lending Fund will be permitted to use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over collateral. As with any extensions of credit, there are
risks of delay in receiving additional collateral or in the recovery of the
securities or, in some cases, even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will be made only when the Custodian, as monitored by VALIC,
considers the borrowing broker-dealers or financial institutions to be
creditworthy and of good standing and the interest earned from such loans to
justify the attendant risks. On termination of the loan, the borrower will be
required to return the securities to the lending Fund. Any gain or loss in the
market price during the loan would inure to the lending Fund. The lending Fund
may pay reasonable finders', administrative, and custodial fees in connection
with a loan of its securities.

BORROWING

Each Fund may borrow money, subject to the Fund's investment restrictions.
This borrowing may be unsecured. Provisions of the 1940 Act require a Fund to
maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed, with
an exception for borrowings not in excess of 5% of the Fund's total assets made
for temporary administrative purposes. Any borrowings for temporary
administrative purposes in excess of 5% of the Fund's total assets must maintain
continuous asset coverage. If the 300% asset coverage should decline as a result
of market fluctuations or other reasons, a Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. As noted below, a Fund also may
enter into certain transactions, including reverse repurchase agreements,
mortgage dollar rolls, and sale-buybacks, that can be viewed as constituting a
form of borrowing or financing transaction by the Fund. To the extent a Fund
covers its commitment under a reverse repurchase agreement (or economically
similar transaction) by the segregation of assets determined in accordance with
procedures adopted by the Trustees, equal in value to the amount of the Fund's
commitment to repurchase, such an agreement will not be considered a "senior
security" by the Fund and therefore will not be subject to the 300% asset
coverage requirement otherwise applicable to borrowings by the Funds. Borrowing
will tend to exaggerate the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio. Money borrowed will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.

DOLLAR ROLLS

In a "dollar roll" transaction, a Fund sells a mortgage-related security,
such as a security issued by the Government National Mortgage Association
("GNMA"), to a dealer and simultaneously agrees to repurchase a similar security
(but not the same security) in the future at a pre-determined price. A "dollar
roll" can be

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viewed, like a reverse repurchase agreement, as a collateralized borrowing in
which a Fund pledges a mortgage-related security to a dealer to obtain cash.
Unlike in the case of reverse repurchase agreements, the dealer with which a
Fund enters into a dollar roll transaction is not obligated to return the same
securities as those originally sold by the Fund, but only securities which are
"substantially identical." To be considered "substantially identical," the
securities returned to a Fund generally must: (1) be collateralized by the same
types of underlying mortgages; (2) be issued by the same agency and be part of
the same program; (3) have a similar original stated maturity; (4) have
identical net coupon rates; (5) have similar market yields (and therefore
price); and (6) satisfy "good delivery" requirements, meaning that the aggregate
principal amounts of the securities delivered and received back must be within
1.0% of the initial amount delivered.
A Fund's obligations under a dollar roll agreement must be covered by
segregated liquid assets equal in value to the securities subject to repurchase
by the Fund. As with reverse repurchase agreements, to the extent that positions
in dollar roll agreements are not covered by segregated liquid assets at least
equal to the amount of any forward purchase commitment, such transactions would
be subject to the Funds' limitations on borrowings. Dollar roll transactions for
terms exceeding three months may be deemed "illiquid" and subject to a Fund's
overall limitations on investments in illiquid securities.

CONVERTIBLE SECURITIES

All of the Funds except for the Money Market Fund and the Municipal Funds
may invest in convertible securities of foreign or domestic issues. A
convertible security is a 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 the common stock of the same or a different issuer. Convertible
securities are senior to common stocks in a corporation's capital structure but
are usually subordinated to similar nonconvertible securities. Convertible
securities provide, through their conversion feature, an opportunity to
participate in capital appreciation resulting from a market price advance in a
convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
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.
A Fund may be required to permit the issuer of a convertible security to
redeem the security, convert it into the underlying common stock, or sell it to
a third party. Thus, a Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on a Fund's ability to achieve
its investment objectives.
To the extent that convertible securities are intended by a Fund to be
equity securities, the following equity quality criteria typically are
considered: industry prospects (growth rate, competitive pressures, supply/
demand characteristics), market valuations (including price-to-book ratios,
price-earnings ratios and return on equity), company profile (suppliers,
competitors, end-users and customers), discretionary cash flow and quality of
management. To the extent that convertible securities are intended by a Fund to
be fixed income securities, the quality criteria typically applied by the Fund
to investments in fixed income securities (i.e., Moody's and S&P ratings) are
applied.

FOREIGN SECURITIES

A foreign security includes corporate debt securities of foreign issuers
(including preferred or preference stock), certain foreign bank obligations (see
"Bank Obligations") and U.S. dollar or foreign currency-denominated obligations
of foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities.
Included within the definition of foreign securities are the following
depositary receipts: American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs) and Global Depositary Receipts (GDRs). Depositary receipts that
are denominated in U.S. dollars are not considered foreign securities in
determining compliance with the Mid Cap Value Fund's investment restrictions.
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. Generally, ADRs are in
registered form. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market
quotations
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are readily available, and (ii) issuers whose securities are represented by ADRs
are generally subject to auditing, accounting and financial reporting standards
similar to those applied to domestic issuers. EDRs and GDRs are receipts
evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are
designed for use in the non-U.S. securities markets. EDRs and GDRs are not
necessarily quoted in the same currency as the underlying security. In addition,
the Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond Fund,
International Growth Fund, International Value Fund, Mid Cap Index Fund, Mid Cap
Value Fund, Small Cap Growth Fund, Small Cap Index Fund, Small Cap Value Fund,
Socially Responsible Fund, Stock Index Fund, and the Strategic Bond Fund may
invest in other types of depositary securities such as international depositary
receipts, global depositary shares, European depositary shares and international
depositary shares.

A Fund may also, in accordance with its specific investment objective(s)
and investment program, policies and restrictions purchase U.S.
dollar-denominated money market securities of foreign issuers. Such money market
securities may be registered domestically and traded on domestic exchanges or in
the over-the-counter market (e.g., Yankee securities) or may be (1) registered
abroad and traded exclusively in foreign markets or (2) registered domestically
and issued in foreign markets (e.g., Eurodollar securities).
Investing in foreign securities may involve advantages and disadvantages
not present in domestic investments. There may be less publicly available
information about securities not registered domestically, or their issuers, than
is available about domestic issuers or their domestically registered securities.
Stock markets outside the U.S. may not be as developed as domestic markets, and
there may also be less government supervision of foreign exchanges and brokers.
Foreign securities may be less liquid or more volatile than U.S. securities.
Trade settlements may be slower and could possibly be subject to failure. In
addition, brokerage commissions and custodial costs with respect to foreign
securities may be higher than those for domestic investments. Accounting,
auditing, financial reporting and disclosure standards for foreign issuers may
be different than those applicable to domestic issuers. Non-U.S.
dollar-denominated foreign securities may be affected favorably or unfavorably
by changes in currency exchange rates and exchange control regulations
(including currency blockage) and a Fund may incur costs in connection with
conversions between various currencies. Foreign securities may also involve
risks due to changes in the political or economic conditions of such foreign
countries, the possibility of expropriation of assets or nationalization, and
possible difficulty in obtaining and enforcing judgments against foreign
entities.

SOVEREIGN DEBT OBLIGATIONS

Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Funds) may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.
A Fund will consider an issuer to be economically tied to a country with
an emerging securities market if (1) the issuer is organized under the laws of,
or maintains its principal place of business in, the country, (2) its securities
are principally traded in the country's securities markets, or (3) the issuer
derived at least half of its

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revenues or profits from goods produced or sold, investments made, or services
performed in the country, or has at least half of its assets in that country.

PERFORMANCE INDEXED PAPER

Performance indexed paper ("PIPs(SM)") is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is established
at maturity as a function of spot exchange rates between the U.S. dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.

BANK OBLIGATIONS

Each Fund, other than the Lifestyle Funds, may invest in bank obligations.
Bank obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances, and fixed time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 10% of its net assets (15% in the case of the Stock Index
Fund, the Mid Cap Index Fund, the Small Cap Index Fund, the International Growth
Fund, the Large Cap Growth Fund, the Small Cap Growth Fund, the Large Cap Value
Fund, the Small Cap Value Fund, the High Yield Bond Fund, the Balanced Fund, the
International Value Fund, the Domestic Bond Fund, the Municipal Bond Fund, the
Strategic Bond Fund and the Core Bond Fund) would be invested in such deposits,
repurchase agreements maturing in more than seven days and other illiquid
assets.
The Funds limit investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Funds limit investments in foreign bank obligations to United States
dollar- or foreign currency-denominated obligations of foreign banks (including
United States branches of foreign banks) which at the time of investment (i)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (ii) in terms of assets are among the 75 largest foreign banks in the
world; (iii) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (iv) in the opinion of
VALIC or a Sub-adviser, are of an investment quality comparable to obligations
of United States banks in which the Funds may invest. The Core Bond Fund may
invest in the same types of bank obligations as the other Funds, but they must
be U.S. dollar-denominated. Subject to a Fund's limitation on concentration in
the securities of issuers in a particular industry, there is no limitation on
the amount of a Fund's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations
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of United States banks, that a foreign jurisdiction might impose withholding
taxes on interest income payable on those obligations, that foreign deposits may
be seized or nationalized, that foreign governmental restrictions such as
exchange controls may be adopted which might adversely affect the payment of
principal and interest on those obligations and that the selection of those
obligations may be more difficult because there may be less publicly available
information concerning foreign banks or the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to United States banks. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.

INTERNATIONAL BONDS

The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Fund,
International Value Fund, Large Cap Growth Fund, Mid Cap Index Fund, Mid Cap
Value Fund, Small Cap Growth Fund, Small Cap Index Fund, Small Cap Value Fund,
Socially Responsible Fund, Stock Index Fund, and the Strategic Bond Fund may
invest in international bonds, which include U.S. dollar-denominated bonds
issued by foreign corporations for which the primary trading market is in the
United States ("Yankee Bonds"), or for which the primary trading market is
abroad ("Euro Bonds"). International bonds may involve special risks and
considerations not typically associated with investing in U.S. companies,
including differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, dispositions of foreign securities and dividends and interest
payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility. A
Fund's investment in international bonds also may be affected either unfavorably
or favorably by fluctuations in the relative rates of exchange between
currencies of different nations, by exchange control regulations and by
indigenous economic and political developments.

EMERGING MARKETS

All of the Funds except for Large Cap Growth Fund, Large Cap Value Fund,
Mid Cap Growth Fund, Money Market Fund, Municipal Bond Fund, and the Municipal
Money Market Fund may invest in companies located in emerging market countries.
The investments may be subject to additional risks. Specifically, volatile
social, political and economic conditions may expose investments in emerging or
developing markets to economic structures that are generally less diverse and
mature. Emerging market countries may have less stable political systems than
those of more developed countries. As a result, it is possible that favorable
economic developments in certain emerging market countries may be suddenly
slowed or reversed by unanticipated political or social events in such
countries. Moreover, the economies of individual emerging market countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth in gross domestic product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additionally, investments in emerging countries may also be adversely impacted
due to the implementation of certain capital control measures which could limit
the a Fund's ability to access U.S. dollars, repatriate earned interest and/or
principal, and sell selected securities.
Investing in emerging market securities, whether in the U.S. or another
country, can result in a lack of liquidity and in greater price volatility.
Until recently, there has been an absence of a capital market structure or
market-oriented economy in certain emerging market countries. If a Fund's
securities will generally be denominated in foreign currencies, the value of
such securities to the Fund will be affected by changes in currency exchange
rates and in exchange control regulations. A change in the value of a foreign
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of a Fund's securities. In addition, some emerging market
countries may have fixed or managed currencies which are not free-floating
against the U.S. dollar. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Many emerging markets countries have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and
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rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
A further risk is that the existence of national policies may restrict a
Fund's investment opportunities and may include restrictions on investment in
issuers or industries deemed sensitive to national interests. Also, some
emerging markets countries may not have developed structures governing private
or foreign investment and may not allow for judicial redress for injury to
private property.

BRADY BONDS

The Domestic Bond Fund, the Balanced Fund, the High Yield Bond Fund, the
Municipal Bond Fund, the Strategic Bond Fund and the Core Bond Fund may invest
in Brady Bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructurings under a debt restructuring plan agreed to by
the debtor nation and its creditors. Brady Plan debt restructurings have been
implemented in a number of countries.
Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (primarily the U.S. dollar) and are actively traded in the
over-the-counter secondary market. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discounts bonds, are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the Brady Bonds, but are not backed by the
U.S. Government. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Funds may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Funds to suffer
a loss of interest or principal on any of its holdings.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS

Foreign currency transactions used by certain of the Funds may be either:
(i) on the spot (i.e., cash) basis at the spot rate prevailing in the foreign
exchange market, or (ii) conducted through the use of forward foreign currency
exchange contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date. In general,
forward foreign currency exchange contracts are not guaranteed by a third party
and, accordingly, each party to a forward foreign currency exchange contract is
dependent upon the creditworthiness and good faith of the other party.
A Fund will enter into forward foreign currency exchange contracts only
under two circumstances. First, a Fund may enter into a forward foreign currency
exchange contract to purchase an amount of foreign currency to protect itself
against a possible loss that might occur between trade and settlement dates for
a particular security, resulting from a decline in the U.S. dollar against the
foreign currency in which such security is denominated. This practice may limit
the potential gains that might result from a positive change in such currency
relationships. Second, when VALIC or a Sub-adviser believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against
the U.S. dollar, a Fund may enter into a forward foreign currency exchange
contract to purchase or sell an amount of foreign currency approximating the
value of some or all of that Fund's portfolio securities denominated in such
foreign currency. The forecasting of short-term currency market movements is
extremely difficult and it is uncertain whether such short-term hedging
strategies will be successful.

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STANDARD AND POOR'S DEPOSITARY RECEIPTS

The Large Cap Growth Fund may, consistent with its objectives, purchase
Standard & Poor's Depositary Receipts ("SPDR's"). SPDRs are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500. This trust is sponsored by a subsidiary of the American Stock Exchange.
SPDRs may be used for several reasons, including but not limited to:
facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk to the Large Cap Growth
Fund as the price movement of the instrument does not perfectly correlate with
the price action of the underlying index.

WHEN-ISSUED SECURITIES

Securities may be purchased on a when-issued, delayed delivery or forward
commitment basis. When such transactions are negotiated, the price of such
securities is fixed at the time of commitment, but delivery and payment for the
securities may take place a month or more after the date of the commitment to
purchase. The securities so purchased are subject to market fluctuation, and no
interest accrues to the purchaser during this period. Forward commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date. VALIC does not believe that a Fund's net asset
value or income will be adversely affected by the purchase of securities on a
when-issued basis.

FIXED INCOME SECURITIES

Fixed income securities are considered high quality if they are rated at
least A by Moody's or its equivalent by any other NRSRO or, if unrated, are
determined to be of equivalent investment quality. High quality fixed income
securities are considered to have a very strong capacity to pay principal and
interest. Fixed income securities are considered investment grade if they are
rated, for example, at least Baa by Moody's or BBB by S&P or their equivalents
by any other NRSRO or, if not rated, are determined to be of equivalent
investment quality. Investment grade fixed income securities are regarded as
having an adequate capacity to pay principal and interest. Lower rated
securities, for example, Ba by Moody's or its equivalent by any other NRSRO are
regarded on balance as high risk and predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
The maturity of fixed income securities may be considered long (ten plus
years), intermediate (one to ten years), or short-term (thirteen months or
less). In general, the principal values of longer-term securities fluctuate more
widely in response to changes in interest rates than those of shorter-term
securities, providing greater opportunity for capital gain or risk of capital
loss. A decline in interest rates usually produces an increase in the value of
fixed income securities, while an increase in interest rates generally reduces
their value.

LOWER RATED FIXED INCOME SECURITIES

Issuers of lower rated or non-rated securities ("high yield" securities,
commonly known as "junk bonds") may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of lower rated securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
Lower rated securities frequently have call or redemption features which
would permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Fund and dividends to
shareholders.
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A Fund may have difficulty disposing of certain lower rated securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and a Fund's ability to dispose of
particular issues when necessary to meet a Fund's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness of
the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of lower rated
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of lower rated securities are likely to adversely affect a
Fund's net asset value. In addition, a Fund may incur additional expenses to the
extent it is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
Finally, there are risks involved in applying credit ratings as a method
for evaluating lower rated fixed income securities. For example, credit ratings
evaluate the safety of principal and interest payments, not the market risks
involved in lower rated fixed income securities. Since credit rating agencies
may fail to change the credit ratings in a timely manner to reflect subsequent
events, the Sub-adviser will monitor the issuers of lower rated fixed income
securities in a Fund to determine if the issuers will have sufficient cash flow
and profits to meet required principal and interest payments, and to assure the
debt securities' liquidity within the parameters of the Fund's investment
policies.

ZERO COUPON FIXED INCOME SECURITIES

The Large Cap Value Fund, the Mid Cap Value Fund, the Balanced Fund, the
High Yield Bond Fund, the Strategic Bond Fund, the Municipal Bond Fund, the Core
Bond Fund and the Domestic Bond Fund may invest in zero coupon fixed income
securities, which are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or that specify a future date
when the securities begin to pay current interest.
Zero coupon fixed income securities are issued and traded at a discount
from their face amount or par value. This discount varies depending on
prevailing interest rates, the time remaining until cash payments begin, the
liquidity of the security, and the perceived credit quality of the issuer.
The discount on zero coupon fixed income securities ("original issue
discount") must be taken into income ratably by a Fund prior to the receipt of
any actual payments. Because the Fund must distribute substantially all of its
net income to its shareholders each year for income and excise tax purposes, the
Fund may have to dispose of portfolio securities under disadvantageous
circumstances to generate cash, or may be required to borrow, to satisfy its
corresponding Fund's distribution requirements.
The market prices of zero coupon fixed income securities generally are
more volatile than the prices of securities that pay interest periodically. Zero
coupon fixed income securities are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having a similar
maturity and credit quality.
Custodial receipts issued in connection with zero coupon fixed income
securities, such as CATs and TIGRs, are not issued by the U.S. Treasury,
although the underlying bond represented by such receipt is a debt obligation of
the U.S. Treasury. Other zero coupon Treasury securities (STRIPs and CUBEs) are
direct obligations of the U.S. Government.

INFLATION-INDEXED BONDS

The Core Bond Fund, the Balanced Fund, the Municipal Bond Fund, the
Domestic Bond Fund, the High Yield Bond Fund and the Strategic Bond Fund may
invest in inflation-indexed bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. Interest payments are made to bondholders semi-annually and are
made up of two components: a fixed "real coupon" or spread, and a variable
coupon linked to an inflation index. Accordingly, payments will increase or
decrease each period as a result of changes in the inflation index. In the
period of deflation payments may decrease to zero, but in any event will not be
less than zero. Inflation-indexed bonds generally are issued at an interest rate
lower than typical bonds, but are expected to retain their principal value over
time. The interest rate on these bonds is fixed at issuance, but over the life
of the bond this interest may be paid on an increasing principal value, which
has been adjusted for inflation.
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Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five, ten or thirty years, although it is anticipated that
securities with other maturities will be issued in the future. The securities
will pay interest on a semi-annual basis, equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if a Fund purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months
were 1%, the mid-year par value of the bond would be $1,010 and the first
semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation
during the second half of the year reached 3%, the end-of-year par value of the
bond would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Fund may be forced to liquidate positions when
it would not be advantageous to do so. There also can be no assurance that the
U.S. Treasury will issue any particular amount of inflation-indexed bonds.
Certain foreign governments, such as the United Kingdom, Canada and Australia,
have a longer history of issuing inflation-indexed bonds, and there may be a
more liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Taxation" for information about the possible tax
consequences of investing in inflation-indexed bonds.

HYBRID INSTRUMENTS

A hybrid instrument can combine the characteristics of equity and fixed
income securities, futures, and options. For example, a hybrid instrument may
combine the characteristics of preferred stock and fixed income securities in
the form of quarterly income preferred stock or trust-originated preferred
stock. In other hybrid securities, the principal amount or interest rate may be
tied (positively or negatively) to the price of some commodity, currency or
securities index or another interest rate (each a "benchmark"). The interest
rate or the

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principal amount payable at maturity of a hybrid security may be increased or
decreased, depending on changes in the value of the benchmark.
Hybrid instruments can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration management, and
increased total return. Hybrids may not bear interest or pay dividends. The
value of a hybrid or its interest rate may be a multiple of a benchmark and, as
a result, may be leveraged and move (up or down) more steeply and rapidly than
the benchmark. These benchmarks may be sensitive to economic and political
events, such as commodity shortages and currency devaluations, which cannot be
readily foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid may
entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes a Fund to the credit risk of the issuer of the
hybrids. These risks may cause significant fluctuations in the net asset value
of the Fund. Accordingly, no Fund will invest more than 5% of its assets in
hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Funds' investments in these products will be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.

CATASTROPHE BONDS

The High Yield Bond Fund, the Balanced Fund, the Municipal Bond Fund, the
Strategic Bond Fund, the Domestic Bond Fund and the Core Bond Fund may invest in
"catastrophe bonds." Catastrophe bonds are fixed income securities, for which
the return of principal and payment of interest is contingent on the non-
occurrence of a specific "trigger" catastrophic event, such as a hurricane or an
earthquake. They may be issued by government agencies, insurance companies,
reinsurers, special purpose corporations or other on-shore or off-shore
entities. If a trigger event causes losses exceeding a specific amount in the
geographic region and time period specified in a bond, a Fund investing in the
bond may lose a portion or all of its principal invested in the bond. If no
trigger event occurs, the Fund will recover its principal plus interest. For
some catastrophe bonds, the trigger event or losses may be based on companywide
losses, index-portfolio losses, industry indices, or readings of scientific
instruments rather than specified actual losses. Often the catastrophe bonds
provide for extensions of maturity that are mandatory, or optional at the
discretion of the issuer, in order to process and audit loss claims in those
cases where a trigger event has, or possibly has, occurred. In addition to the
specified trigger events, catastrophe bonds may also expose the Fund to certain
unanticipated risks including but not limited to issuer (credit) default,
adverse regulatory or jurisdictional interpretations, and adverse tax
consequences.
Catastrophe bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Illiquid Securities" below. Lack of a liquid market may impose the risk of
higher transaction costs and the possibility that a Fund may be forced to
liquidate positions when it would not be advantageous to do so. Catastrophe
bonds are typically rated, and a Fund will only invest in catastrophe bonds that
meet the credit quality requirements for the Fund.

REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS")

Real estate securities are equity securities consisting of (i) common
stocks, (ii) rights or warrants to purchase common stocks, (iii) securities
convertible into common stocks and (iv) preferred stocks issued by real estate
companies. A real estate company is one that derives at least 50% of its
revenues from the ownership, construction, financing, management or sale of
commercial, industrial, or residential real estate or that has at least 50% of
its assets invested in real estate.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interest. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real
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estate mortgages and derive income from the collection of interest payments.
Like regulated investment companies such as the Funds, REITs are not taxed on
income distributed to shareholders provided they comply with certain
requirements under the Internal Revenue Code (the "Code"). A Fund will
indirectly bear its proportionate share of any expenses paid by REITs in which
it invests in addition to the expenses paid by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject
to interest rate risks.

WARRANTS

Bonds with warrants attached to purchase equity securities have many
characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Bonds also may be issued with
warrants attached to purchase additional fixed income securities at the same
coupon rate. A decline in interest rates would permit a Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value. Warrants do not
entitle a holder to dividends or voting rights with respect to the underlying
securities and do not represent any rights in the assets of the issuing company.
In addition, the value of warrants does not, necessarily, in all cases change to
the same extent as the value of the underlying securities to which they relate.
Warrants cease to have value if they are not exercised prior to the expiration
date. These factors can make warrants more speculative than other types of
investments.

SWAP AGREEMENTS

These transactions are entered into in an attempt to obtain a particular
return when it is considered desirable to do so, possibly at a lower cost to the
Fund than if the Fund had invested directly in an instrument that yielded that
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, which may be adjusted for an interest
factor. The gross returns to be exchanged or "swapped" between the parties are
generally 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. Forms of swap agreements include interest rate
caps, under which, in return for a premium, one party agrees to make payments to
the other to the extent that interest rates exceed a specified rate, or "cap";
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified rate, or "floor"; and interest rate collars, under which a party sells
a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding minimum or maximum levels.
Most swap agreements entered into by the Funds would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Fund's current 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 current 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 counterparty will be covered by the
segregation of assets determined to be liquid by VALIC or a Sub-adviser in
accordance with procedures established by the Board of Trustees, to avoid any
potential leveraging of a Fund's portfolio. Obligations under swap agreements so
covered will not be construed to be "senior securities" for purposes of the
Fund's investment restriction concerning senior securities. 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.
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Whether a Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on VALIC or a Sub-adviser's
ability to predict correctly 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 counterparty. The Funds will
enter into swap agreements only with counterparties that meet certain standards
of creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Funds 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.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which include the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.

STRUCTURED NOTES

Structured notes are derivative fixed income securities, the interest rate
or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, VALIC or a Sub-Adviser will analyze these securities in its
overall assessment of the effective duration of the Fund's portfolio in an
effort to monitor the Fund's interest rate risk.

EURODOLLAR OBLIGATIONS

All of the Funds except for the International Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Mid Cap Growth Fund, Municipal Bond Fund and
the Municipal Money Market Fund may invest in Eurodollar obligations, including
Eurodollar bonds and Eurodollar certificates of deposit. A Eurodollar obligation
is a security denominated in U.S. dollars and originated principally in Europe,
giving rise to the term Eurodollar.
Such securities are not registered with the SEC and generally may only be
sold to U.S. investors after the initial offering and cooling-off periods. The
market for Eurodollar securities is dominated by foreign-based investors and the
primary trading market for these securities is London.

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Eurodollar obligations, including Eurodollar bonds and Eurodollar
certificates of deposit, are principally obligations of foreign branches of U.S.
banks. These instruments represent the loan of funds actually on deposit in the
U.S. The Series Company believes that the U.S. bank would be liable in the event
that its foreign branch failed to pay on its U.S. dollar denominated
obligations. Nevertheless, the assets supporting the liability could be
expropriated or otherwise restricted if located outside the U.S. Exchange
controls, taxes, or political and economic developments also could affect
liquidity or repayment. Due to possibly conflicting laws or regulations, the
foreign branch of the U.S. bank could maintain and prevail that the liability is
solely its own, thus exposing a Fund to a possible loss. Such U.S. dollar
denominated obligations of foreign branches of Federal Deposit Insurance
Corporation ("FDIC") member U.S. banks are not covered by the usual $100,000 of
FDIC insurance if they are payable only at an office of such a bank located
outside the U.S., Puerto Rico, Guam, American Samoa, and the Virgin Islands.
Moreover, there may be less publicly available information about foreign
issuers whose securities are not registered with the SEC and such foreign
issuers may not be subject to the accounting, auditing, and financial reporting
standards applicable to issuers registered domestically. In addition, foreign
issuers, stock exchanges, and brokers generally are subject to less government
regulation. There are, however, no risks of currency fluctuation since the
obligations are U.S. dollar denominated.
The Core Bond Fund, High Yield Bond Fund, Mid Cap Index Fund, Small Cap
Growth Fund, Small Cap Index Fund, Small Cap Value Fund, Socially Responsible
Fund, Stock Index Fund and the Strategic Bond Fund may purchase and sell
Eurodollar futures contracts, which enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in a foreign prime lending interest rate to which many interest swaps
and fixed income securities are linked.

MORTGAGE-RELATED SECURITIES

Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." Certain of the Funds may also invest in fixed income securities
which are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities. These securities may be structured in classes with rights to receive
varying proportions of principal and interest. Science & Technology Fund may not
invest in mortgage-related securities.

Mortgage Pass-Through Securities

Interests in pools of mortgage-related securities differ from other forms
of fixed income securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities are
GNMA, Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage ("FHLMC"). GNMA is a wholly
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owned United States Government corporation within the Department of Housing and
Urban Development. GNMA 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 institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of mortgages insured by the Federal Housing Administration (the "FHA"), or
guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the United States Government. FHLMC was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. It is a government-sponsored corporation formerly owned by the twelve
Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC
issues Participation Certificates ("PCs") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the United States Government.

Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental 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 former
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. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Series Company's 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. The Funds may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, VALIC or a Sub-adviser determines that the securities meet the Series
Company's quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. No Fund will purchase mortgage-related securities or any
other assets which in VALIC's or the Sub-adviser's opinion are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid
(15% in the case of the International Growth Fund, the Small Cap Growth Fund,
the Large Cap Growth Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the
Science & Technology Fund, the Small Cap Value Fund, the High Yield Bond Fund,
the Balanced Fund, the International Value Fund, the Domestic Bond Fund, the
Strategic Bond Fund and the Core Bond Fund.)

Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Funds take the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
Veterans' Administration. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government securities nor
U.S. Government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of
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adverse economic, political or business developments that may affect such region
and, ultimately, the ability of residential homeowners to make payments of
principal and interest on the underlying mortgages.

Collateralized Mortgage Obligations (CMOs)

A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal is
paid, in most cases, monthly. CMOs may be collateralized by whole mortgage
loans, but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured in multiple classes, each bearing a different stated
maturity, coupon, and prepayment preference. Actual maturity and average life
will depend upon the prepayment experience of the collateral. CMOs 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 receive principal only after the
first class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.
As an example of a CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.

Commercial Mortgage-Backed Securities

Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage-or asset-backed securities.

OTHER MORTGAGE-RELATED SECURITIES

Other mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, including mortgage
dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS").
Other mortgage-related securities may be equity or fixed income 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,
partnerships, trusts and special purpose entities of the foregoing.

CMO Residuals

CMO residuals are 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.

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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
particular, the yield to maturity on 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-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." 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-backed securities, in certain circumstances a 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 only very 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 of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 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-Backed Securities ("SMBS")

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 principal-only or "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 recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.

ASSET-BACKED SECURITIES

Asset-backed securities (unrelated to first mortgage loans) represent
fractional interests in pools of retail installment loans, both secured (such as
certificates for automobile receivables) and unsecured, and leases, or revolving
credit receivables both secured and unsecured (such as credit card receivable
securities). These assets are generally held by a trust and payments of
principal and interest, or interest only are passed through monthly or quarterly
to certificate holders and may be guaranteed up to certain amounts by letters of
credit issued by a financial institution affiliated or unaffiliated with the
trustee or originator of the trust.
Underlying automobile sales contracts, leases or credit card receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Nevertheless, principal repayment rates tend not to vary
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much with interest rates and the short-term nature of the underlying loans,
leases, or receivables tends to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying loans, leases or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with its investment objective(s) and policies, a
Fund may invest in other asset-backed securities that may be developed in the
future.

MUNICIPAL BONDS

Municipal bonds are debt obligations that are typically issued by a
municipality to obtain funding for public purposes, such as the construction of
public facilities (e.g., airports, highways, bridges and schools). Private
activity bonds issued by or on behalf of public authorities to finance various
privately operated facilities also are considered municipal bonds. Municipal
bonds at the time of issuance may have varying maturities. The Municipal Money
Market Fund will not purchase a security which, after giving effect to any
demand features, has a remaining maturity of greater than 13 months, or
maintains a dollar-weighted average portfolio maturity in excess of 90 days.
The Municipal Bond Fund and the Municipal Money Market Fund may invest in
investment grade municipal bonds. Investment grade municipal bonds are
instruments that are rated at the time of purchase within the four highest
ratings assigned by Moody's, S&P, Fitch, or determined by a Sub-adviser to be of
comparable quality. The four highest ratings currently assigned by Moody's to
municipal bonds are "Aaa", "Aa", "A" and "Baa"; the four highest ratings
assigned by S&P and Fitch to municipal bonds are "AAA", "AA", "A" and "BBB".
Although municipal obligations rated in the fourth highest rating category by
Moody's (i.e., "Baa") or S&P or Fitch (i.e., "BBB") are considered investment
grade, they may be subject to greater risks than other higher rated investment
grade securities. Municipal obligations rated "Baa" by Moody's, for example, are
considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. Municipal
obligations rated "BBB" by S&P and Fitch are regarded as having an adequate
capacity to pay principal and interest. A more complete description of the
ratings assigned by Moody's, S&P and Fitch is included in the Appendix to the
Class A and Class B Prospectus.

MUNICIPAL NOTES

Municipal notes are notes issued by local, regional and state governments
to meet their short-term funding requirements. Municipal notes generally have
maturities at the time of issuance of three years or less.
Funds may invest in municipal notes rated at the time of purchase "MIG1",
"MIG2" (or "VMIG-1" or "VMIG-2", in the case of variable rate demand notes),
"P-2" or better by Moody's, "SP-2", "A-2" or better by S&P or "F-2" or better by
Fitch, or if not rated, determined by a Sub-adviser to be of comparable quality.
Municipal notes that may be purchased by the Funds include, but are not
limited to:
Tax Anticipation Notes. Tax anticipation notes ("TANs") are sold as
interim financing in anticipation of collection of taxes. An uncertainty in a
municipal issuer's capacity to raise taxes as a result of such factors as a
decline in its tax base or a rise in delinquencies could adversely affect the
issuer's ability to meet its obligations on outstanding TANs.
Bond Anticipation Notes. Bond anticipation notes ("BANs") are sold as
interim financing in anticipation of a bond sale. The ability of a municipal
issuer to meet its obligations on its BANs is primarily dependent on the
issuer's adequate access to the longer term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal of, and interest on, BANs.
Revenue Anticipation Notes. Revenue anticipation notes ("RANs") are sold
as interim financing in anticipation of receipt of other revenues. A decline in
the receipt of certain revenues, such an anticipated revenues from another level
of government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs.
TANs, BANs and RANs are usually general obligations of the issuer.

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MUNICIPAL OBLIGATIONS

Municipal obligations are debt obligations issued by or on behalf of
states, cities, municipalities and other public authorities. The two principal
classifications of municipal obligations that may be held by the Municipal Bond
Fund and the Municipal Money Market Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of a facility being financed. Revenue securities may include private
activity bonds. Such bonds may be issued by or on behalf of public authorities
to finance various privately operated facilities and are not payable from the
unrestricted revenues of the issuer. As a result, the credit quality of private
activity bonds is frequently related directly to the credit standing of private
corporations or other entities. In addition, the interest on private activity
bonds issued after August 7, 1986 is subject to the federal alternative minimum
tax. The Funds will not be restricted with respect to the proportion of its
assets that may be invested in such obligations. Accordingly, the Funds may not
be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax.
The Funds' portfolio may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality that
created the issuer.
In addition, the Funds may invest in municipal lease obligations ("MLOs").
MLOs are not fully backed by the municipality's credit and their interest may
become taxable if the lease is assigned. If the governmental user does not
appropriate sufficient funds for the following year's lease payments, the lease
will terminate, with the possibility of default on the MLO and loss to the Fund.
The Sub-adviser may invest more than 5% of each Fund's net assets in MLOs and
the Trustees of the Series Company have established procedures the Sub-adviser
will use to examine certain factors in evaluating the liquidity of such
obligations. These factors include (i) the frequency of trades and quotes for
the MLO; (ii) the number of dealers willing to purchase or sell such MLO and the
number of other potential purchasers; (iii) the willingness of dealers to
undertake to make a market in the MLO; (iv) the nature of the MLO and the nature
of the marketplace trades (e.g., the time needed to dispose of the security and
the method of soliciting offers); (v) the nature of the offering of such MLO
(e.g., the size of the issue and the number of anticipated holders); (vi) the
ability of the MLO to maintain its marketability throughout the time the
instrument is held in the Fund; and (vii) other factors, if any, which the
Sub-adviser deems relevant to determining the existence of a trading market for
such MLO. The Funds also may invest in resource recovery bonds, which may be
general obligations of the issuing municipality or supported by corporate or
bank guarantees. The viability of the resource recovery project, environmental
protection regulations and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.
The Funds currently intend to invest substantially all of their assets in
obligations the interest on which is exempt from regular federal income taxes.
However, in order to maintain liquidity, each of these Funds may invest up to
20% of its assets in taxable obligations, including taxable high-quality
short-term money market instruments. These Funds also may invest in the
following taxable high-quality short-term money market instruments: obligations
of the U.S. Government or its agencies or instrumentalities; commercial paper of
issuers rated, at the time of purchase, "A-2" or better by S&P, "P-2" or better
by Moody's, or "F-2" or better by Fitch or which if unrated, in the opinion of
the Sub-adviser, are of comparable quality; certificates of deposit, bankers'
acceptances or time deposits of U.S. banks with total assets of at least $1
billion (including obligations of foreign branches of such banks) and of the 75
largest foreign commercial banks in terms of total assets (including domestic
branches of such banks), and repurchase agreements with respect to such
obligations.
If at some future date, in the opinion of the Sub-adviser, adverse
conditions prevail in the market for obligations the interest on which is exempt
from regular federal income taxes, the Funds may invest its assets without limit
in taxable high-quality short-term money market instruments. Dividends paid by
the Funds that are attributable to interest derived from taxable money market
instruments will be taxable to investors.
From time to time, the Funds may invest more than 25% of its assets in
obligations whose interest payments are from revenues of similar projects (such
as utilities or hospitals) or whose issuers share the same

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geographic location. As a result, the Funds may be more susceptible to a single
economic, political or regulatory development than would a portfolio of
securities with a greater variety of issuers. These developments include
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance. Neither the
Series Company nor the Sub-adviser will review the proceedings relating to the
issuance of municipal obligations or the basis for such opinions.

MUNICIPAL COMMERCIAL PAPER

The Municipal Bond Fund and the Municipal Money Market Fund may also
purchase municipal commercial paper. Municipal commercial paper that may be
purchased by the Funds consists of short term obligations of a municipality.
Such paper is likely to be issued to meet seasonal working capital needs of a
municipality or as interim construction financing. Municipal commercial paper,
in many cases, is backed by a letter of credit lending agreement, repurchase
agreement or other credit facility agreement offered by banks or other
institutions.
The Funds may invest in commercial paper that is rated at the time of
purchase "P-2" or better by Moody's, "A-2" or better by S&P, or "F-2" or better
by Fitch, or, if not rated, determined by a Sub-adviser to be of comparable
quality.

VARIABLE RATE DEMAND NOTES

Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and which are subject to an unconditional right of demand to receive
payment of the principal balance plus accrued interest either at any time or at
specified intervals not exceeding one year and in either case upon no more than
seven days notice. The interest rates are adjustable at intervals ranging from
daily ("floating rate") to up to one year to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments are typically based upon the prime rate of a
bank or some other appropriate interest rate adjustment index.
The Municipal Bond Fund, the Municipal Money Market Fund and the Money
Market Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days. A
Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.

PRE-REFUNDED BONDS

From time to time, a municipality may refund a bond that it has already
issued prior to the original bond's call date by issuing a second bond, the
proceeds of which are used to purchase securities. The securities are placed in
an escrow account pursuant to an agreement between the municipality and an
independent escrow agent. The principal and interest payments on the securities
are then used to pay off the original bondholders. For the purposes of
diversification, pre-refunded bonds will be treated as governmental issues.

LOAN PARTICIPATIONS

Loan Participations are debt obligations of corporations and are usually
purchased from major money center banks, selected regional banks, and major
foreign banks with branches in the U.S. which are regulated by the Federal
Reserve System or appropriate state regulatory authorities. VALIC and the
Sub-advisers believe that the credit standards imposed by such banks are
comparable to the standards such banks use in connection
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with loans originated by them and in which they intend to maintain a full
interest. The financial institutions offering loan participations do not
guarantee principal or interest on the loan participations which they offer.
VALIC and the Sub-advisers will not purchase such securities for the Funds
unless they believe that the collateral underlying the corporate loans is
adequate and the corporation will be able, in a timely fashion, to pay scheduled
interest and principal amounts.

ADJUSTABLE RATE SECURITIES

Adjustable rate securities (i.e., variable rate and floating rate
instruments) are securities that have interest rates that are adjusted
periodically, according to a set formula. The maturity of some adjustable rate
securities may be shortened under certain special conditions described more
fully below.
Variable rate instruments are obligations (usually certificates of
deposit) that provide for the adjustment of their interest rates on
predetermined dates or whenever a specific interest rate changes. A variable
rate instrument whose principal amount is scheduled to be paid in 13 months or
less is considered to have a maturity equal to the period remaining until the
next readjustment of the interest rate. Many variable rate instruments are
subject to demand features which entitle the purchaser to resell such securities
to the issuer or another designated party, either (1) at any time upon notice of
usually 30 days or less, or (2) at specified intervals, not exceeding 13 months,
and upon 30 days notice. A variable rate instrument subject to a demand feature
is considered to have a maturity equal to the longer of the period remaining
until the next readjustment of the interest rate or the period remaining until
the principal amount can be recovered through demand.
Floating rate instruments (generally corporate notes, bank notes, or
Eurodollar certificates of deposit) have interest rate reset provisions similar
to those for variable rate instruments and may be subject to demand features
like those for variable rate instruments. The maturity of a floating rate
instrument is considered to be the period remaining until the principal amount
can be recovered through demand.

All of the Funds except for International Growth Fund, International Value
Fund, Large Cap Growth Fund, Large Cap Value Fund, Money Market Fund, Municipal
Bond Fund, Municipal Money Market Fund and Science & Technology Fund may invest
in inverse floaters, which are derivative fixed income or municipal securities.
Inverse floaters may be issued by agencies or instrumentalities of the U.S.
government or by private issuers including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Inverse floaters generally have greater
volatility than other types of mortgage securities in which a Fund may invest.
Although inverse floaters are purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers, the
market for such securities has not yet been fully developed. Accordingly,
inverse floaters are generally illiquid.

Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate securities.

ILLIQUID SECURITIES

The Money Market Fund and Municipal Money Market Fund will not invest more
than 10% (15% in the case of the Stock Index Fund, the Mid Cap Index Fund, the
Small Cap Index Fund, the International Growth Fund, the Small Cap Growth Fund,
the Large Cap Growth Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the
Small Cap Value Fund, the High Yield Bond Fund, the Balanced Fund, the
International Value Fund, the Domestic Bond Fund, the Strategic Bond Fund, the
Municipal Bond Fund, the Science & Technology Fund and the Core Bond Fund), of
the value of their net assets in securities or other investments that are
illiquid or not readily marketable (including repurchase agreements with
maturities exceeding seven days). Securities received as a result of a corporate
reorganization or similar transaction affecting readily-marketable securities
already held in the portfolio of a Fund will not be considered securities or
other investments that are not readily marketable. However, the Funds will
attempt, in an orderly fashion, to dispose of any securities received under
these

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circumstances, to the extent that such securities are considered not readily
marketable, and together with other illiquid securities, exceed 10% (or 15%) of
the value of a Fund's net assets.

RULE 144A SECURITIES

Privately placed securities are eligible for purchase and sale pursuant to
Rule 144A under the 1933 Act. This Rule permits certain qualified institutional
buyers, such as the Funds, to trade in privately placed securities even though
such securities are not registered under the 1933 Act. The Series Company, under
the supervision of the Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Funds'
restriction on investing more than 10% (15% in the case of the Stock Index Fund,
the Mid Cap Index Fund, the Small Cap Index Fund, the International Growth Fund,
the Small Cap Growth Fund, the Large Cap Growth Fund, the Large Cap Value Fund,
the Mid Cap Value Fund, the Small Cap Value Fund, the High Yield Bond Fund, the
Balanced Fund, the International Value Fund, the Domestic Bond Fund, the
Strategic Bond Fund and the Core Bond Fund) of its net assets in illiquid
securities. Excluded from the Funds' investment limitations, however, are any
Rule 144A securities that have been determined to be liquid by the Board of
Trustees, VALIC or the Sub-adviser pursuant to Board approved guidelines.
Determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination the Series Company will consider the trading
markets for the specific security taking into account the unregistered nature of
a Rule 144A security. In addition the Series Company could consider (i)
frequency of trades and quotes, (ii) number of dealers and potential purchasers,
(iii) dealer undertakings to make a market, and (iv) nature of the security and
market place trades (for example, the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities will also be monitored by the Series Company and, if, as a
result of changed conditions, it is determined that a Rule 144A security is no
longer liquid, the Funds' holding of illiquid securities will be reviewed to
determine what, if any, action is required to assume that the Funds do not
invest more than 10% (or 15%) of their net assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the amount
of the Funds' investments in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. Each Fund other than the
Lifestyle Funds, may invest in Rule 144A securities that have been determined to
be liquid by Board approved guidelines.

OPTIONS ON SECURITIES AND SECURITIES INDICES

Each Fund, other than the Large Cap Growth Fund, the Mid Cap Growth Fund,
the International Growth Fund, the Lifestyle Funds, the Municipal Money Market
Fund and the Money Market Fund, may write covered call and put options on
securities and securities indices. A call option is a contract that gives to the
holder the right to buy a specified amount of the underlying security or
currency at a fixed or determinable price (called the exercise or "strike"
price) upon exercise of the option. A put option is a contract that gives the
holder the right to sell a specified amount of the underlying security or
currency at a fixed or determinable price upon exercise of the option.
To "cover" a call option written, a Fund may, for example, identify and
have available for sale the specific portfolio security, group of securities, or
foreign currency to which the option relates. To cover a put option written, a
Fund may, for example, establish a segregated asset account with its custodian
containing cash or liquid assets that, when added to amounts deposited with its
broker or futures commission merchant ("FCM") as margin, equals the market value
of the instruments underlying the put option written.
All the Funds except for International Growth Fund, Mid Cap Growth Fund,
Money Market Fund, and the Municipal Money Market Fund may write options on
securities and securities indices. If a Fund writes an option which expires
unexercised or is closed out by the Fund at a profit, it will retain the premium
received for the option, which will increase its gross income. If the price of
the underlying security or currency moves adversely to the Fund's position, the
option may be exercised and the Fund, as the writer of the option, will be
required to sell or purchase the underlying security or currency at a
disadvantageous price, which may only be partially offset by the amount of
premium received.
Options on stock indices are similar to options on stock, except that all
settlements are made in cash rather than by delivery of stock, and gains or
losses depend on price movements in the stock market generally (or in a
particular industry or segment of the market represented by the index) rather
than price movements of
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individual stocks. When a Fund writes an option on a securities index, and the
underlying index moves adversely to the Fund's position, the option may be
exercised. Upon such exercise, the Fund, as the writer of the option, will be
required to pay in cash an amount equal to the difference between the exercise
settlement value of the underlying index and the exercise price of the option,
multiplied by a specified index "multiplier."
Call or put options on a stock index may be written at an exercise or
"strike" price which is either below or above the current value of the index. If
the exercise price at the time of writing the option is below the current value
of the index for a call option or above the current value of the index for a put
option the option is considered to be "in the money." In such a case, the Fund
will cover such options written by segregating with its custodian or pledging to
its commodity broker as collateral cash, U.S. Government or other high-grade,
short-term debt obligations equal in value to the amount by which the option
written is in the money, times the multiplier, times the number of contracts.
Stock indices for which options are currently traded include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, Computer
Technology Index, Oil Index, NYSE Options Index, Technology Index, Gold/Silver
Index, Institutional Index and NYSE Beta Index. The Funds may also use options
on such other indices as may now or in the future be available.
All the Funds except for International Growth Fund, Mid Cap Growth Fund,
Money Market Fund, and the Municipal Money Market Fund may also purchase put or
call options on securities and securities indices in order to (i) hedge against
anticipated changes in interest rates or stock prices that may adversely affect
the prices of securities that the Fund intends to purchase at a later date, (ii)
hedge its investments against an anticipated decline in value, or (iii) attempt
to reduce the risk of missing a market or industry segment advance. These Funds
also may purchase put options on foreign currencies that correlate with the
Fund's portfolio securities in order to minimize or hedge against anticipated
declines in the exchange rate of the currencies in which the Fund's securities
are denominated and may purchase call options on foreign currencies that
correlate with its portfolio securities to take advantage of anticipated
increases in exchange rates. In the event that the anticipated changes in
interest rates, stock prices, or exchange rates occur, the Fund may be able to
offset the resulting adverse effect on the Fund, in whole or in part, through
the options purchased.
The premium paid for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation of
the option, and, unless the price of the underlying security, securities index,
or currency changes sufficiently, the option may expire without value to the
Fund. To close option positions purchased by the Funds, the Funds may sell put
or call options identical to options previously purchased, which could result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option purchased.
Options used by the Funds may be traded on the national securities
exchanges or in the over-the-counter market. Only the Large Cap Value Fund, the
Small Cap Growth Fund, the High Yield Bond Fund, the Strategic Bond Fund, the
Municipal Bond Fund and the Core Bond Fund may use over-the-counter options.
Options traded in the over-the-counter market may not be as actively traded as
those on an exchange. Accordingly, it may be more difficult to value such
options. In addition, it may be more difficult to enter into closing
transactions with respect to options traded over-the-counter. In this regard,
the Funds may enter into contracts with the primary dealers with whom they write
over-the-counter options. The contracts will provide that each Fund has the
absolute right to repurchase an option it writes at any time at a repurchase
price which represents the fair market value of such option, as determined in
good faith through negotiations between the parties, but which in no event will
exceed a price determined pursuant to a formula contained in the contract.
Although the specific details of the formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by each Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e., the amount the option is
"in-the-money"). The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Although the specific details of
the formula may vary with different primary dealers, each contract will provide
a formula to determine the maximum price at which each Fund can repurchase the
option at any time. The Funds have established standards of creditworthiness for
these primary dealers.

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WRITING COVERED CALL AND PUT OPTIONS AND PURCHASING CALL AND PUT OPTIONS

All of the Funds, except International Growth Fund, Mid Cap Growth Fund,
Large Cap Growth Fund, Municipal Money Market Fund and Money Market Fund, may
write exchange-traded covered call and put options on or relating to specific
securities in order to earn additional income or, in the case of a call written,
to minimize or hedge against anticipated declines in the value of the Fund's
securities. The Mid Cap Value Fund may write exchange-traded covered call
options, but not put options in this connection. To "cover" an option means, for
example, to identify and make available for sale the specific portfolio security
or foreign currency to which the option relates. Through the writing of a
covered call option a Fund receives premium income but obligates itself to sell
to the purchaser of such an option the particular security or foreign currency
underlying the option at a specified price at any time prior to the expiration
of the option period, regardless of the market value of the security or the
exchange rate for the foreign currency during this period. Through the writing
of a covered put option a Fund receives premium income but obligates itself to
purchase a particular security or foreign currency underlying the option at a
specified price at any time prior to the expiration of the option period,
regardless of market value or exchange rate during the option period.
All of the Funds, except International Growth Fund, Mid Cap Growth Fund,
Large Cap Growth Fund, Municipal Money Market Fund and Money Market Fund, may
also write exchange-traded covered call and put options on stock indices and may
purchase call and put options on stock indices that correlate with the Fund's
portfolio securities. These Funds may engage in such transactions for the same
purposes as they may engage in such transactions with respect to individual
portfolio securities or foreign currencies, that is, to generate additional
income or as a hedging technique to minimize anticipated declines in the value
of the Fund's portfolio securities or the exchange rate of the securities in
which the Fund invested. In economic effect, a stock index call or put option is
similar to an option on a particular security, except that the value of the
option depends on the weighted value of the group of securities comprising the
index, rather than a particular security, and settlements are made in cash
rather than by delivery of a particular security.
Each Fund, other than International Growth Fund, Large Cap Growth Fund,
Mid Cap Growth Fund, Money Market Fund, and the Municipal Bond Fund, may also
purchase exchange-traded call and put options with respect to securities and
stock indices that correlate with that Fund's particular portfolio securities.
In this connection, the Mid Cap Value Fund may purchase exchange traded call
options only.
A Fund may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of its portfolio securities or
currencies. As the holder of a put option with respect to individual securities
or currencies, the Fund has the right to sell the securities or currencies
underlying the options and to receive a cash payment at the exercise price at
any time during the option period. As the holder of a put option on an index, a
Fund has the right to receive, upon exercise of the option, a cash payment equal
to a multiple of any excess of the strike price specified by the option over the
value of the index.
A Fund may purchase call options on individual securities, currencies or
stock indices in order to take advantage of anticipated increases in the price
of those securities or currencies by purchasing the right to acquire the
securities or currencies underlying the option or, with respect to options on
indices, to receive income equal to the value of such index over the strike
price. As the holder of a call option with respect to individual securities or
currencies, a Fund obtains the right to purchase the underlying securities or
currencies at the exercise price at any time during the option period. As the
holder of a call option on a stock index, a Fund obtains the right to receive,
upon exercise of the option, a cash payment equal to the multiple of any excess
of the value of the index on the exercise date over the strike price specified
in the option.
Unlisted options may be used by the Large Cap Value Fund, the Small Cap
Growth Fund, the High Yield Bond Fund, the Strategic Bond Fund, the Municipal
Bond Fund and the Core Bond Fund. Such options are not traded on an exchange and
may not be as actively traded as listed securities, making the valuation of
these securities more difficult. In addition, an unlisted option entails a risk
not found in connection with listed options -- that the party on the other side
of the option transaction will default. This may make it impossible to close out
an unlisted option position in some cases, and profits may be lost thereby. Such
unlisted, over-the-counter options, unless otherwise indicated, will be
considered illiquid securities. The Funds will engage in such transactions only
with firms of sufficient credit to minimize these risks. In instances in which a
Fund has entered into agreements with primary dealers with respect to the
unlisted, over-the-counter options it has written, and such agreements would
enable the Fund to have an absolute right to repurchase, at a pre-established
formula

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price, the over-the-counter options written by it, the Fund will treat as
illiquid only the amount equal to the formula price described above less the
amount by which the option is "in-the-money."
Although these investment practices will be used to generate additional
income and to attempt to reduce the effect of any adverse price movement in the
securities or currencies subject to the option, they do involve certain risks
that are different in some respects from investment risks associated with
similar funds which do not engage in such activities. These risks include the
following: writing covered call options -- the inability to effect closing
transactions at favorable prices and the inability to participate in the
appreciation of the underlying securities or currencies above the exercise
price; writing covered put options -- the inability to effect closing
transactions at favorable prices and the obligation to purchase the specified
securities or currencies or to make a cash settlement on the stock index at
prices which may not reflect current market values or exchange rates; and
purchasing put and call options -- possible loss of the entire premium paid. In
addition, the effectiveness of hedging through the purchase or sale (writing) of
stock index options will depend upon the extent to which price movements in the
portion of a Fund's portfolio being hedged correlate with price movements in the
selected stock index. Perfect correlation may not be possible because the
securities held or to be acquired by a Fund may not exactly match the
composition of the stock index on which options are purchased or written. If the
forecasts of VALIC or the Sub-Advisers regarding movements in securities prices,
currencies or interest rates are incorrect, a Fund's investment results may have
been better without the hedge.

FINANCIAL FUTURES CONTRACTS

Each Fund, except the Mid Cap Growth Fund, the International Growth Fund,
the Mid Cap Value Fund, the Lifestyle Funds, the Municipal Money Market Fund and
the Money Market Fund, in accordance with its investment objective(s),
investment program, policies, and restrictions may purchase and sell exchange-
traded financial futures contracts as a hedge to protect against anticipated
changes in prevailing interest rates, overall stock prices or currency rates, or
to efficiently and in a less costly manner implement either increases or
decreases in exposure to the equity or bond markets. The Funds may also write
covered call options and purchase put and call options on financial futures
contracts for the same purposes or to earn additional income and the Small Cap
Growth Fund, the Large Cap Value Fund and the Large Cap Growth Fund may also
write covered put options on stock index futures contracts. The Large Cap Value
Fund may utilize currency futures contracts and both listed and unlisted
financial futures contracts and options thereon.
Financial futures contracts consist of interest rate futures contracts,
stock index futures contracts, and currency futures contracts. An interest rate
futures contract is a contract to buy or sell specified debt securities at a
future time for a fixed price. A stock index futures contract is similar in
economic effect, except that rather than being based on specific securities, it
is based on a specified index of stocks and not the stocks themselves. A
currency futures contract is a contract to buy or sell a specific foreign
currency at a future time for a fixed price.
An interest rate futures contract binds the seller to deliver to the
purchaser on a specified future date a specified quantity of one of several
listed financial instruments, against payment of a settlement price specified in
the contract. A public market currently exists for futures contracts covering a
number of indexes as well as financial instruments and foreign currencies,
including: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian
dollar; the British pound; the German mark; the Japanese yen; the French franc;
the Swiss franc; the Mexican peso; and certain multinational currencies, such as
the European Currency Unit ("ECU"). It is expected that other futures contracts
will be developed and traded in the future.
The Municipal Bond Fund may enter into municipal bond index futures
contracts. A municipal bond index futures contract is an agreement to take or
make delivery of an amount of cash equal to the difference between the value of
the index at the beginning and at the end of the contract period. The Municipal
Bond Fund may enter into short municipal bond index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of securities in its respective portfolio that might otherwise
result. When the Fund is not fully invested in securities and anticipates a
significant market advance, it may enter into long municipal bond index futures
contracts in order to gain rapid market exposure that may wholly or partially
offset increases in the costs of securities that it intends to purchase. In a
substantial majority of

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these transactions, the Fund will purchase such securities upon termination of
the futures position but, under unusual market conditions, a futures position
may be terminated without the corresponding purchase of securities.
Stock index futures contracts bind purchaser and seller to deliver, at a
future date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. A public market currently exists for stock
index futures contracts based on the S&P 500 Index, the S&P MidCap 400, the
Nikkei 225, the New York Stock Exchange Composite Index, the Value Line Stock
Index, and the Major Market Index. It is expected that financial instruments
related to broad-based indices, in addition to those for which futures contracts
are currently traded, will in the future be the subject of publicly-traded
futures contracts, and the Funds may use any of these, which are appropriate, in
its hedging strategies.
A financial futures contract is an agreement to buy or sell a security (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery of a specified security)
for a set price in the future. Exchange-traded futures contracts are designated
by boards of trade which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC").
Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but instead are liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Fund will usually be liquidated in this manner, the Fund
may instead make or take delivery of underlying securities whenever it appears
economically advantageous to the Fund to do so. A clearing organization
associated with the relevant exchange assumes responsibility for closing out
transactions and guarantees that, as between the clearing members of an
exchange, the sale and purchase obligations will be performed with regard to all
positions that remain open at the termination of the contract.
Unlisted financial futures contracts, which may be purchased or sold only
by the Large Cap Value Fund, the High Yield Bond Fund, the Strategic Bond Fund,
the Municipal Bond Fund and the Core Bond Fund, like unlisted options, are not
traded on an exchange and, generally, are not as actively traded as listed
futures contracts or listed securities. Such financial futures contracts
generally do not have the following elements: standardized contract terms,
margin requirements relating to price movements, clearing organizations that
guarantee counter-party performance, open and competitive trading in centralized
markets, and public price dissemination. These elements in listed instruments
serve to facilitate their trading and accurate valuation. As a result, the
accurate valuation of unlisted financial futures contracts may be difficult. In
addition, it may be difficult or even impossible, in some cases, to close out an
unlisted financial futures contract, which may, in turn, result in significant
losses to the Fund. Such unlisted financial futures contracts will be considered
by the Fund to be illiquid securities and together with other illiquid
securities will be limited to no more than 10% (or 15%) of the value of such
Fund's total assets. In making such determination, the value of unlisted
financial futures contracts will be based upon the "face amount" of such
contracts.
When financial futures contracts are entered into by a Fund, either as the
purchaser or the seller of such contracts, the Fund is required to deposit with
the Custodian in a segregated account in the name of the FCM an initial margin
of cash or U.S. Treasury bills equaling as much as 5% to 10% or more of the
contract settlement price. The nature of initial margin requirements in futures
transactions differs from traditional margin payments made in securities
transactions in that initial margins for financial futures contracts do not
involve the borrowing of funds by the customer to finance the transaction.
Instead, a customer's initial margin on a financial futures contract represents
a good faith deposit securing the customer's contractual obligations under the
financial futures contract. The initial margin deposit is returned, assuming
these obligations have been met, when the financial futures contract is
terminated. In addition, subsequent payments to and from the FCM, called
"variation margin," are made on a daily basis as the price of the underlying
security, stock index, or currency fluctuates, reflecting the change in value in
the long (purchase) or short (sale) positions in the financial futures contract,
a process known as "marking to market."
Financial futures contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, the Funds will normally close all futures positions by entering
into an offsetting transaction which operates to cancel the position held, and
which usually results in a
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profit or loss. A Fund may not adhere to its internal operating policy in
circumstances where the Fund is required to invest a large cash infusion.

OPTIONS ON FINANCIAL FUTURES CONTRACTS

For bona fide hedging purposes, each Fund, except the Mid Cap Growth Fund,
the International Growth Fund, the Mid Cap Value Fund, the Lifestyle Funds, the
Municipal Money Market Fund and the Money Market Fund, may also purchase call
and put options on financial futures contracts and write call options on
financial futures contracts of the type which the particular Fund is authorized
to enter into. Options on financial future contracts used by the Funds are
traded on exchanges that are licensed and regulated by the CFTC. A call option
on a financial futures contract gives the purchaser the right in return for the
premium paid, to purchase a financial futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires. A
put option gives the purchaser the right, in return for the premium paid, to
sell a financial futures contract (assume a "short" position), for a specified
exercise price, at any time before the option expires.
Unlike entering into financial futures contracts, purchasing options on
financial futures contracts allows a Fund to decline to exercise the option,
thereby avoiding any loss beyond foregoing the purchase price (or "premium")
paid for the options. Therefore, the purchase of options on financial futures
contracts may be a preferable hedging strategy when a Fund desires maximum
flexibility. Whether, in order to achieve a particular objective, a Fund enters
into a financial futures contract, on the one hand, or an option contract, on
the other, will depend on all the circumstances, including the relative costs,
liquidity, availability and capital requirements of such financial futures and
options contracts. Also, the Funds will consider the relative risks involved,
which may be quite different. These factors, among others, will be considered in
light of market conditions and the particular objective to be achieved.

CERTAIN ADDITIONAL RISKS OF OPTIONS AND FINANCIAL FUTURES CONTRACTS

The use of options and financial futures contracts may entail some risks.
First, although such instruments when used by the Funds are intended to
correlate with the Funds' portfolio securities or currencies, in many cases the
options or financial futures contracts used may be based on securities,
currencies, or stock indices the components of which are not identical to the
portfolio securities owned or intended to be acquired by the Funds. Second, due
to supply and demand imbalances and other market factors, the price movements of
financial futures contracts, options thereon, currency options, and stock index
options may not necessarily correspond exactly to the price movements of the
securities, currencies, or stock indices on which such instruments are based.
Accordingly, there is a risk that a Fund's transactions in those instruments
will not in fact offset the impact on the Fund of adverse market developments in
the manner or to the extent contemplated or that such transactions will result
in losses to the Fund which are not offset by gains with respect to
corresponding portfolio securities owned or to be purchased by that Fund.
To some extent, these risks can be minimized by careful management of
hedging activities. For example, where price movements in a financial futures or
option contract are expected to be less volatile than price movements in the
related portfolio securities owned or intended to be acquired by a Fund, it may,
in order to compensate for this difference, use an amount of financial futures
or option contracts which is greater than the amount of such portfolio
securities. Similarly, where the price movement of a financial futures or option
contract is anticipated to be more volatile, a Fund may use an amount of such
contracts which is smaller than the amount of portfolio securities to which such
contracts relate.
The risk that the hedging technique used will not actually or entirely
offset an adverse change in a Fund's portfolio securities is particularly
relevant to financial futures contracts and options written on stock indices and
currencies. A Fund, in entering into a futures purchase contract, potentially
could lose any or all of the contract's settlement price. In entering into a
futures sale contract, a Fund could potentially lose a sum equal to the excess
of the contract's value (marked to market daily) over the contract's settlement
price. In writing options on stock indices or currencies a Fund could
potentially lose a sum equal to the excess of the value of the index or currency
(marked to market daily) over the exercise price. In addition, because financial
futures contracts require delivery at a future date of either a specified
security or currency, or an amount of cash equal to a multiple of the difference
between the value of a specified stock index on that date and the settlement
price, an algebraic relationship exists between any price movement in the
underlying security or
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currency or index and the potential cost of settlement to a Fund. A small
increase or decrease in the value of the underlying security or currency or
stock index can, therefore, result in a much greater increase or decrease in the
cost to the Fund.
Stock index call options written also pose another risk as hedging tools.
Because exercises of stock index options are settled in cash, there is an
inherent timing risk that the value of a Fund's portfolio securities "covering"
a stock index call option written by it may decline during the time between
exercise of the option by the option holder and notice to the Fund of such
exercise (usually one day or more) thereby requiring the Fund to use additional
assets to settle the transaction. This risk is not present in the case of
covered call options on individual securities, which are settled by delivery of
the actual securities.
There are also special risks in using currency options including the
following: (i) settlement of such options must occur in the country issuing the
currency in conformity with foreign regulations for such delivery, including the
possible imposition of additional costs and taxes, (ii) no systematic reporting
of "last sale" information for foreign currencies, and (iii) the need to use
"odd lot" transactions for underlying currencies at prices less favorable than
those for "round lot" transactions.
Although the Funds intend to establish positions in these instruments only
when there appears to be an active market, there is no assurance that a liquid
market for such instruments will exist when a Fund seeks to "close out" (i.e.
terminate) a particular financial futures contract or option position. This is
particularly relevant for over-the-counter options and financial futures
contracts, as previously noted. Trading in such instruments could be
interrupted, for example, because of a lack of either buyers or sellers. In
addition, the futures and options exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the exchange. Exercise of options could also be restricted or delayed because
of regulatory restrictions or other factors. A Fund may be able, by adjusting
investment strategy in the cash or other contract markets, to offset to some
extent any adverse effects of being unable to liquidate a hedge position.
Nevertheless, in some cases, a Fund may experience losses as a result of such
inability. Therefore it may have to liquidate other more advantageous
investments to meet its cash needs.
In addition, FCMs or brokers in certain circumstances will have access to
a Fund's assets posted as margin in connection with these transactions as
permitted under the 1940 Act. The Funds will use only FCMs or brokers in whose
reliability and financial soundness they have full confidence and have adopted
certain other procedures and limitations to reduce the risk of loss with respect
to any assets which brokers hold or to which they may have access. Nevertheless,
in the event of a broker's insolvency or bankruptcy, it is possible that a Fund
could experience a delay or incur costs in recovering such assets or might
recover less than the full amount due. Also the value of such assets could
decline by the time a Fund could effect such recovery.
The success of a Fund in using hedging techniques depends, among other
things, on VALIC's, or the Sub-adviser's ability to predict the direction and
volatility of price movements in both the futures and options markets as well as
the securities markets and on VALIC's or the Sub-adviser's ability to select the
proper type, time, and duration of hedges. There can be no assurance that these
techniques will produce their intended results. In any event, VALIC, or the
Sub-adviser will use financial futures contracts, options thereon, currency
options and stock index options only when it believes the overall effect is to
reduce, rather than increase, the risks to which a Fund is exposed. Hedging
transactions also, of course, may be more, rather than less, favorable to a Fund
than originally anticipated.

LIMITATIONS

No Fund will enter into any financial futures contract or purchase any
option thereon if, immediately thereafter, the total amount of its assets
required to be on deposit as initial margin to secure its obligations under
financial futures contracts, plus the amount of premiums paid by it for
outstanding options to purchase futures contracts, exceeds 5% of the market
value of its total assets; provided however, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. This is a fundamental policy of the Socially
Responsible Fund. Collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of the investment restrictions concerning
borrowing money, mortgaging, or hypothecating assets of any Fund.

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<PAGE> 327

Each Fund has an operating policy which provides that it will not enter
into financial futures contracts or write put or call options with respect to
financial futures contracts unless such transactions are either "covered" or
subject to segregation requirements considered appropriate by the SEC staff.
Further, each Fund has an operating policy which provides that it will not enter
into custodial arrangements with respect to initial or variation margin deposits
or marked-to-market amounts unless the custody of such initial and variation
margin deposits and marked-to-market amounts are in compliance with current SEC
staff interpretive positions or no-action letters or rules adopted by the SEC.

SHORT SALES AND SHORT SALES AGAINST THE BOX

The Balanced Fund, each Bond Fund, International Value Fund, and Socially
Responsible Fund may enter in short sales in connection with options and futures
contracts only. Mid Cap Value Fund, Small Cap Index Fund, and Strategic Index
Fund may engage in short sale transactions in securities listed on one or more
national securities exchanges or on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ"). Short selling involves the
sale of borrowed securities. At the time a short sale is effected, a Fund incurs
an obligation to replace the security borrowed at whatever its price may be at
the time that the Fund purchases it for delivery to the lender. When a short
sale transaction is closed out by delivery of the securities, any gain or loss
on the transaction is taxable as a short term capital gain or loss. Until the
security is replaced, the Fund is required to pay to the lender amounts equal to
any dividends or interest which accrue during the period of the loan. All short
sales will be fully collateralized. The Large Cap Growth Fund and Mid Cap Growth
Fund may only engage in short sales against the box, which involves selling a
security the Fund holds in its portfolio for delivery at a specified date in the
future. A Fund will not engage in short sales or short sales against the box if
immediately following such transaction the aggregate market value of all
securities sold short and sold short against the box would exceed 10% of the
Fund's net assets (taken at market value).

MONEY MARKET SECURITIES OF FOREIGN ISSUERS

Foreign money market instruments utilized by certain of the Funds will be
limited to: (i) obligations of, or guaranteed by, a foreign government, its
agencies or instrumentalities; (ii) certificates of deposit, bankers'
acceptances, short-term notes, negotiable time deposits and other obligations of
the ten largest banks in each foreign country, measured in terms of net assets;
and (iii) other short-term unsecured corporate obligations (usually 1 to 270 day
commercial paper) of foreign companies. For temporary purposes or in light of
adverse foreign political or economic conditions, the Funds may invest in
short-term high quality foreign money market securities without limitation.

INVESTMENT ADVISER

VALIC is a stock life insurance company organized on May 1, 1969 under the
Texas Insurance Code as a successor to The Variable Annuity Life Insurance
Company of America, a District of Columbia insurance company organized in 1955.
VALIC is an indirect wholly-owned subsidiary of American General Corporation,
Houston, Texas. Members of the American General Corporation group of companies
operate in each of the 50 states, the District of Columbia, and Canada and
collectively engage in substantially all forms of financial services. American
General Corporation was incorporated as a Texas business corporation on February
26, 1980 as the successor to American General Life Insurance Company (organized
in 1926) as the result of a corporate reorganization completed on July 1, 1980.
VALIC serves as the investment adviser to each of the Funds pursuant to an
Investment Advisory Agreement with each Fund that was approved by the Board of
Trustees on August 26, 1998. Under the

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<PAGE> 328

Investment Advisory Agreement, each Fund pays VALIC an annual fee, payable
monthly, based on its average daily net asset value. For the fiscal period
ending October 31, 1999, the Funds paid the following advisory fees to VALIC:

<TABLE>
<CAPTION>
ADVISORY
FUND NAME FEES
- --------- ---------
<S> <C>
Stock Index Fund 29,869
Mid Cap Index Fund 17,492
Small Cap Index Fund 16,062
International Growth Fund 52,251
Large Cap Growth Fund 49,471
Mid Cap Growth Fund 54,371
Small Cap Growth Fund 62,829
International Value Fund 66,958
Large Cap Value Fund 35,427
Mid Cap Value Fund 51,545
Small Cap Value Fund 40,252
Socially Responsible Fund 15,928
Balanced Fund 59,766
High Yield Bond Fund 426,557
Strategic Bond Fund 31,224
Domestic Bond Fund 45,924
Core Bond Fund 1,551,018
Municipal Bond Fund 30,118
Money Market Fund 32,936
Municipal Money Market Fund 27,357
Growth Lifestyle Fund 6,889
Moderate Growth Lifestyle Fund 7,247
Conservative Growth Lifestyle Fund 7,049
</TABLE>

Pursuant to the Investment Advisory Agreement, the Series Company retains
VALIC to manage the investment of the assets of each Fund, maintain a trading
desk, and place orders for the purchase and sale of portfolio securities. As
investment adviser, VALIC obtains and evaluates as appropriate economic,
statistical, and financial information in order to formulate and implement
investment programs in furtherance of each Fund's investment objective(s) and
investment program. Pursuant to the Investment Advisory Agreements, VALIC
provides other services including furnishing the services of the President and
such other executives and clerical personnel as the Series Company requires to
conduct its day-to-day operations, to prepare the various reports and statements
required by law, and to conduct any other recurring or nonrecurring activity
which the Series Company may need to continue operations. The Investment
Advisory Agreement provides that the Series Company pay all expenses not
specifically assumed by VALIC under the Agreement. Examples of the expenses paid
by the Series Company include transfer agency fees, custodial fees, the fees of
outside legal and auditing firms, the costs of reports to shareholders and
expenses of servicing shareholder accounts (e.g., daily calculation of the net
asset value). The Series Company allocates advisory fees, SEC filing fees,
interest expenses and state filing fees, if any, to the Fund that incurs such
charges and allocates all other expenses among the Funds based on the net assets
of each Fund in relation to the net assets of the Series Company.
The Investment Advisory Agreement requires that VALIC's advisory fee be
reduced by any commissions, tender and exchange offer solicitation fees and
other fees, or similar payments (less any direct expenses incurred) received by
VALIC or its affiliates in connection with the purchase and sale of portfolio
investments of the Funds. In this regard, the Investment Advisory Agreement
requires VALIC to use its best efforts to recapture tender and exchange
solicitation offer fees for each Fund's benefits, and to advise the Series
Company's Board of Trustees of any other fees, or similar payments that it (or
any of its affiliates) may receive in connection with each Fund's portfolio
transactions or of other arrangements that may benefit any of the Funds or the
Series Company.

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<PAGE> 329

The Investment Advisory Agreement may be continued with respect to any
Fund if specifically approved, after the initial two year term, at least
annually by (a)(i) the Series Company's Board of Trustees or (ii) a majority of
that Fund's outstanding voting securities (as defined by the 1940 Act), and (b)
the affirmative vote of a majority of the trustees who are not parties to the
agreement or "interested persons" of any such party (as defined by the 1940 Act)
by votes cast in person at a meeting called for this purpose. The Investment
Advisory Agreement also provides that it shall terminate automatically if
assigned. The Investment Advisory Agreement may be terminated as to any Fund at
any time by the Series Company's Board of Trustees, by vote of a majority of the
Fund's outstanding voting securities, or by VALIC, on not more than 60 days'
written notice, nor less than 30 days' written notice, or upon such shorter
notice as may be mutually agreed upon, without the payment of any penalty.
Additionally the Investment Advisory Agreement provides that VALIC shall not be
liable to the Series Company, or any shareholder in the Series Company, for any
act or omission in rendering services under the Agreement, or for any losses
sustained in the purchase, holding, or sale of any portfolio security, so long
as there has been no willful misfeasance, bad faith, negligence, or reckless
disregard of obligations or duties on the part of VALIC.
Pursuant to an Accounting Services Agreement ("Agreement"), VALIC provides
accounting services to the Series Company. The Agreement provides that the
Series Company will pay to VALIC an annual fee payable monthly based on average
daily net assets for providing the accounting services.

INVESTMENT SUB-ADVISERS

Pursuant to Investment Sub-advisory Agreements with each Sub-adviser,
VALIC has engaged American General Investment Management, L.P. ("AGIM") to
provide sub-advisory services to High Yield Bond Fund, Strategic Bond Fund, Core
Bond Fund, Municipal Bond Fund, Municipal Money Market Fund, Stock Index Fund,
Mid Cap Index Fund, Small Cap Index Fund and for a portion of the Small Cap
Value Fund. Capital Guardian Trust Company ("Capital Guardian") provides
sub-advisory services for the International Value Fund, the Domestic Bond Fund
and the Balanced Fund, Jacobs Asset Management provides sub-advisory services
for the International Growth Fund, State Street Bank and Trust Company/State
Street Global Advisors ("State Street Global Advisors") provides sub-advisory
services for the Large Cap Value Fund, Goldman Sachs Asset Management ("GSAM")
provides sub-advisory services for the Large Cap Growth Fund and Neuberger
Berman Management Inc. ("N B Management") provides sub-advisory services for the
Mid Cap Value Fund pursuant to separate Sub-advisory Agreements. Brown Capital
Management, Inc. ("Brown Capital Management") provides sub-advisory services for
the Mid Cap Growth Fund, Fiduciary Management Associates, Inc. ("FMA") provides
sub-advisory services for a portion of the Small Cap Value Fund, J.P. Morgan
Investment Management, Inc. ("JP Morgan") provides sub-advisory services for the
Small Cap Growth Fund and T. Rowe Price Associates, Inc. ("T. Rowe") provides
sub-advisory services for the Science & Technology Fund pursuant to separate
sub-advisory Agreements, as well. AGIM, Capital Guardian, Jacobs Asset
Management, State Street Global Advisors, GSAM, N&B Management, Brown Capital
Management, FMA, JP Morgan and T. Rowe (collectively, the "Sub-advisers") will
be subject to the control, supervision and direction of VALIC, which will retain
responsibility for the overall management of the Funds to which these companies
provide sub-advisory services (collectively, the "Sub-advised Funds").
In selecting Sub-advisers, the Series Company's Trustees carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-adviser, (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-adviser's personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid to each Sub-adviser.
The Series Company was issued an exemptive order by the SEC on September
9, 1998 for an exemption (the "Exemption") from certain provisions of the 1940
Act which would otherwise require VALIC to obtain formal shareholder approval
prior to engaging and entering into sub-advisory agreements with Sub-advisers.
The relief is based on the conditions set forth in the Exemption that, among
other things; (1) VALIC will select, monitor, evaluate and allocate assets to
the Sub-advisers and oversee Sub-advisers compliance with the relevant Fund's
investment objective, policies and restrictions; (2) before a Fund may rely on
the Exemption, the Exemption must be approved by the shareholders of the Funds
operating under the Exemption; (3) the Series Company will provide to
shareholders certain information about a new Sub-adviser; (4) the Series Company
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<PAGE> 330

will disclose in its Prospectus the existence, substance and effect of the
Exemption; and (5) the Trustees, including a majority of the "non-interested"
Trustees, must approve each sub-advisory agreement in the manner required under
the 1940 Act. Any changes to the Investment Advisory Agreement between the
Series Company and VALIC would still require shareholder approval. As required
by the Exemption, the initial shareholder of each Fund on October 7, 1998,
consented to permit VALIC to terminate, replace or add Sub-advisers and to enter
into sub-advisory agreements with Sub-advisers upon approval of the Board of
Trustees but without formal shareholder approval.
Pursuant to the Investment Sub-advisory Agreements and subject to VALIC's
control, supervision and direction, the Sub-advisers will manage the investment
and reinvestment of the assets, other than cash, of the Sub-advised Funds,
including the evaluation of pertinent economic, statistical, financial and other
data, and the determination of industries and companies to be represented in the
Sub-advised Funds. Further, the Sub-advisers will maintain a trading desk and
place orders for the purchase and sale of portfolio investments for the
Sub-advised Funds, accounts with brokers and dealers selected by the
Sub-advisers, or arrange for any other entity to provide a trading desk and to
place orders with brokers and dealers selected by the Sub-advisers and VALIC.
The Investment Sub-advisory Agreements provide that the Sub-advisers will
bear the expense of discharging their responsibilities.
VALIC shall pay to AGIM, for the services rendered and expenses paid by
AGIM, a monthly fee computed at the annual rate of 0.25% of the first $200
million, 0.20% of the next $300 million and 0.15% of average daily net asset
values on the excess over $500 million for each of the Core Bond Fund, the
Municipal Bond Fund and the Municipal Money Market Fund. With respect to the
Strategic Bond Fund, VALIC pays AGIM, a monthly fee computed at the annual rate
of 0.35% of the first $200 million, 0.25% of the next $300 million and 0.20% of
average daily net assets over $500 million. For the High Yield Bond Fund, VALIC
pays AGIM, a monthly fee computed at the annual rate of 0.45% of the first $200
million, 0.35% of the next $300 million and 0.30% of average daily net assets
over $500 million.
VALIC shall pay to Brown Capital Management, for the services rendered to
the Mid Cap Growth Fund and expenses paid by Brown Capital Management, a monthly
fee computed at the annual rate of 0.40% of the first $25 million, 0.30% of the
next $25 million and 0.20% of average daily net asset values on the excess over
$50 million.
VALIC shall pay to Capital Guardian, for the services rendered and
expenses paid by Capital Guardian, a quarterly fee computed at the annual rate
of 0.75% of the first $25 million, 0.60% of the next $25 million, 0.425% of the
next $200 million and 0.375% of average daily net assets values on the excess
over $250 million of the International Value Fund, 0.35% of the first $50
million, 0.20% of the next $50 million, 0.18% of the next $200 million and 0.15%
of average daily net asset values on the excess over $300 million of the
Domestic Bond Fund and 0.55% of the first $25 million, 0.40% of the next $25
million and 0.20% of average daily net asset values on the excess over $50
million of the Balanced Fund. Capital Guardian aggregates fees with respect to
the International Value Fund, the Domestic Bond Fund and the Balanced Fund and
applies a 5% discount to all fees if total fees are between $1.25 million and $4
million, a 7.5% discount to all fees if total fees are between $4 million and $8
million, a 10% discount to all fees if total fees are between $8 million and $12
million and a 12.5% discount to all fees if total fees exceed $12 million.
VALIC shall pay to FMA, for the services rendered to the portion of the
Small Cap Value Fund that it manages and expenses paid by FMA, a monthly fee
computed at the annual rate of 0.50% of the first $50 million and 0.40% of
average daily net asset values on the excess over $50 million.
VALIC shall pay to GSAM, for the services rendered to the Large Cap Growth
Fund and expenses paid by GSAM, a monthly fee computed at the annual rate of
0.30% of average daily net asset values of the Large Cap Growth Fund.
VALIC shall pay to JP Morgan, for the services rendered to the Small Cap
Growth Fund and expenses paid by JP Morgan, a monthly fee computed at the annual
rate of 0.60% of average daily net asset values of the Small Cap Growth Fund.
VALIC shall pay to Jacobs Asset Management, for the services rendered to
the International Growth Fund and expenses paid by Jacobs Asset Management, a
monthly fee computed at the annual rate of 0.65% of the first $100 million and
0.55% of average daily net asset values on the excess over $100 million.

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<PAGE> 331

VALIC shall pay to N&B Management, for the services rendered to the Mid
Cap Value Fund and expenses paid by N&B Management, a monthly fee computed at
the annual rate of 0.50% of the first $100 million, 0.475% of the next $150
million, 0.45% of the next $250 million, 0.425% of the next $250 million and
0.40% of average daily net asset values on the excess over $750 million.
VALIC shall pay to State Street Global Advisors, for the services rendered
to the Large Cap Value Fund and expenses paid by State Street, a monthly fee
computed at the annual rate of 0.25% of average daily net asset values of the
Large Cap Value Fund, but in no event less than $50,000 per year.
VALIC shall pay to T. Rowe Price, for the services rendered to the Science
& Technology Fund and expenses paid by T. Rowe Price, a monthly fee based on
average daily net asset values of the Science & Technology Fund. The fee shall
be computed at the annual rate of 0.60% on the first $500 million, and 0.55% on
the assets over $500 million.
The Investment Sub-advisory Agreements may be continued with respect to
any of the Funds if approved, after the initial two year term, at least annually
by the vote of the Series Company's Board of Trustees who are not parties to the
Investment Sub-advisory Agreements or interested persons of any such parties,
cast in person at a meeting called for the purpose of voting on such approval
and by a vote of a majority of the Series Company's Board of Trustees or a
majority of the relevant Fund's outstanding voting securities.
Subject to the Exemption, the Investment Sub-advisory Agreements may be
terminated at any time by VALIC, the relevant Sub-adviser, the Series Company's
Board of Trustees, or by vote of a majority of the outstanding voting securities
of the relevant Sub-advised Fund, on not more than 60 days' nor less than 30
days' written notice to the other entities, or upon such shorter notice as may
be mutually agreed upon. Such termination shall be without the payment of any
penalty.
The Investment Sub-advisory Agreements provide that the Sub-advisers shall
not be liable to VALIC, the Series Company or to any shareholder of the Series
Company for any act or omission in rendering services under the Investment
Sub-advisory Agreements or for any losses sustained in the purchase, holding or
sale of any portfolio security, so long as there has been no willful
misfeasance, bad faith, negligence or reckless disregard of obligations or
duties on the part of the Sub-advisers.

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<PAGE> 332

OTHER SERVICE PROVIDERS

National Financial Data Services, Inc., 330 West 9th Street, Kansas City,
Missouri 64105, is the "Transfer Agent") for the Funds. The Transfer Agent
receives a fee from each Fund for services provided. For the fiscal period
ending October 31, 1999, the Funds paid transfer agent fees of:

<TABLE>
<CAPTION>
TRANSFER
FUND NAME AGENCY FEES
- --------- -----------
<S> <C>
Stock Index Fund 28,946
Mid Cap Index Fund 17,009
Small Cap Index Fund 15,744
International Growth Fund 15,736
Large Cap Growth Fund 23,366
Mid Cap Growth Fund 22.972
Small Cap Growth Fund 19,233
International Value Fund 17,843
Large Cap Value Fund 19,156
Mid Cap Value Fund 18,640
Small Cap Value Fund 14,755
Socially Responsible Fund 17,278
Balanced Fund 19,973
High Yield Bond Fund 161,837
Strategic Bond Fund 14,255
Domestic Bond Fund 20,582
Core Bond Fund 850,770
Municipal Bond Fund 16,399
Money Market Fund 34,592
Municipal Money Market Fund 14,865
Growth Lifestyle Fund -0-
Moderate Growth Lifestyle Fund -0-
Conservative Growth Lifestyle Fund -0-
</TABLE>

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<PAGE> 333

The Series Company has entered into an Accounting Services Agreement with
VALIC which appointed VALIC as accounting services agent. Under the Agreement,
VALIC provides accounting services and administrative services to each Fund. For
the fiscal year ended October 31, 1999, the Funds paid VALIC the following fees
for these services:

<TABLE>
<CAPTION>
ACCOUNTING ADMINISTRATIVE
FUND NAME SERVICES SERVICE FEE
- --------- ---------- --------------
<S> <C> <C>
Stock Index Fund 3,323 -0-
Mid Cap Index Fund 1,878 -0-
Small Cap Index Fund 1,725 -0-
International Growth Fund 1,746 3,275
Large Cap Growth Fund 2,703 4,169
Mid Cap Growth Fund 2,513 8,118
Small Cap Growth Fund 2,222 4,305
International Value Fund 2,013 3,702
Large Cap Value Fund 2,130 3,481
Mid Cap Value Fund 2,066 3,579
Small Cap Value Fund 1,614 3,025
Socially Responsible Fund 1,915 4,044
Balanced Fund 2,245 3,594
High Yield Bond Fund 18,307 213
Strategic Bond Fund 1,565 3,141
Domestic Bond Fund 2,300 4,857
Core Bond Fund 97,007 214
Municipal Bond Fund 1,811 -0-
Money Market Fund 3,958 4,271
Municipal Money Market Fund 1,645 -0-
Growth Lifestyle Fund -0- -0-
Moderate Growth Lifestyle Fund -0- -0-
Conservative Growth Lifestyle Fund -0- -0-
</TABLE>

The Series Company has entered into an Administrative Services Agreement
with VALIC Retirement Services Company ("VRSCO") and VALIC Investment Services
Company ("VISCO") for the provision of recordkeeping and shareholder services to
retirement and employee benefit plans purchasing Class I shares. Under the terms
of the Service Agreement, the Series pays either VRSCO or VISCO a fee on Class I
Shares equal to 0.25% of average net assets of each Fund's Class I shares,
except for the Lifestyle Funds. For the fiscal year ended October 31, 1999, the
Funds paid $53,988 to VRSCO and VISCO for these services.

PORTFOLIO TRANSACTIONS AND BROKERAGE

As investment adviser to the Series Company, VALIC has responsibility for
placing (and deciding when to place) orders for the purchase and sale of
investments for the portfolio of each Fund, selecting brokers or dealers to
handle these transactions, and negotiating commissions on these transactions.
VALIC utilizes the assistance of Sub-advisers in selecting brokers or dealers to
handle transactions for the Sub-advised Funds. The Sub-advisers may employ
affiliated brokers for portfolio transactions under circumstances described in
the Prospectus under the heading "Welcome to American General Corporation."
Virtually all of the over-the-counter transactions by the actively managed
portion of the Small Cap Value Fund, High Yield Bond Fund, Strategic Bond Fund,
Domestic Bond Fund, Municipal Bond Fund and Mid Cap Growth Fund are principal
transactions with issuers and dealers at net prices which entail no brokerage
commissions. The International Value Fund, Mid Cap Value Fund and Socially
Responsible Fund each purchase and sell most of their portfolio securities on a
national securities exchange on an agency basis. The International Growth Fund,
Balanced Fund, Mid Cap Growth Fund, Small Cap Value Fund, and Large Cap Value
Fund engage in over-the-counter transactions with principals and transactions
with national securities

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<PAGE> 334

exchanges on an agency basis. The Series Company normally enters into principal
transactions directly with the issuer or the market-maker.
When the Series Company purchases or sells securities or financial futures
contracts on an exchange, it pays a commission to any FCM or broker executing
the transaction. When the Series Company purchases securities from the issuer,
an underwriter usually receives a commission or "concession" paid by the issuer.
When the Series Company purchases securities from a market-maker, it pays no
commission, but the price includes a "spread" or "mark-up" (between the bid and
asked price) earned by the market-making dealer on the transaction.
In purchasing and selling each Fund's portfolio securities, it is the
policy of VALIC and the Sub-advisers (collectively, the "Advisers") to seek the
best execution at the most favorable price through responsible broker-dealers
and, in the case of agency transactions, at competitive commission rates. When
selecting brokers or dealers, and in negotiating prices and commissions, the
Advisers consider such factors as: the broker or dealer's reliability; the
quality of the broker or dealer's execution services on a continuing basis; the
rate of the commission; the size and difficulty of the order and the timeliness
of execution; the reliability, integrity, financial condition, general
execution, and operational capabilities of that firm and competing
broker-dealers. In over-the-counter transactions, the Advisers place orders
directly with the principal market-maker unless they believe the Series Company
can obtain a better price (or receive better execution of orders) from a broker
on an agency basis. In transactions executed on securities or commodities
exchanges, the Advisers seek the best overall price and execution at the most
favorable commission rate (except when higher brokerage commissions are paid to
obtain brokerage and research services, as explained below). When the Advisers
believe that more than one firm meets these criteria the Advisers may prefer
brokers who provide the Advisers or the Series Company with brokerage and
research services, described below.
The Advisers may cause a Fund to pay a broker-dealer a commission (for
executing a securities transaction) that is greater than the commission another
broker-dealer would have received for executing the same transaction, if the
Advisers determine in good faith that the greater commission paid to the first
broker-dealer is reasonable in relation to the value of brokerage and research
services provided to the Advisers viewed in terms of either that particular
transaction or the overall responsibilities of the Advisers.
The Advisers receive a wide range of research services from
broker-dealers, including: information on securities markets, the economy and
individual companies; statistical information; accounting and tax law
interpretations; technical market action; pricing and appraisal services; and
credit analyses. Research services are received by the Advisers primarily in the
form of written reports, telephone contacts, personal meetings with securities
analysts, corporate and industry spokespersons, and access to various
computer-generated data.
The Advisers have no agreements or understandings with broker-dealers by
which specific amounts of transactions or commissions are directed to specific
broker-dealers.
The Advisers evaluate whether such research services provide lawful and
appropriate assistance to them in the performance of their investment
decision-making responsibilities, for the Series Company. The Advisers will not
cause the Series Company to pay higher commissions without first determining, in
good faith, that the cost is reasonable considering the brokerage and research
services provided, with respect to either the particular transaction or the
Advisers' overall responsibilities with respect to accounts for which they
exercise investment discretion. The Advisers receive research services at no
cost and cannot assign any specific monetary value to them; nevertheless, the
Advisers believe these supplemental investment research services are essential
to the Advisers' ability to provide high quality portfolio management to the
Funds. Research services furnished by broker-dealers through whom a Fund effects
securities transactions may be used by the Advisers in servicing all of the
Funds, and the Advisers may not use all such services in managing the Funds.
The amount of brokerage commissions paid, the quality of execution, the
nature and quality of research services provided, and the amount of commissions
paid to firms providing research services are reviewed

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<PAGE> 335

quarterly by the Series Company's Board of Trustees. For the fiscal year ended
October 31, 1999, the Funds paid aggregate brokerage commissions as follows:

<TABLE>
<CAPTION>
BROKERAGE
FUND NAME COMMISSIONS
- --------- -----------
<S> <C>
Balanced Fund 9,772
Conservative Growth Lifestyle Fund -0-
Core Bond Fund -0-
Domestic Bond Fund -0-
Growth Lifestyle Fund -0-
High Yield Bond Fund -0-
International Growth Fund 51,865
International Value Fund 27,694
Large Cap Growth Fund 13,376
Large Cap Value Fund 11,942
Mid Cap Growth Fund 14,845
Mid Cap Index Fund 4,880
Mid Cap Value Fund 41,428
Moderate Growth Lifestyle Fund -0-
Money Market Fund -0-
Municipal Bond Fund -0-
Municipal Money Market Fund -0-
Small Cap Growth Fund 10,252
Small Cap Index Fund 5,721
Small Cap Value Fund 17,835
Socially Responsible Fund 4,603
Stock Index Fund 5,986
Strategic Bond Fund -0-
</TABLE>

Following are those Funds for which brokerage commissions were paid to
brokers selected on the basis of the quality of the execution together with
research services provided to VALIC or a Sub-Adviser along with the approximate
commissions paid and the related transaction totals: Mid Cap Growth Fund,
$1,135, $24,923; Small Cap Value Fund, $4,179, $8,532,812.

Occasions may arise when one or more of the Funds or other accounts that
may be considered affiliated persons of the Funds under the 1940 Act desire to
purchase or sell the same portfolio security at approximately the same time. On
those occasions when such simultaneous purchase and sale transactions are made
such transaction will be allocated in an equitable manner according to written
procedures approved by the Series Company's Board of Trustees. Specifically,
such written procedures provide that in allocating purchase and sale
transactions made on a combined basis the parties will seek to achieve the same
net unit price of securities for each Fund or other account and to allocate as
nearly as practicable, such transactions on a pro-rata basis substantially in
proportion to the amounts ordered to be purchased and sold by each Fund or other
account. In some cases, this procedure could have an adverse effect on the price
or quantity of securities available to the Funds. However, the Funds may,
alternatively, benefit from lower broker's commissions and/or correspondingly
lower costs for brokerage and research services by engaging in such combined
transactions. In the Advisers' opinion, the results of this procedure will, on
the whole, be in the best interest of each Fund.

For the fiscal year ended October 31, 1999, the Series Company did not pay
brokerage commissions to any of the Funds' affiliated brokers.

DISTRIBUTION AND SERVICE PLAN

American General Distributors, Inc. (the "Distributor") acts as the
principal underwriter of the Series Company's shares. Effective May 1, 1999,
American General Distributors, Inc. replaced VALIC Investment Services Company
("VISCO") as the Distributor. The Distributor has the exclusive right to
distribute shares of the Series Company. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Series Company is required
to take and pay for only such shares of the Series Company as

65
<PAGE> 336

may be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Distributor's address is the same as that of VALIC. For
the fiscal year ended October 31, 1999, the Funds paid net commissions to the
Distributor as follows:
$4,746 for the six months ended April 30, 1999 to VISCO and $19,414 for
the period May 1, 1999 to October 31, 1999 to American General Distributors,
Inc.
The Series Company, with respect to each Fund (except for the Lifestyle
Funds), has adopted a Distribution and Service Plan for Class A shares and Class
B shares (the "Plan"). The Plan provides that the Fund may spend a portion of
the Fund's average daily net assets attributable to each class of shares in
connection with the provision of ongoing distribution and shareholders services.
The Plan shall continue in force, after the initial two year period, from year
to year, provided that such continuance is approved at least annually (a)(i) by
the Board of Trustees of the Series Company, or (ii) by vote of a majority of
the Series Company's outstanding voting securities (as defined in the 1940 Act)
and (b) by the affirmative vote of a majority of the Series Company's Trustees
who are not interested persons of the Series Company, as defined in the 1940
Act, by votes cast in person at a meeting called for such purpose. The Plan may
be terminated at any time, without penalty, by a vote of the Board of Trustees
of the Series Company or by a vote of a majority of the outstanding voting
securities of the Series Company, or by the Distributor, on sixty days' written
notice to the other party. The Plan also automatically terminates in the event
of an assignment.
Under the Plan, the Distributor must submit quarterly reports to the Board
of Trustees of the Series Company, setting forth separately by Fund and class of
shares all amounts paid under the Plan and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. Pursuant to the Plan, the
Distributor pays promotional and advertising expenses and the cost of printing
prospectuses used to offer and sell shares of the Series Company (after
typesetting and printing the copies required for regulatory filings by the
Series Company). Promotional and advertising expenses include any expense
related to distribution of shares of the Funds or attributable to any activity
primarily intended to result in the sale of shares, including, for example, the
preparation, printing, and distribution of advertising and sales literature
(including reports to shareholders used as sales literature). The Series Company
pays all expenses related to the registration of Fund shares under federal and
state laws, including registration and filing fees, the cost of preparing the
prospectus for such purpose, and related expenses of outside legal and auditing
firms. During the fiscal year ended October 31, 1999, the Funds paid the
following fees for distribution and servicing:

<TABLE>
<CAPTION>
DISTRIBUTION FEES
-----------------
FUND NAME CLASS A CLASS B
- --------- ------- -------
<S> <C> <C>
Stock Index Fund 9,224 65,092
Mid Cap Index Fund 7,078 32,282
Small Cap Index Fund 6,790 28,565
International Growth Fund 3,401 16,888
Large Cap Growth Fund 4,860 34,739
Mid Cap Growth Fund 3,680 21,310
Small Cap Growth Fund 4,060 22,970
International Value Fund 3,709 18,850
Large Cap Value Fund 4,037 24,584
Mid Cap Value Fund 3,825 22,257
Small Cap Value Fund 3,172 15,450
Socially Responsible Fund 3,693 18,075
Balanced Fund 3,924 29,389
High Yield Bond Fund 231 3,087
Strategic Bond Fund 3,142 14,194
Domestic Bond Fund 3,783 26,519
Core Bond Fund 297 1,749
Municipal Bond Fund 6,741 33,044
Money Market Fund 7,535 34,961
Municipal Money Market Fund 6,983 26,326
</TABLE>

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DETERMINATION OF NET ASSET VALUE

Equity investments (including common stocks, preferred stocks, convertible
securities, and warrants) and call options written on all portfolio investments
listed or traded on a national exchange are valued at their last sale price on
that exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
and call options written on portfolio securities are valued at the last sale
price on the NASDAQ (National Association of Securities Dealers Automated
Quotations) National Market System. In the absence of any National Market System
sales on that day, equity securities are valued at the last reported bid price
and call options written on all portfolio securities for which other
over-the-counter market quotations are readily available are valued at the last
reported asked price.
U.S. Treasury securities and other obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, are valued at representative
quoted prices. Such quotations generally are obtained from government securities
pricing services; however, in circumstances where it is deemed appropriate to do
so, quotations may be obtained from dealers in government securities.
The Board of Trustees also has authorized the Funds to value certain fixed
income securities by reference to valuations obtained from pricing services
which take into account appropriate factors such as institution-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data in determining valuations
of such securities, without extensive reliance upon quoted prices, since such
valuations are believed by the Board of Trustees to more accurately reflect the
fair value of such securities.
Publicly-traded corporate bonds are valued at prices obtained from pricing
services, such as Merrill Lynch or Interactive Data Services, or other
representative services.
Short-term fixed income securities for which market quotations are readily
available are valued at the last reported bid price, except for those with a
remaining maturity of 60 days or less which are valued by the amortized cost
method (unless, due to special circumstances, the use of such a method with
respect to any security would result in a valuation which does not approximate
fair market value).
Convertible bonds are valued at prices obtained from one or more of the
major dealers in such bonds. Where there is a discrepancy between dealers or
when no quotes are readily available, values may be adjusted based on a
combination of yields and premium spreads to the underlying common stock.
Portfolio securities that are primarily traded on foreign securities
exchanges are generally valued at the last sale price on the exchange where such
security is primarily traded. All foreign securities traded on the
over-the-counter market are valued at the last sale quote, if market quotations
are available, or the last closing bid price, if there is no active trading in a
particular security for a given day. Where market quotations are not readily
available for such foreign over-the-counter securities, then such securities
will be valued in good faith by a method that the Series Company's Board of
Trustees, or its delegates, believes accurately reflects fair value. Quotations
of foreign securities in foreign currencies are converted, at current exchange
rates, to their U.S. dollar equivalents in order to determine their current
value. In addition, because of the need to value foreign securities (other than
ADRs) as of the close of trading on various exchanges and over-the-counter
markets throughout the world, the calculation of the net asset value of Funds
investing in such foreign securities may not take place contemporaneously with
the valuation of such foreign securities in those Funds' portfolios.
Options purchased by the Funds (including options on financial futures
contracts, stock indices, foreign currencies, and securities) listed on national
securities exchanges are valued on the exchange where such security is primarily
traded.
Over-the-counter options purchased or sold by the Funds are valued based
upon prices provided by market-makers in such securities or dealers in such
currencies.
Exchange-traded financial futures contracts (including interest rate
futures contracts, stock index futures contracts, and currency futures
contracts) are valued at the settlement price for such contracts established
each day by the board of trade or exchange on which such contracts are traded.
Unlisted financial futures contracts are valued based upon prices provided by
market-makers in such financial futures contracts.
All of the assets of the Municipal Money Market Fund and the Money Market
Fund are valued on the basis of amortized cost. Under the amortized cost method
of valuation, securities are valued at a price on a given date, and thereafter a
constant accretion of any discount or amortization of any premium to maturity is
assumed, regardless of the impact of fluctuating interest rates on the market
value of the security. While this

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<PAGE> 338

method provides certainty in valuation it may result in periods in which value
as determined by amortized cost is higher or lower than the price a Fund would
receive if it sold the security. During such periods, the yield to investors may
differ somewhat from that obtained by a similar fund or portfolio which uses
available market quotations to value all of its portfolio securities. The Series
Company's Board of Trustees has established procedures reasonably designed,
taking into account current market conditions and Municipal Money Market Fund's
and Money Market Fund's investment objective, to stabilize the net asset value
per share for purposes of sales and redemptions at $1.00. These procedures
include review by the Board, at such intervals as it deems appropriate, to
determine the extent, if any, to which the net asset value per share calculated
by using available market quotations deviates from $1.00 per share. In the event
such deviation should exceed one half of one percent, the Board will promptly
consider initiating corrective action. If the Board believes that the extent of
any deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing shareholders, it will take
such steps as it considers appropriate to eliminate or reduce these consequences
to the extent reasonably practicable. Such steps may include: selling portfolio
securities prior to maturity; shortening the average maturity of the portfolio;
withholding or reducing dividends; or utilizing a net asset value per share
determined from available market quotations. Even if these steps were taken, the
Municipal Money Market Fund's and Money Market Fund's net asset value might
still decline.

PURCHASING AND SELLING FUND SHARES

PURCHASE OF SHARES

Please see the Prospectus for a complete discussion of how to buy shares.
Shares of the Funds are sold in a continuous offering and may be purchased on
any business day through the Transfer Agent or your registered representative.

SELLING FUND SHARES
(APPLICABLE TO ALL CLASSES OF SHARES)

Please see the Prospectus for a complete discussion of how to sell shares.

CONTINGENT DEFERRED SALES CHARGE
(APPLICABLE TO CLASS A SHARES)

For investments of $1,000,000 or more of Class A Shares of a Fund
("Qualified Purchaser"), the initial sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of 1.00% is imposed on
redemptions made within the first year of the purchase and 0.50% within the
second year. If a CDSC -- Class A is imposed upon redemption, the amount of the
CDSC -- Class A will be equal to the lesser of 1.00% or 0.50%, respectively, of
the net asset value of the shares at the time of purchase or 1.00% or 0.50%,
respectively, of the net asset value of the shares at the time of redemption.
The CDSC -- Class A will be imposed only if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one or two year period prior to the redemption. No CDSC
- -- Class A will be imposed on exchanges between Funds. For purposes of the CDSC
- -- Class A, when shares of one Fund are exchanged for shares of another Fund,
the purchase date for the shares of the Fund exchanged into will be assumed to
be the date on which shares were purchased in the Fund from which the exchange
was made. If the exchanged shares themselves are acquired through an exchange,
the purchase date is assumed to carry over from the date of the original
election to purchase shares subject to a CDSC -- Class A rather than pay an
initial sales charge. In determining whether a CDSC -- Class A is payable, it is
assumed that shares held the longest are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an account of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of a Fund described in the Prospectus.

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<PAGE> 339

EXCHANGE PRIVILEGE

By use of the exchange privilege, as discussed in the Prospectus, the
investor authorizes the Transfer Agent to act on telephonic, telegraphic or
written exchange instructions from any person representing himself or herself to
be the investor or the agent of the investor and believed by the Transfer Agent
to be genuine. The Series Company, the Distributor and the Transfer Agent employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither the Series Company, the Distributor nor the Transfer Agent will be
liable for following telephone instructions which it reasonably believes to be
genuine. The Series Company, the Distributor and the Transfer Agent may be
liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed.

TAXATION

The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Series Company. This summary does
not address special tax rules applicable to certain classes of investors, such
as tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Statement of Additional Information, which are subject to change.

GENERAL

Each Fund is a separate taxable entity. Each Fund has elected to be
treated and intends to qualify for each taxable year as a regulated investment
company under Subchapter M of the Code.
If a Fund does not qualify as a regulated investment company, it will be
taxable on all of its investment company taxable income and net capital gain at
corporate rates, and its distributions to shareholders will be taxable as
ordinary dividends to the extent of its current and accumulated earnings and
profits.

FOREIGN TAX ON INCOME

If a Fund invests in foreign securities, the earnings may be subject to
foreign taxes on income (possibly including, in some cases, capital gains) from
foreign securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes in some cases. If, as may occur for some Funds,
more than 50% of a Fund's total assets at the close of any taxable year consists
of stock or securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service pursuant to which shareholders of the Fund
would be required to (i) include in ordinary gross income (in addition to
taxable dividends actually received) their pro rata shares of foreign income
taxes paid by the Fund that are treated as income taxes under U.S. tax
regulations (which excludes, for example, stamp taxes, securities transaction
taxes, and similar taxes) even though not actually received by such
shareholders, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them.
If a Fund makes this election, its respective shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of foreign taxes paid by a Fund,
although such shareholders will be required to include their shares of such
taxes in gross income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by a Fund, the amount of
the credit that may be claimed in any year may not exceed the same proportion of
the U.S. tax against which such credit is taken which the shareholder's taxable
income from foreign sources (but not in excess of the shareholder's entire
taxable income) bears to his entire taxable income.

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<PAGE> 340

For this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by a Fund will generally not be treated as income from
foreign sources. This foreign tax credit limitation may also be applied
separately to certain specific categories of foreign-source income and the
related foreign taxes. As a result of these rules, which have different effects
depending upon each shareholder's particular tax situation, certain shareholders
of a Fund which has made this election may not be able to claim a credit for the
full amount of their proportionate share of the foreign taxes paid by such Fund
even if the election is made by such a Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that a Fund files the election described above, its shareholders
will be notified of the amount of (i) each Shareholder's pro rata share of
qualified foreign taxes paid by a Fund and (ii) the portion of Fund dividends
which represents income from each foreign country. The other Funds will not be
entitled to elect to pass foreign taxes and associated credits or deductions
through to their shareholders because they will not satisfy the 50% requirement
described above. If a Fund cannot or does not make this election, it may deduct
such taxes in computing the amount it is required to distribute.

TAX EXEMPT INFORMATION

The Municipal Bond Fund and the Municipal Money Market Fund intend to
qualify to pay "exempt-interest dividends," as that term is defined in the Code.
Because the Municipal Bond Fund and the Municipal Money Market Fund will
primarily invest in municipal obligations, dividends from these Funds will
generally be exempt from regular federal income tax. Further, gain from a sale
or redemption of shares of the Municipal Bond Fund and the Municipal Money
Market Fund will be taxable to shareholders as capital gain even though the
increase in value of such shares is attributable to tax-exempt income. Thus, it
will normally be advantageous for the Municipal Bond Fund and the Municipal
Money Market Fund to declare exempt-interest dividends frequently.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued for private entities (but
not to certain tax-exempt organizations such as universities and non-profit
hospitals) is included as an item of tax preference in determining the amount of
a taxpayer's alternative minimum taxable income. To the extent that the
Portfolio receives income from municipal obligations treated as a tax preference
item for purposes of the alternative minimum tax, a portion of the dividends
paid by it, although otherwise exempt from federal income tax, will be taxable
to shareholders to the extent that their tax liability will be determined under
the alternative minimum tax. The Funds will supply shareholders with an annual
report indicating the percentage of portfolio income attributable to municipal
obligations subject to the alternative minimum tax. Additionally, taxpayers must
disclose to the Internal Revenue Service on their tax returns the entire amount
of tax-exempt interest (including exempt-interest dividends on shares of the
Portfolio) received or accrued during the year.
In addition, for corporations, the alternative minimum taxable income may
be increased by a percentage of the amount by which an alternative measure of
income ("adjusted current earnings," referred to as "ACE") exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the Portfolio, is included in calculating ACE. Taxpayers that may be subject to
the alternative minimum tax should consult their tax advisers before investing
in these Funds.
Shares of these Funds would not be a suitable investment for tax-exempt
institutions and may not be a suitable investment for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement accounts,
because such plans and accounts are generally tax-exempt and, therefore, would
not gain any additional benefit from the receipt of exempt-interest dividends
from the Portfolio. Moreover, subsequent distributions of such dividends to the
beneficiaries will be taxable.
In addition, the receipt of exempt-interest dividends from each of the
Funds affects the federal tax liability of certain foreign corporations, S
corporations and insurance companies. The Code may also require shareholders
that receive exempt-interest dividends to treat as taxable income a portion of
certain otherwise nontaxable social security and railroad retirement benefit
payments.

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<PAGE> 341

TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS

For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. Shareholders receiving a distribution in
the form of newly issued shares will be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
Distributions from investment company taxable income for the year will be
taxable as ordinary income. Capital gain dividends (i.e., dividends from net
capital gain) if designated as such in a written notice to shareholders, will be
taxed to shareholders as long-term capital gain regardless of how long shares
have been held by shareholders, but are not eligible for the dividends-received
deduction for corporations. Distributions, if any, that are in excess of a
Fund's current and accumulated earnings and profits will first reduce a
shareholder's tax basis in his shares and, after such basis is reduced to zero,
will generally constitute capital gains to a shareholder who holds his shares as
capital assets.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Distributions from such plans, or from
annuity contracts which may invest in these shares, are generally tax reported
to the participant as ordinary income taxable at the participant's marginal tax
rate for the year of the distribution to the participant, rather than as capital
gains or losses for the year of the sale or other disposition.

TAXPAYER IDENTIFICATION NUMBER CERTIFICATION REQUIRED

Each Fund may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including capital gain dividends)
and share redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to be the Fund is incorrect, or if (when required to do so) the payee
fails to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Any amounts withheld may be credited against a
shareholders' U.S. federal income tax liability.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.

NON-U.S. SHAREHOLDERS

The discussion above relates solely to U.S. federal income tax law as it
applies to "U.S. persons" subject to tax under such law. Shareholders who, as to
the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter case, the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by a
Fund which are designated as undistributed capital gains, to a non-U.S.
shareholder will not be subject to U.S. federal income or withholding tax unless
the distributions are effectively connected with the shareholder's trade or
business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. shareholders may also be subject to U.S. federal withholding tax
on deemed income resulting from

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<PAGE> 342
any election by a Fund to treat qualified foreign taxes it pays as passed
through to shareholders (as described above), but they may not be able to claim
a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a non-U.S. shareholder upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholders
trade or business in the U.S., or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the U.S. for 183
days or more during the taxable year and certain other conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or an
acceptable substitute may be subject to backup withholding at the rate of 31% on
reportable dividends and the redemption proceeds. Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and
non-U.S. tax consequences of ownership of shares of and receipt of distributions
from the Funds.

STATE AND LOCAL

Each Fund may be subject to state or local taxes in jurisdictions in which
such Fund may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.

TRUSTEES AND OFFICERS

The trustees, in addition to their functions set forth under "Investment
Adviser," review such actions and decide on general policy. The officers conduct
and supervise the daily business operations of the Series Company. All officers
are affiliates of VALIC and are located at 2929 Allen Parkway, Houston, Texas
77019, unless otherwise noted.
The Series Company has an Audit Committee. The Series Company's Audit
Committee consists of Messrs. Lancaster, Hackerman, Love, Maupin and Paulsen.
The Audit Committee recommends to the Board the selection of independent
auditors for the Series Company and reviews with such independent auditors the
scope and results of the annual audit, reviews the performance of the accounts,
and considers any comments of the independent auditors regarding the Series
Company's financial statements or books of account. The Series Company does not
have a standing nominating or compensation committee.
The trustees and officers of the Series Company and members of their
families, as a group, beneficially owned less than 1% of the shares of
beneficial interest of each Fund outstanding.

<TABLE>
<CAPTION>
NAME AND POSITION(S) PRINCIPAL OCCUPATION(S)
HELD WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- ------------------------------------------------------------
<S> <C>
Executive Vice President and Executive Vice President and Chief Financial Officer, VALIC
Trustee and AGAIC (1999-Present), Executive Vice President and Chief
Kent E. Barrett* Financial Officer, American General Life & Accident
2929 Allen Parkway Insurance Company ("AGLA") (1998-1999), Senior Vice
Houston, Texas 77019 President -- Finance and Treasurer, AGLA (1997-1998), Senior
Date of Birth: 09/20/56 Vice President, Controller and Treasurer, AGLA (1994-1997).

Trustee Retired Administrator; Formerly President, United Way of the
Dr. Judith L. Craven Texas Gulf Coast (1992-1998); Director, Houston Branch,
3212 Ewing St. Federal Reserve Bank of Dallas (1992-Present), Compaq
Houston, Texas 77004 Computer Corporation (1998-Present), Luby's Inc.
Date of Birth: 10/06/45 (1998-Present), A.H. Belo Corporation (journalism, TV and
radio) (1993-Present), and Sysco Corporation (marketing and
distribution of food) (1996-Present); Formerly, Board
Member, Sisters of Charity of the Incarnate Word
(1996-1999).
</TABLE>

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<PAGE> 343
<TABLE>
<CAPTION>
NAME AND POSITION(S) PRINCIPAL OCCUPATION(S)
HELD WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- ------------------------------------------------------------
<S> <C>
Trustee Professor and Head, Department of Neuroscience and Visscher
Dr. Timothy J. Ebner Chair of Physiology (1998-Present), Director, Graduate
17994 N.W. Union Blvd. Program in Neuroscience, University of Minnesota
Elk River, Minnesota 55330 (1991-1999). Formerly, Consultant to EMPI, Inc. (1994-1995)
Date of Birth: 07/15/49 and Medtronic Inc. (1997-1998) (manufacturers of medical
products).

Trustee Municipal Court Judge, Dallas, Texas (1995-Present);
Judge Gustavo E. Gonzales, Jr. Director, Downtown Dallas YMCA Board (1996-Present);
8320 Coolgreen Dr. Director, Dallas Easter Seals Society (1997-Present).
Dallas, Texas 75228 Formerly, private attorney (litigation) (1980-1995).
Date of Birth: 07/27/40

Trustee Chairman -- Scientific Advisory Board for The Robert A.
Dr. Norman Hackerman Welch Foundation (1983-Present); Director, Electrosource,
2001 Pecos Street Inc. (develops, manufactures and markets energy storage
Austin, Texas 78703 products); President Emeritus, Rice University, Houston,
Date of Birth: 03/02/12 Texas.

Chairman of the Board and President of American General Fund Group (1999-Present);
President Formerly, Executive Vice President, American General
Alice T. Kane* Investment Management, L.P. (1998-1999); Formerly, Executive
125 Maiden Lane Vice President, (1994-1998) and General Counsel (1986-1995)
New York, New York 10038 New York Life Insurance Company; Chair, MainStay Mutual
Date of Birth: 01/16/48 Funds (1994-1998). President of other investment companies
advised by VALIC.

Trustee Pastor Emeritus and Director of Planned Giving, First
Dr. John Wm. Lancaster Presbyterian Church, Houston Texas (1996-Present); Formerly,
4624 Braeburn Pastor, First Presbyterian Church, Houston, Texas.
Bellaire, Texas 77401
Date of Birth: 12/15/23

Trustee Retired. Formerly, Director, Mid-American (waste products)
Ben H. Love (1993- 1997); Formerly, Chief Executive, Boy Scouts of
4407 Eaton Circle America. (1985-1993).
Colleyville, Texas 76034
Date of Birth: 09/26/30

Trustee President, Meharry Medical College, Nashville, Tennessee
Dr. John E. Maupin, Jr. (1994- Present); Nashville Advisory Board Member, First
Meharry Medical College American National Bank (1996-Present); Director, Monarch
1005 D.B. Todd Blvd. Dental Corporation (1997- Present), LifePoint Hospitals,
Nashville, Tennessee 37208 Inc. (1998-Present).
Date of Birth: 10/28/46

Trustee Dean and Professor Emeritus, University of Arizona, Tucson,
Dr. F. Robert Paulsen Arizona. Formerly, Dean and Professor, University of
2801 N. Indian Ruins Connecticut, Storrs, Connecticut and Carnegie Fellow,
Tucson, Arizona 85715 University of Michigan, Ann Arbor, Michigan.
Date of Birth: 07/05/22

Vice President Associate General Counsel and Assistant Secretary, American
Pauletta P. Cohn General Life Companies (1998-Present), Senior Attorney,
Date of Birth: 06/06/48 American General (1993-1998).
</TABLE>

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<TABLE>
<CAPTION>
NAME AND POSITION(S) PRINCIPAL OCCUPATION(S)
HELD WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- ------------------------------------------------------------
<S> <C>
Vice President and Assistant Associate General Counsel, VALIC (1997-Present). Formerly,
Secretary Of Counsel, Winstead Sechrest and Minick P.C. (1997); Vice
Nori L. Gabert President and Associate General Counsel of Van Kampen
Date of Birth: 08/15/53 American Capital, Inc. (1981- 1996).

Assistant Vice President Senior Compliance Analyst, VALIC (1995-Present).
Cynthia A. Gibbons
Date of Birth: 12/06/67

Assistant Treasurer Vice President, Fund Accounting, AGIM (1999-Present).
Gregory R. Kingston Formerly, Assistant Treasurer First Investor Management
Date of Birth: 01/18/66 Company (1994-1999).

Vice President and Investment Trader -- VALIC (1991-Present).
Officer
Teresa S. Moro
Date of Birth: 08/14/60

Controller Associate Director of Fund Accounting, AGIM (1996-Present).
Kathryn A. Pearce Formerly, Supervisor, Mutual Fund Accounting, Van Kampen
Date of Birth: 02/05/47 American Capital, Inc. (1977-1996).

Assistant Treasurer Director -- Variable Product Accounting and Financial
Jaime M. Sepulveda Reporting, AGIM (1998-Present). Formerly, Accounting
Date of Birth: 01/09/52 Manager, Metro Networks, Inc. (1997-1998); Controller and
Investment Officer, Port of Houston Authority (1994-1997).

Treasurer Vice President -- Variable Product Accounting, AGIM
Gregory R. Seward (1998-Present); Assistant Controller, AGAIC (1998-Present)
Date of Birth: 06/27/56 and VALIC (1991-1998).

Vice President and Investment Portfolio Manager, VALIC (1987-Present).
Officer
William Trimbur, Jr.
Date of Birth: 06/15/51

Senior Investment Officer Executive Vice President, Trading and Portfolio Management,
Peter V. Tuters AGIM (1998-Present); Vice President and Investment Officer
Date of Birth: 04/18/52 (1998-Present), Vice President and Chief Investment Officer
(1993-1998), VALIC and AGAICX (1998-Present). Formerly,
Director, VALIC, Senior Vice President and Chief Investment
Officer, American General Corporation (1993-1998).

Assistant Controller Associate Director, Mutual Fund Accounting, AGIM
Heriberto Valdez (1999-Present); Manager, Mutual Fund Accounting (1998-1999);
Date of Birth: 04/25/57 Manager, Variable Product Accounting (1997-1998); Staff
Accountant, Variable Products Division, VALIC (1989-1997).
Formerly, self-employed consultant (1998).
</TABLE>

* Interested trustees of the Series Company as defined in the 1940 Act.

The trustees of the Series Company who are not affiliated with VALIC are
each paid annual trustees' fees and are reimbursed for certain out-of-pocket
expenses by the Series Company. Trustees who are not interested persons of the
Series Company receive an annual retainer of $6,200. In addition, such trustees
are paid per board meeting, committee meeting and telephone meeting, a fee of
$1,000, $250 and $250, respectively, plus expenses, if any. Each of the trustees
is a director or trustee of American General Series Portfolio Company ("AGSPC"),
AGSPC 3, and USLife Income Fund, Inc., investment companies for which VALIC
serves as investment adviser.

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The following table sets forth information regarding the estimated
compensation and benefits earned by the disinterested Trustees for the fiscal
year ending October 31, 1999.

COMPENSATION TABLE
FISCAL YEAR ENDING OCTOBER 31, 1999

<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM FUND COMPLEX
SERIES COMPANY PAID TO DIRECTORS
----------------- ------------------
<S> <C> <C>
Dr. Judith L. Craven 6,585 33,500
Dr. Timothy J. Ebner 6,548 33,000
Hon. Gustavo E. Gonzales, Jr. 6,585 33,750
Dr. Norman Hackerman 6,585 34,250
Dr. John W. Lancaster 6,548 34,000
Mr. Ben L. Love 6,622 34,250
Dr. John E. Maupin, Jr. 6,500 33,000
Dr. F. Robert Paulsen 6,548 34,000
Dr. R. Miller Upton 6,126 33,579
</TABLE>

* Dollar amounts are cash basis

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 4, 2000, the following persons owned 5% or more of a
particular class and Fund:

<TABLE>
<S> <C>
Balanced Fund
VALIC 67.63%, Class A
State Street IRA FBO H. Richards 8.04%, Class A
VALIC 20.12%, Class B
State Street IRA FBO W. Roth 5.81%, Class B
VALIC 77.69%, Class I
VALIC 100.00%, Class II
Conservative Growth Lifestyle Fund
VALIC 74.83%, Class A
K. Kirby 14.42%, Class A
VALIC 21.60%, Class B
State Street IRA FBO G. Stevens 5.88%, Class B
State Street IRA FBO L. Stevens 6.50%, Class B
VALIC 73.09%, Class I
VALIC 100.00%, Class II
Core Bond Fund
VALIC 9.05%, Class A
G. Stepan 6.96%, Class A
L. Gibbs 69.78%, Class A
M. Bronaugh 6.90%, Class A
R. Kester 7.25%, Class A
A. LeBrun Trust 10.53%, Class B
A. Class Trust 5.24%, Class B
D. Montano 5.10%, Class B
E. Merrill 6.45%, Class B
M. McDermott 10.34%, Class B
State Street IRA FBO B. Payer 6.24%, Class B
</TABLE>

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<PAGE> 346
<TABLE>
<S> <C>
State Street IRA FBO C. Guerra 7.51%, Class B
State Street IRA FBO F. Imke 6.64%, Class B
VALIC 24.99%, Class I
J. Murphy 6.91%, Class I
J. Kovach 31.62%, Class I
K. Earls 6.10%, Class I
R. Taylor 15.32%, Class I
A.G. Retirement Plan 100.00%, Class II
Domestic Bond Fund
VALIC 13.27%, Class A
A.G. Conservative Growth Lifestyle Fund 34.56%, Class A
A.G. Growth Lifestyle Fund 12.16%, Class A
A.G. Moderate Growth Lifestyle Fund 26.95%, Class A
Eastwood Family Trust 6.91%, Class A
A.G. Conservative Growth Lifestyle Fund 38.94%, Class B
A.G. Growth Lifestyle Fund 10.13%, Class B
A.G. Moderate Growth Lifestyle Fund 25.27%, Class B
VALIC 13.82%, Class I
A.G. Conservative Growth Lifestyle Fund 5.46%, Class I
A.G. Growth Lifestyle Fund 22.01%, Class I
A.G. Moderate Growth Lifestyle Fund 8.22%, Class I
VALIC 20.94%, Class II
A.G. Conservative Growth Lifestyle Fund 40.65%, Class II
A.G. Growth Lifestyle Fund 11.66%, Class II
A.G. Moderate Growth Lifestyle Fund 26.75%, Class II
Growth Lifestyle Fund
VALIC 61.00%, Class A
State Street IRA FBO R. Daniels 7.67%, Class B
State Street IRA FBO S. Karfunkle 8.73%, Class B
L. Wood 7.20%, Class A
VALIC 23.75%, Class B
VALIC 81.96%, Class I
VALIC 100.00%, Class II
High Yield Bond Fund
VALIC 7.36%, Class A
State Street IRA FBO R. Childers 9.41%, Class A
State Street IRA FBO S. Karfunkle 43.57%, Class A
K. Barrett 26.08%, Class A
B. Laytart 5.09%, Class B
State Street IRA FBO C. Getman 6.16%, Class A
State Street IRA FBO J. Frederick 5.41%, Class A
State Street IRA FBO J. Kernic 7.05%, Class A
State Street IRA FBO M. Ramenofsey 8.42%, Class A
State Street IRA FBO T. Helzer 5.99%, Class A
VALIC 100.00%, Class I
A.G. Retirement Plan 100.00%, Class II
International Growth Fund
VALIC 61.91%, Class A
A.G. Growth Lifestyle Fund 18.61%, Class A
A.G. Moderate Growth Lifestyle Fund 7.74%, Class A
VALIC 32.55%, Class B
A.G. Conservative Growth Lifestyle Fund 8.16%, Class B
</TABLE>

76
<PAGE> 347
<TABLE>
<S> <C>
A.G. Growth Lifestyle Fund 25.43%, Class B
A.G. Moderate Growth Lifestyle Fund 12.20%, Class B
VALIC 70.51%, Class I
A.G. Conservative Growth Lifestyle Fund 5.23%, Class I
A.G. Growth Lifestyle Fund 15.25%, Class I
A.G. Moderate Growth Lifestyle Fund 7.40%, Class I
VALIC 75.67%, Class II
A.G. Growth Lifestyle Fund 14.15%, Class II
A.G. Moderate Growth Lifestyle Fund 6.06%, Class II
International Value Fund
VALIC 53.76%, Class A
A.G. Growth Lifestyle Fund 14.36%, Class A
A.G. Moderate Growth Lifestyle Fund 6.81%, Class A
State Street IRA FBO H. Richards 5.12%, Class A
VALIC 28.85%, Class B
A.G. Conservative Growth Lifestyle Fund 6.48%, Class B
A.G. Growth Lifestyle Fund 19.61%, Class B
A.G. Moderate Growth Lifestyle Fund 11.47%, Class B
VALIC 55.86%, Class I
A.G. Growth Lifestyle Fund 10.89%, Class I
A.G. Moderate Growth Lifestyle Fund 5.95%, Class I
VALIC 77.05%, Class II
A.G. Growth Lifestyle Fund 12.89%, Class II
A.G. Moderate Growth Lifestyle Fund 6.31%, Class II
Large Cap Growth Fund
VALIC 28.30%, Class A
A.G. Conservative Growth Lifestyle Fund 7.91%, Class A
A.G. Growth Lifestyle Fund 9.56%, Class A
A.G. Moderate Growth Lifestyle Fund 9.89%, Class A
JATO & Co. 9.10%, Class A
VALIC 8.26%, Class B
A.G. Conservative Growth Lifestyle Fund 7.98%, Class B
A.G. Growth Lifestyle Fund 7.15%, Class B
A.G. Moderate Growth Lifestyle Fund 8.62%, Class B
VALIC 35.17%, Class I
A.G. Conservative Growth Lifestyle Fund 10.10%, Class I
A.G. Growth Lifestyle Fund 8.76%, Class I
A.G. Moderate Growth Lifestyle Fund 10.32%, Class I
VALIC 60.73%, Class II
A.G. Conservative Growth Lifestyle Fund 12.79%, Class II
A.G. Growth Lifestyle Fund 12.72%, Class II
A.G. Moderate Growth Lifestyle Fund 13.76%, Class II
Large Cap Value Fund
VALIC 34.39%, Class A
A.G. Conservative Growth Lifestyle Fund 13.22%, Class A
A.G. Growth Lifestyle Fund 14.87%, Class A
A.G. Moderate Growth Lifestyle Fund 16.48%, Class A
JATO & Co. 9.47%, Class A
VALIC 12.95%, Class B
A.G. Conservative Growth Lifestyle Fund 17.83%, Class B
A.G. Growth Lifestyle Fund 14.70%, Class B
A.G. Moderate Growth Lifestyle Fund 18.57%, Class B
</TABLE>

77
<PAGE> 348
<TABLE>
<S> <C>
VALIC 41.83%, Class I
A.G. Conservative Growth Lifestyle Fund 16.50%, Class I
A.G. Growth Lifestyle Fund 13.11%, Class I
A.G. Moderate Growth Lifestyle Fund 16.86%, Class I
VALIC 53.32%, Class II
A.G. Conservative Growth Lifestyle Fund 15.72%, Class II
A.G. Growth Lifestyle Fund 14.42%, Class II
A.G. Moderate Growth Lifestyle Fund 16.54%, Class II
Mid Cap Growth Fund
VALIC 54.75%, Class A
A.G. Growth Lifestyle Fund 9.25%, Class A
A.G. Moderate Growth Lifestyle Fund 8.25%, Class A
VALIC 23.38%, Class B
A.G. Conservative Growth Lifestyle Fund 7.27%, Class B
A.G. Growth Lifestyle Fund 10.36%, Class B
A.G. Moderate Growth Lifestyle Fund 10.59%, Class B
VALIC 15.17%, Class I
VALIC 78.76%, Class II
A.G. Conservative Growth Lifestyle Fund 5.21%, Class II
A.G. Growth Lifestyle Fund 8.36%, Class II
A.G. Moderate Growth Lifestyle Fund 7.67%, Class II
Mid Cap Index Fund
VALIC 87.48%, Class A
VALIC 61.57%, Class B
Mid Cap Value Fund
VALIC 57.95%, Class A
A.G. Growth Lifestyle Fund 10.17%, Class A
A.G. Moderate Growth Lifestyle Fund 9.06%, Class A
VALIC 20.55%, Class B
A.G. Conservative Growth Lifestyle Fund 6.18%, Class B
A.G. Growth Lifestyle Fund 9.59%, Class B
A.G. Moderate Growth Lifestyle Fund 11.06%, Class B
VALIC 71.92%, Class I
A.G. Conservative Growth Lifestyle Fund 5.79%, Class I
A.G. Growth Lifestyle Fund 9.23%, Class I
A.G. Moderate Growth Lifestyle Fund 9.44%, Class I
VALIC 77.48%, Class II
A.G. Conservative Growth Lifestyle Fund 5.06%, Class II
A.G. Growth Lifestyle Fund 9.26%, Class II
A.G. Moderate Growth Lifestyle Fund 8.20%, Class II
Moderate Growth Lifestyle Fund
VALIC 62.75%, Class A
Alpine Special 6.68%, Class A
Eastwood Family Trust 5.95%, Class A
State Street IRA FBO M. Flynn 12.74%, Class A
VALIC 21.32%, Class B
VALIC 73.82%, Class I
R. Gullion 7.43%, Class I
VALIC 100.00%, Class II
</TABLE>

78
<PAGE> 349
<TABLE>
<S> <C>
Money Market Fund
VALIC 11.92%, Class A
VALIC 22.07%, Class B
VALIC 45.94%, Class I
VALIC 28.06%, Class II
A.G. Retirement Plan 71.94%, Class II
Municipal Bond Fund
VALIC 73.55%, Class A
J.S. Wilson Trust 14.79%, Class A
VALIC 59.57%, Class B
Roselyn Indicator Trust 6.56%, Class B
Municipal Money Market Fund
VALIC 59.47%, Class A
M. Cleveland 5.05%, Class A
VALIC 81.84%, Class B
State Street IRA FBO P. Jacoby 9.30%, Class B
Small Cap Growth Fund
VALIC 48.42%, Class A
A.G. Growth Lifestyle Fund 6.87%, Class A
VALIC 20.99%, Class B
A.G. Growth Lifestyle Fund 7.91%, Class B
A.G. Moderate Growth Lifestyle Fund 5.67%, Class B
VALIC 43.13%, Class I
VALIC 84.19%, Class II
A.G. Growth Lifestyle Fund 7.24%, Class II
A.G. Moderate Growth Lifestyle Fund 5.25%, Class II
Small Cap Index Fund
VALIC 94.27%, Class A
VALIC 75.62%, Class B
Small Cap Value Fund
VALIC 57.71%, Class A
A.G. Conservative Growth Lifestyle Fund 6.16%, Class A
A.G. Growth Lifestyle Fund 17.19%, Class A
A.G. Moderate Growth Lifestyle Fund 12.32%, Class A
VALIC 31.00%, Class B
A.G. Conservative Growth Lifestyle Fund 11.39%, Class B
A.G. Growth Lifestyle Fund 23.60%, Class B
A.G. Moderate Growth Lifestyle Fund 19.71%, Class B
VALIC 66.12%, Class I
A.G. Conservative Growth Lifestyle Fund 7.29%, Class I
A.G. Growth Lifestyle Fund 14.46%, Class I
A.G. Moderate Growth Lifestyle Fund 11.85%, Class I
VALIC 71.54%, Class II
A.G. Conservative Growth Lifestyle Fund 5.72%, Class II
A.G. Growth Lifestyle Fund 13.12%, Class II
A.G. Moderate Growth Lifestyle Fund 9.62%, Class II
Socially Responsible Fund
VALIC 89.23%, Class A
VALIC 45.12%, Class B
VALIC 71.30%, Class I
VALIC 100.00%, Class II
</TABLE>

79
<PAGE> 350
<TABLE>
<S> <C>
Stock Index Fund
VALIC 48.10%, Class A
State Street IRA FBO M.A. Boettger 18.72%, Class A
VALIC 17.19%, Class B
Strategic Bond Fund
VALIC 78.59%, Class A
State Street IRA FBO H. Richards 10.69%, Class A
State Street IRA FBO S. Karfunkle 5.09%, Class A
VALIC 17.36%, Class B
VALIC 100.00%, Class I
VALIC 100.00%, Class II
</TABLE>

MARKETING INFORMATION

The Funds and/or affiliates may prepare advertising or sales literature
that provides information concerning various financial or market indices, the
economy, investment climate, investment strategies, political and social
conditions, or other relevant information. The Funds may discuss factors and
allocation strategies, designed to help the shareholders to determine whether
Funds are compatible with their investment goals. The Funds may list portfolio
holdings, or give examples of portfolio holdings.
VALIC, and its affiliates (collectively, referred to as the "Company"),
have targeted organizations in specific market sectors as the central focus of
their marketing efforts for the Series Company Funds. The Company has utilized
as its general marketing theme the concept that the Company is "America's
Retirement Plan Specialists." The Series Company Funds may be referred to as the
American General Fund Group or the AG Funds.
The Company may refer to its package of retirement plan services.
Collectively, this package of services may be referred to as easy Retirement
Plan. Easy Retirement Planning includes: (1) personal, face-to-face service from
highly trained Company Retirement Planning Specialists; (2) informative
retirement-investment education programs, seminars and materials; (3)
specialized computer-aided services for retirement planning and developing asset
allocation strategies; (4) a wide selection of innovative, market-responsive
investment options; (5) advanced and efficient administration of retirement
accounts; and (6) a financially strong and stable Company with which to do
business.
The Company may refer to the diversifying process of asset allocation
based on the Modern Portfolio Theory developed by Nobel Prize-winning economist
Harry Markowitz. The basic assumptions of Modern Portfolio Theory are that the
selection of individual investments has little impact on portfolio performance,
market timing strategies seldom work, markets are efficient and selecting the
suitable mix of asset classes is more important when creating a long-term
investment portfolio. Modern Portfolio Theory allows an investor to determine an
"efficient" or "optimized" portfolio that has historically provided a higher
return with the same risk or the same return with lower risk.
When presenting the asset allocation process, the Company may outline the
process of personal and investment risk analysis including determining
individual risk tolerances and a discussion of the different types of investment
risk. The Company may quote various industry experts on which types of
investments are best suited to each risk category. The Company may also provide
a historical overview of the performance of a variety of investment market
indexes and different asset categories, such as stocks, bonds, cash equivalents,
etc. The Company may discuss investment volatility (standard deviation)
including the range of returns for different asset categories and classes over
different time horizons, and the correlation between the returns of different
asset categories and classes. The Company may discuss the basis of portfolio
optimization and may describe various investment strategies and methods of
implementation.
The Company, in its marketing efforts to each of the market segments, may
design sales literature and material specifically for that market segment, e.g.,
the healthcare segment. This sales literature and material may also be specific
to a certain group. For example, sales literature and material may be designed
for a specific hospital.

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<PAGE> 351

The Company may refer to certain milestones which are intended to
emphasize the Company's growth and development in assets, groups and various
market segments. Additionally the Company may refer to marketing strategies it
utilizes to promote the Company's business objectives. Further, the Company may
refer from time to time in advertisements or sales materials to certain
value-added services it provides to its investors.
The Company may refer in its advertisements to Schwab Personal Choice
Retirement Accounts ("PCRA"). The PCRA is a self-directed brokerage account that
may be used by investors to directly invest in publicly available mutual funds.
PCRA is marketed through the VALIC Investment Services Company.

ENDORSEMENTS AND PUBLISHED RATINGS

From time to time, in advertisements or in reports to shareholders, the
Company or the Series Company may refer to its endorsements. Endorsements are
often in the form of a list of organizations, individuals or other parties which
recommend the Company or the Series Company. The endorser's name will be used
only with the endorser's consent.
The Company or the Series Company may refer to publishers of statistical
data, such as Lipper Analytical Services Incorporated ("Lipper"), Morningstar,
Inc. ("Morningstar") and CDA/Wiesenberger Investment Companies
(CDA/Wiesenberger). Additionally, the Company may compare the performance of the
Series Company Funds to categories published by Lipper and Morningstar.
Finally, the Company will utilize as a comparative measure for the
performance of the Series Company Funds the Consumer Price Index ("CPI"). The
CPI is a measure of change in consumer prices, as determined in a monthly survey
of the U.S. Bureau of Labor Statistics. Housing costs, transportation, food,
electricity, changes in taxes and labor costs are among the CPI components. The
CPI provides a tool for determining the impact of inflation on an individual's
purchasing power.

OTHER INFORMATION

SHAREHOLDER REPORTS

Annual Reports containing audited financial statements of the Series
Company and Semiannual Reports containing unaudited financial statements, as
well as proxy materials, are sent to investors.

INDEPENDENT AUDITORS

Ernst & Young LLP, One Houston Center, 1221 McKinney, Suite 2400, Houston,
Texas 77010, serve as independent auditors of the Series Company.

VOTING AND OTHER RIGHTS

The Series Company was organized under the laws of the state of Delaware
as a business trust, and presently is authorized to sell 24 series. Each of
these series is authorized to issue an unlimited number of shares of beneficial
interest, par value $0.01 per share, divided into classes. The expenses of each
class differ; therefore, dividend payments and net asset value will differ as
well.

CUSTODY OF ASSETS

Pursuant to a Custodian Contract with the Series Company, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, holds
the cash and portfolio securities of the Series Company as custodian.
The Custodian is responsible for holding all securities and cash of each
Fund, receiving and paying for securities purchased, delivering against payment
securities sold, receiving and collecting income from investments, making all
payments covering expenses of the Series Company, and performing other
administrative duties, all as directed by persons authorized by the Series
Company. The Custodian does not exercise any supervisory function in such
matters as the purchase and sale of portfolio securities, payment of dividends,
or payment of expenses of the Funds or the Series Company. Portfolio securities
of the Funds purchased

81
<PAGE> 352

domestically are maintained in the custody of the Custodian and may be entered
into the book entry systems of securities depositories approved by the Board of
Trustees. Pursuant to the Custodian Contract, portfolio securities purchased
outside the United States will be maintained in the custody of various foreign
branches of the Custodian and such other custodians, including foreign banks and
foreign securities depositories, as are approved by the Board of Trustees, in
accordance with regulations under the 1940 Act.
The Custodian holds securities of the Funds on which call options have
been written and certain assets of the Funds constituting margin deposits with
respect to financial futures contracts at the disposal of the FCMs through which
such transactions are effected. The Funds may also be required to post margin
deposits with respect to covered call and put options written on stock indices
and for this purpose certain assets of those Funds may be held by the custodian
pursuant to similar arrangements with the brokers involved.
This arrangement regarding margin deposits essentially consists of the
Custodian creating a separate segregated account into which it transfers (upon
the Series Company's instructions) assets from a Fund's general (regular)
custodial account. The custody agreement for such arrangement provides that FCMs
or brokers will have access to the funds in the segregated accounts when and if
the FCMs or brokers represent that the Series Company has defaulted on its
obligation to the FCMs or brokers and that the FCMs or brokers have met all the
conditions precedent to their right to receive such funds under the agreement
between the Series Company and the FCMs or brokers. The Series Company has an
agreement with each FCM or broker which provides (1) that the assets of any Fund
held by the FCM or broker will be in the possession of State Street Bank until
released or sold or otherwise disposed of in accordance with or under the terms
of such agreement, (2) that such assets would not otherwise be pledged or
encumbered by the FCM or broker, (3) that when requested by the Series Company
the FCM or broker will cause State Street Bank to release to its general
custodial account any assets to which a Fund is entitled under the terms of such
agreement, and (4) that the assets in the segregated account shall otherwise be
used only to satisfy the Series Company's obligations to the FCM or broker under
the terms of such agreement.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts or covered options on stock indices held
through a given FCM or broker, it is entitled immediately to receive from the
FCM or broker, and usually will receive by the next business day, the net amount
of such gains. Thereupon, such assets will be deposited in its general or
segregated account with the Custodian, as appropriate.

INDEX FUNDS

The Small Cap Index Fund is not promoted, sponsored or endorsed by, nor in
any way affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed the Fund nor any associated literature or
publications and Frank Russell Company makes no representation or warranty,
express or implied, as to their accuracy, or completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice,
to alter, amend, terminate or in any way change its Index(es). Frank Russell
Company has no obligation to take the needs of any particular fund or its
participants or any product or person into consideration in determining,
comprising or calculating the Index(es).
Frank Russell Company's publication of the Index(es) in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in any or all securities upon which the Index(es)
is (are) based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR
GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE
INDEX(ES) OR ANY DATA INCLUDED IN THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO
REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE
INDEX(ES) OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF)
COMPRISING THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO OTHER EXPRESS OR
IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND, INCLUDING
WITHOUT MEANS OR LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX(ES) OR ANY DATA OR ANY SECURITY (OR
COMBINATION THEREOF) INCLUDED THEREIN.

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<PAGE> 353

The Stock Index Fund and the Mid Cap Index Fund are not sponsored,
endorsed, sold or promoted by Standard & Poor's Corporation ("S&P"). S&P makes
no representation or warranty, express or implied, to the Series Company or its
participants regarding the advisability of investing in securities generally or
in the Stock Index Fund or the Mid Cap Index Fund particularly or the ability of
the S&P 500 Index or the S&P Mid Cap 400 Index to track general stock market
performance. S&P has no obligation to take the need of the Series Company or its
investors into consideration in determining, composing or calculating the S&P
500 Index or S&P Mid Cap 400 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Stock Index
Fund or the Mid Cap Index Fund or the timing of the issuance or sale of such
Funds or in the determination or calculation of the equation by which such Funds
are to be converted into cash. S&P has no obligation or liability in connection
with the administration, marketing or trading of the Funds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR S&P MID CAP 400 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE
NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE SERIES COMPANY
FROM THE USE OF THE S&P 500 INDEX OR S&P MID CAP 400 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR S&P MID CAP 400 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

BOND RATINGS

MOODY'S BOND RATINGS
Aaa: Bonds that 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 edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that 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 that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that 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
that suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that 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 that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

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C: Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by: (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

STANDARD & POOR'S RATINGS
AAA: An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor'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 financial commitment
on the obligation. Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated 'CCC' is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D: An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized. Plus (+) or minus (-): The ratings
from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.