AMERICAN GENERAL SERIES PORTFOLIO CO 3, 485APOS, 1999-11-04

AMERICAN GENERAL SERIES PORTFOLIO CO 3
485APOS, 1999-11-04

Previous: AMERICAN GENERAL SERIES PORTFOLIO CO 3, N-30D, 1999-11-04

Next: MERCURY ASSET MANAGEMENT FUNDS INC, 497J, 1999-11-04

<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON: November 4, 1999

REGISTRATION NO. 333-53589/811-08789
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3 [X]

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

AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(713) 526-5251
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

HUEY P. FALGOUT, JR., ESQ.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
P.O. BOX 3206, HOUSTON, TEXAS 77253
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

Copy to:
JOHN A. DUDLEY, ESQ.
SULLIVAN & WORCESTER, LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036

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

It is proposed that this filing will become effective (check
appropriate box):

<TABLE>
<S> <C>
immediately upon filing pursuant to paragraph (b)
-----
on (date) pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(1)
-----
X on January 3, 2000 pursuant to paragraph (a)(1)
-----
75 days after filing pursuant to paragraph (a)(2)
-----
on (date) pursuant to paragraph (a)(2) of Rule 485
-----
</TABLE>
If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

Title of Securities Being Registered: Shares of Beneficial Interest

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

================================================================================
<PAGE> 2

AMERICAN GENERAL SERIES
PORTFOLIO COMPANY 3

2929 ALLEN PARKWAY
HOUSTON TEXAS 77019
JANUARY 3, 2000

PROSPECTUS

The American General Series Portfolio Company 3 (the "Series Company") is a
mutual fund made up of 18 separate Funds (the "Funds"). Each of the Funds has a
different investment objective. Each Fund is explained in more detail on its
Fact Sheet contained in this prospectus. Here is a summary of the goals of the
18 Funds:

ACTIVELY MANAGED EQUITY FUNDS:

AMERICAN GENERAL INTERNATIONAL GROWTH FUND ("INTERNATIONAL GROWTH
FUND")
Long-term capital appreciation through investments in non-U.S.
companies, the majority of which are expected to be in developed
markets.

AMERICAN GENERAL LARGE CAP GROWTH FUND ("LARGE CAP GROWTH FUND")
Long-term growth through investments in large cap U.S. issuers.
Dividend income is a secondary objective.

AMERICAN GENERAL MID CAP GROWTH FUND ("MID CAP GROWTH FUND")
Capital appreciation through investments in medium capitalization
equity securities. Current income is a secondary objective.

AMERICAN GENERAL SMALL CAP GROWTH FUND ("SMALL CAP GROWTH FUND")
Long-term growth through investments in small growth companies.

AMERICAN GENERAL INTERNATIONAL VALUE FUND ("INTERNATIONAL VALUE FUND")
Growth of capital and future income through investments in non-U.S.
issuers.

AMERICAN GENERAL LARGE CAP VALUE FUND ("LARGE CAP VALUE FUND")
Total returns exceeding the Russell 1000 Value Index through
investments in equity securities.

AMERICAN GENERAL MID CAP VALUE FUND ("MID CAP VALUE FUND")
Growth through investments in medium capitalization companies.

AMERICAN GENERAL SMALL CAP VALUE FUND ("SMALL CAP VALUE FUND")
Maximum long-term return through investments in small capitalization
companies.

SPECIALTY EQUITY FUND:

AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND ("SOCIALLY RESPONSIBLE
FUND")
Growth through investments in companies meeting social criteria of the
Fund.

BALANCED FUND:

AMERICAN GENERAL BALANCED FUND ("BALANCED FUND")
Conservation of principal and long-term growth of capital and income
through investments in fixed income and equity securities.

INCOME FUNDS:

AMERICAN GENERAL HIGH YIELD BOND FUND ("HIGH YIELD BOND FUND")
Highest possible total return and income consistent with conservation
of capital through investments in high yielding, high risk fixed
income securities.

INVESTMENTS OF THIS TYPE ARE REGARDED BY THE RATING AGENCIES AS
PREDOMINANTLY SPECULATIVE WITH RESPECT TO AN ISSUER'S CONTINUING
ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.

AMERICAN GENERAL STRATEGIC BOND FUND ("STRATEGIC BOND FUND")
Highest possible total return and income consistent with conservation
of capital through investments in income producing securities.

THE LOWER RATED FIXED INCOME SECURITIES IN WHICH THE FUND MAY INVEST
ARE REGARDED BY THE RATING AGENCIES AS SPECULATIVE WITH RESPECT TO AN
ISSUER'S CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.

AMERICAN GENERAL DOMESTIC BOND FUND ("DOMESTIC BOND FUND")
High total return consistent with conservation of capital through
investments primarily in investment grade fixed income securities.

AMERICAN GENERAL CORE BOND FUND ("CORE BOND FUND")
Highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed income securities.

MONEY MARKET FUND:

AMERICAN GENERAL MONEY MARKET FUND ("MONEY MARKET FUND")
Income through investments in short-term money market securities.

LIFESTYLE FUNDS:

AMERICAN GENERAL GROWTH LIFESTYLE FUND ("GROWTH LIFESTYLE FUND")
Growth through investments in Series Company Funds.

AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND ("MODERATE GROWTH
LIFESTYLE FUND")
Growth and current income through investments in Series Company Funds.

AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND ("CONSERVATIVE
GROWTH LIFESTYLE FUND")
Current income and a low to moderate level of growth through
investments in Series Company Funds.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR HAS IT DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.

<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COVER PAGE
WELCOME........................................ 1
ABOUT THE FUNDS................................ 1
Growth, Balanced, Income, Stability and
Lifestyle Categories.................... 1
SERIES COMPANY FUND FACT SHEETS
Balanced Fund............................. 3
Conservative Growth Lifestyle Fund........ 5
Core Bond Fund............................ 6
Domestic Bond Fund........................ 8
Growth Lifestyle Fund..................... 10
High Yield Bond Fund...................... 11
International Growth Fund................. 13
International Value Fund.................. 15
Large Cap Growth Fund..................... 16
Large Cap Value Fund...................... 18
Mid Cap Growth Fund....................... 19
Mid Cap Value Fund........................ 20
Moderate Growth Lifestyle Fund............ 21
Money Market Fund......................... 22
Small Cap Growth Fund..................... 23
Small Cap Value Fund...................... 24
Socially Responsible Fund................. 26
Strategic Bond Fund....................... 27
MORE ABOUT PORTFOLIO INVESTMENTS............... 29
Equity Securities......................... 29
Fixed Income Securities................... 29
U.S. Government Securities................ 30
Mortgage-Related Securities............... 30
Asset-Backed Securities................... 31
Loan Participations....................... 31
Variable Amount Demand Master Notes....... 31
Variable Rate Demand Notes................ 31
Structured Securities..................... 32
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Real Estate Securities.................... 32
Foreign Securities........................ 32
Depository Receipts....................... 32
Investment Funds.......................... 32
Foreign Currency.......................... 32
Illiquid Securities....................... 32
When-Issued Securities.................... 33
Money Market Securities................... 33
Investment Companies...................... 33
Futures and Options....................... 33
Swap Agreements........................... 34
Warrants and Rights....................... 34
Repurchase Agreements..................... 34
Reverse Repurchase Agreements, Dollar
Rolls and Borrowing..................... 34
A Word About Risk......................... 35
Investment Practices...................... 37
ABOUT THE SERIES COMPANY'S MANAGEMENT.......... 39
Investment Adviser........................ 39
Investment Sub-advisers................... 39
How VALIC is Paid for Its Services........ 43
ABOUT THE SERIES COMPANY....................... 44
Series Company Shares..................... 44
Net Asset Value of the Series Company
Shares.................................. 44
Dividends and Capital Gains............... 44
Tax Consequences.......................... 45
FINANCIAL HIGHLIGHTS........................... 46
PERFORMANCE INFORMATION........................ 48
APPENDIX -- DESCRIPTION OF BOND RATINGS........ 67
APPENDIX -- DESCRIPTION OF COMMERCIAL PAPER
RATINGS............................ 69
</TABLE>

(i)
<PAGE> 4

WELCOME
- --------------------------------------------------------------------------------

Unless otherwise specified in this prospectus, the words we, our, and VALIC mean
The Variable Annuity Life Insurance Company and any investment Sub-adviser that
we work with. The words you and your mean the participant.

Individuals can't invest in the shares of these Funds directly. Instead, they
participate through annuity or variable life contracts or employer plans with
VALIC or one of its affiliates, or employee thrift plans maintained by VALIC or
American General Corporation. Most often employers set up these contracts so
they can offer their employees a way to save for retirement. Retirement plans
through employers may be entitled to tax benefits that individual retirement
plans may not be entitled to. These tax benefits are fully explained in your
contract prospectus.

After you invest in a Fund, you participate in Fund earnings or losses, in
proportion to the amount of money you invest. Depending on your contract, if you
withdraw your money before retirement, you may incur charges and additional tax
liabilities. However, to save for retirement, you generally should let your
investments and their earnings build. At retirement, you may withdraw all or a
portion of your money, leave it in the account until you need it, or start
receiving annuity payments. At a certain age you may be required to begin
withdrawals.

All inquiries regarding this prospectus should be directed, in writing, to VALIC
Customer Service, A3-01, 2929 Allen Parkway, Houston, Texas 77019, or by calling
1-800-633-8960.

All inquiries regarding contracts issued by American General Life Insurance
Company (AGL) should be directed to AGL's Annuity Administration Department,
2727-A Allen Parkway, Houston, Texas 77019-2191 or call 1-800-813-5065. AGL is a
member of the American General Corporation group of companies, as is VALIC.

ABOUT THE FUNDS
- --------------------------------------------------------------------------------

GROWTH, BALANCED, INCOME, STABILITY
AND LIFESTYLE CATEGORIES

The Funds offered in this prospectus fall into five general investment
categories: growth, balanced, income, stability and lifestyle.

Growth Category

The goal of a Fund in the growth category is to increase the value of your
investment over the long term by investing mostly in stocks. Stocks are a type
of investment that can increase in value over a period of years. Companies sell
stock to get the money they need to grow. These companies often keep some of
their profits to reinvest in their business. As they grow, the value of their
stock may increase. This is how the value of your investment may increase.

Series Company Growth Category includes:

International Growth Fund

International Value Fund

Large Cap Growth Fund

Large Cap Value Fund

Mid Cap Growth Fund

Mid Cap Value Fund

Small Cap Growth Fund

Small Cap Value Fund

Socially Responsible Fund

Balanced Category
(Combination of Growth and Income Categories)

The goal of a Fund in the balanced category is to increase the value of your
investment over the long term and to provide income. The Fund in the balanced
category seeks to conserve the value of your initial investment and promote
long-term growth and income by investing in stocks and income producing
securities.

Series Company Balanced Category includes:

Balanced Fund

Income Category

Unlike Funds in the growth category, where the objective is to make the Fund's
investments increase in value, Funds in the income category try to keep the
value of their investments from falling, while providing an increase in the
value of your investment through the income earned on a Fund's investments. To
meet this objective, Funds in the income category buy investments that are
expected to pay interest to a Fund on a regular basis.

Series Company Income Category includes:

Core Bond Fund

Domestic Bond Fund

High Yield Bond Fund

Strategic Bond Fund

1
<PAGE> 5

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

Stability Category

The Fund in the stability category provides liquidity, protection of capital and
current income through investments in high quality securities.

Series Company Stability Category includes:

Money Market Fund

Lifestyle Category

The proliferation of mutual funds over the last several years has left many
investors in search of a simple means to manage their long-term investments.
With new investment categories emerging each year and with each mutual fund
reacting differently to political, economic and business events, many investors
are forced to make complex investment decisions in the face of limited
experience, time and personal resources. The Lifestyle Funds are designed to
meet the needs of investors who prefer to have their asset allocation decisions
made by professional money managers, are looking for an appropriate core
investment for their retirement portfolio and appreciate the advantages of broad
diversification.

A Lifestyle Fund does not invest directly in portfolio securities but, rather,
invests in a combination of Series Company Funds in order to meet its investment
objective. In this manner, the Lifestyle Funds offer you the opportunity to
diversify your investment portfolio by investing in one Fund, rather than in a
variety of Series Company Funds.

Series Company Lifestyle Category includes:

Conservative Growth Lifestyle Fund

Growth Lifestyle Fund

Moderate Growth Lifestyle Fund

2
<PAGE> 6

BALANCED FUND
Fact Sheet
- -------------------------------------------------
Investment Goal CONSERVATION OF PRINCIPAL
AND LONG-TERM GROWTH
OF CAPITAL AND INCOME
THROUGH INVESTMENTS IN
FIXED INCOME AND
EQUITY SECURITIES
- -------------------------------------------------
Investment Category BALANCED
- --------------------------------------------------------------------------------

INVESTMENT ADVISER
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.

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. At all times at least 25% of the Fund's
total assets are invested in fixed income senior securities. We select
securities for the Fund's portfolio by identifying fixed income and equity
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.

We follow the guidelines listed below for making the primary investments for the
Fund.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Fixed income securities
Securities rated A or better up to 75%
by Moody's Investors Service,
Inc. ("Moody's") or Standard &
Poors Ratings Group ("S&P") or
of comparable investment
quality(2), U.S. Government
securities and its
instrumentalities, securities
issued by the Canadian
Government, its provinces or
their instrumentalities,
mortgage-related securities of
governmental issuers, GNMA
certificates of private
issuers, collateralized
mortgage obligations,
mortgage-backed bonds, cash or
cash equivalents, including
commercial bank obligations
and commercial paper(3)
- ----------------------------------------------------
Fixed income senior securities at least 25%
- ----------------------------------------------------
Equity securities(4) up to 75%
- ----------------------------------------------------
High yielding high risk fixed up to 20%
income securities(5)
- ----------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
(1) At time of purchase.
(2) The Sub-adviser will not necessarily dispose of
a fixed income security when its rating is down
graded to below investment grade.
(3) All of the above listed fixed income securities
will constitute at least 75% of the fixed income
securities held by the Fund.
(4) Equity securities held by the Fund will be
listed on national securities exchanges or in
the national over-the-counter market (NASDAQ)
and may include American Depository Receipts. We
may invest up to 10% of the Fund's assets in the
securities of U.S. small-capitalization
companies.
(5) No minimum rating requirement applied. Commonly
referred to as high yield, high risk, junk or
below investment grade fixed income securities.
</TABLE>

INVESTMENT RISK

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

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

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: the risk that fluctuations in interest rates may affect the
value of the Fund's interest-paying fixed income securities.

Risk of Lower Rated Fixed Income Securities: A significant 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 (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 be worth less than what the Fund paid for them.

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

3
<PAGE> 7

BALANCED FUND
Fact Sheet
- --------------------------------------------------------------------------------

Prepayment Risk: the risk that issuers of fixed income securities will make
prepayments earlier than anticipated during periods of falling interest rates
requiring the Fund to invest in new securities with lower interest rates. This
will reduce the stream of cash payments that flow through the Fund.

Manager Risk: like all managed 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.

4
<PAGE> 8

CONSERVATIVE GROWTH
LIFESTYLE FUND
Fact Sheet
- -------------------------------------------------
Investment Goal CURRENT INCOME AND LOW
TO MODERATE GROWTH
THROUGH INVESTMENTS IN
SERIES COMPANY FUNDS
- -------------------------------------------------
Investment Category LIFESTYLE

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

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE

Seeks current income and low to moderate growth of capital through investments
in Series Company 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.

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 for this Fund.

<TABLE>
<S> <C>
International Equity Securities 5%-15%
Small Capitalization Equity Securities 5%-15%
Medium Capitalization Equity Securities 5%-15%
Large Capitalization Equity Securities 25%-35%
Bonds 30%-50%
</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 Series Company
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 Series Company Funds, in
combination, to be appropriate for the Fund's investment objective. We may
change the asset allocation ranges, the particular Underlying Series Company
Funds in which the Fund may invest and the target investment percentages set
from time to time by VALIC, subject to the supervision of the Series Company's
Board of Trustees.

We intend to allocate the Fund's assets among the Series Company Funds as
follows:

<TABLE>
<S> <C>
American General International Value Fund 5%
American General International Growth Fund 5%
American General Small Cap Value Fund 5%
American General Small Cap Growth Fund 5%
American General Mid Cap Value Fund 5%
American General Mid Cap Growth Fund 5%
American General Large Cap Growth Fund 15%
American General Large Cap Value Fund 15%
American General Domestic Bond Fund 40%
</TABLE>

INVESTMENT RISK

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 Series Company Funds themselves are
diversified companies.

The allocation among the different Series Company 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 Series Company 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 and only
within the investment ranges described below, 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
Series Company Funds in which it invests. Changes in the net asset values of the
Underlying Series Company 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 Series Company Fund to meet their investment objectives.

Investment in the Underlying Series Company 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. The
securities that Underlying Series Company Funds invest in also involve various
risks. For a discussion of these risks, see the Funds "Fact Sheets" and "A Word
About Risk" in this prospectus.

5
<PAGE> 9

CORE BOND FUND
Fact Sheet
- -------------------------------------------------
Investment Goal HIGHEST POSSIBLE TOTAL
RETURN CONSISTENT WITH
CONSERVATION OF CAPITAL
THROUGH INVESTMENTS IN
MEDIUM TO HIGH QUALITY
FIXED INCOME SECURITIES
- -------------------------------------------------
Investment Category INCOME

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

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
American General Investment Management, L.P.

INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments
in medium to high quality fixed income securities.

INVESTMENT STRATEGY
The Fund invests in medium to high quality fixed income securities to provide
you with the highest possible total return from current income and capital gains
while preserving your investment. To increase the Fund's earning potential, we
may use a small part of the Fund's assets to make some higher risk investments.

We follow the guidelines listed below for making the primary investments for the
Fund.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Investment grade intermediate and at least 65%
long-term corporate fixed income
securities rated at least Baa3 by
Moody's or BBB-- by S&P(2) or of
comparable quality, U.S. dollar
denominated fixed income
securities issued by foreign
issuers(3), securities issued or
guaranteed by the U.S.
Government(4), mortgaged backed
and other asset backed securities
- ----------------------------------------------------
Interest bearing short-term up to 35%
investments, such as
commercial paper, bankers'
acceptances, bank
certificates of deposit and
other cash equivalents and
cash
- ----------------------------------------------------
Other fixed income securities up to 10%
corporate bonds rated below Baa3
by Moody's and BBB-- by S&P(5)
- ----------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Equity securities up to 20%
preferred stocks,
convertible securities,
common stocks and warrants
- ----------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
(1) At time of purchase.
(2) The Sub-adviser will not necessarily dispose of
a fixed income security when its rating is down
graded to below investment grade.
(3) The Fund currently intends to limit these
investments to no more than 40% of its total
assets.
(4) U.S. Government securities are securities issued
or guaranteed by the U.S. Government which are
supported by at least one of the following: (i)
the full faith and credit of the U.S. Government
(e.g., Government National Mortgage
Association), (ii) the right of the issuer to
borrow from the U.S. Treasury (e.g., Federal
Home Loan Banks), (iii) the credit of the
issuing government agency (e.g., Student Loan
Marketing Association) or (iv) the discretionary
authority of the U.S. Government to purchase
certain obligations of the agency.
(5) Commonly referred to as high yield, high risk,
junk or below investment grade bonds.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

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: the risk that fluctuations in interest rates may affect the
value of the Fund's interest-paying fixed income securities.

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."

6
<PAGE> 10

CORE BOND FUND
Fact Sheet
- --------------------------------------------------------------------------------

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.

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.

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.

Manager Risk: like all managed 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.

7
<PAGE> 11

DOMESTIC BOND FUND
Fact Sheet
- -------------------------------------------------
Investment Goal HIGH TOTAL RETURN
CONSISTENT WITH
CONSERVATION OF
CAPITAL THROUGH
INVESTMENTS PRIMARILY IN
INVESTMENT GRADE FIXED
INCOME SECURITIES
- -------------------------------------------------
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.

INVESTMENT STRATEGY
The Fund invests in high quality fixed income securities to provide you with the
highest possible total return from current income and capital gains while
preserving your investment. To increase the Fund's earning potential, we may use
a small part of the Fund's assets to make some higher risk investments.

We follow the guidelines listed below for making the primary investments for the
Fund.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Investment grade U.S. corporate at least 65%
fixed income securities rated at
least A by Moody's or S&P(2), and
securities issued or guaranteed by
the U.S. Government(3), Yankee
bonds, asset backed bonds, and
mortgage backed bonds
- ----------------------------------------------------
Non-U.S. investment grade up to 35%
intermediate and long-term
corporate fixed income securities
rated at least A by Moody's or
S&P** or of comparable quality,
Eurodollar fixed income
securities(4), securities issued
or guaranteed by the Canadian
Government, its provinces or their
instrumentalities, interest
bearing short-term investments,
such as commercial paper, bankers'
acceptances, bank certificates of
deposit and other cash equivalents
and cash
- ----------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Other fixed income securities, up to 25%
Corporate bonds rated less than A
by Moody's or S&P,
mortgage-related securities, high
yield, high risk bonds(5)
- ----------------------------------------------------
(1) At time of purchase.
(2) The Sub-adviser will not necessarily dispose of
a fixed income security when its rating is down
graded to below investment grade.
(3) U.S. Government securities are securities issued
or guaranteed by the U.S. Government which are
supported by at least one of the following: (i)
the full faith and credit of the U.S. Government
(e.g., Government National Mortgage
Association), (ii) the right of the issuer to
borrow from the U.S. Treasury (e.g., Federal
Home Loan Banks), (iii) the credit of the
issuing government agency (e.g., Student Loan
Marketing Association) or (iv) the discretionary
authority of the U.S. Government to purchase
certain obligations of the agency.
(4) The Fund currently intends to limit these
investments to no more than 20% of its total
assets.
(5) No minimum rating requirement applies. Commonly
referred to as high yield, high risk, junk or
below investment grade fixed income securities.
</TABLE>

INVESTMENT RISK
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: the risk that fluctuations in interest rates may affect the
value of the Fund's interest-paying fixed income securities.

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

8
<PAGE> 12

DOMESTIC BOND FUND
Fact Sheet
- --------------------------------------------------------------------------------

Manager Risk: like all managed 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.

9
<PAGE> 13

GROWTH LIFESTYLE
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS IN SERIES
COMPANY FUNDS
- -------------------------------------------------
Investment Category LIFESTYLE

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

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks growth through investments in Series Company Funds. This Fund is suitable
for investors seeking the potential for capital growth that a fund investing
predominately in equity securities may offer.

<TABLE>
<S> <C>
International Equity Securities 25%-35%
Small Capitalization Equity
Securities 15%-25%
Medium Capitalization Equity
Securities 10%-20%
Large Capitalization Equity
Securities 20%-30%
Bonds 5%-15%
</TABLE>

We intend to allocate the Fund's assets among the Series Company Funds as
follows:

<TABLE>
<S> <C>
American General International Value Fund 15%
American General International Growth Fund 15%
American General Small Cap Value Fund 10%
American General Small Cap Growth Fund 10%
American General Mid Cap Value Fund 8%
American General Mid Cap Growth Fund 7%
American General Large Cap Growth Fund 13%
American General Large Cap Value Fund 12%
American General Domestic Bond Fund 10%
</TABLE>

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

Because the Fund's assets will be adjusted only periodically and only within the
investment ranges described herein, 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
Series Company Funds in which it invests. Changes in the net asset values of the
underlying Series Company 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 Series Company Funds to meet their investment objectives.

Investment in the Underlying Series Company 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. The
securities that Underlying Series Company Funds invest in also involve various
risks. For a discussion of these risks, see the Funds "Fact Sheets" and "A Word
About Risk" in this prospectus.

For additional information
about THE FUND'S
INVESTMENTS see "More
about Portfolio Investments"
in the prospectus.

10
<PAGE> 14

HIGH YIELD BOND
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal HIGHEST POSSIBLE TOTAL
RETURN AND INCOME
CONSISTENT WITH
CONSERVATION OF CAPITAL
THROUGH INVESTMENTS IN
HIGH YIELDING, HIGH RISK
FIXED INCOME SECURITIES
- -------------------------------------------------
Investment Category INCOME

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

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
American General Investment Management, L.P.

INVESTMENT OBJECTIVE
Seeks the highest possible total return and income consistent with conservation
of capital through investment in a diversified portfolio of high yielding, high
risk fixed income securities.

INVESTMENT STRATEGY
The Fund invests in high yielding, high risk fixed income securities to provide
you with the highest possible total return from current income and capital gains
while preserving your investment.

We follow the guidelines listed below for making the primary investments for the
Fund.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ---------------------------------------------------
<S> <C>
Fixed income securities rated at least 65%
below Baa3 by Moody's and below
BBB- by S&P(2)
- ---------------------------------------------------
Foreign fixed income securities up to 35%
rated below Baa3 by Moody's and
below BBB- by S&P(2)
- ---------------------------------------------------
Fixed income securities rated up to 35%
Baa3 or higher by Moody's or
Rated BBB- or higher by S&P(3)
- ---------------------------------------------------
Zero coupon securities (i.e., up to 15%
securities not paying current
cash interest)
- ---------------------------------------------------
Equity securities, preferred up to 20%
stocks, convertible securities,
common stocks and warrants
- ---------------------------------------------------
Fixed income securities rated up to 15%
below Caa3 by Moody's or CCC- by
S&P(3)
- ---------------------------------------------------
Equity securities preferred up to 20%
stocks, convertible securities,
common stocks and warrants
- ---------------------------------------------------
</TABLE>

(1) At time of purchase.

(2) Commonly referred to as high yield, high risk, junk or below investment
grade fixed income securities.

(3) The Sub-adviser will not necessarily dispose of a fixed income security when
its rating is downgraded to below investment grade.

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Fund's interest-paying fixed income securities.

Risk of Lower Rated Fixed Income Securities: High yielding, high risk fixed
income 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 be worth less than what the Fund paid
for them.

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.

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.

Liquidity Risk: foreign markets may be less liquid and more volatile than

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

11
<PAGE> 15

HIGH YIELD BOND
FUND
Fact Sheet
- --------------------------------------------------------------------------------

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.

Manager Risk: like all managed 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.

12
<PAGE> 16

INTERNATIONAL GROWTH
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal LONG-TERM CAPITAL
APPRECIATION THROUGH
INVESTMENTS IN NON-U.S.
COMPANIES, THE MAJORITY
OF WHICH ARE EXPECTED TO
BE IN DEVELOPED MARKETS
- -------------------------------------------------
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.

INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in foreign equity
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.

The Fund will invest in equity securities in the markets of at least three
countries outside the United States. The Fund will diversify its investments
among developed and emerging market countries. 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. 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 (the World Bank) and the International Finance
Corporation. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. Investing in many emerging countries is not feasible
or may involve unacceptable political risks.

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.

We follow the guidelines listed below for making the primary investments for the
Fund. For temporary defensive purposes, we may invest up to 100% of the Fund's
assets in high quality foreign and domestic money market securities. We may do
this when we think economic, political or market conditions in foreign countries
make it too risky to follow our general guidelines. Whenever the Fund assumes
such a defensive position, the Fund may not achieve its investment objective.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Foreign equity securities(2) at least 65%
Equity securities including common
stock, preferred stock,
convertible preferred stock,
rights and warrants, and American
Depository Receipts ("ADRs"),
European Depository Receipts
("EDRs") and Global Depository
Receipts ("GDRs")
- ----------------------------------------------------
Equity securities of issuers in up to 40%
emerging countries(3)
- ----------------------------------------------------
Equity securities of small generally 50%
capitalization companies(4)
- ----------------------------------------------------
Forward currency exchange up to 35%
contracts
- ----------------------------------------------------
Short-term investments up to 100%
- ----------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
(1) At time of purchase.
(2) We intend to invest at least 65% of this Fund's
total assets in the equity securities of at
least three countries outside the United States.
(3) An "emerging country" security is issued by a
company that in our opinion has one or more of
the following characteristics: (i) its principal
securities trading market is in an emerging
country; (ii) alone or on a consolidated basis,
it derives 50% or more of its annual revenue
from either goods produced, sales made or
services performed in emerging countries, or
(iii) it is organized under the laws of, and has
a principal office in, an emerging country.
(4) Small capitalization companies are companies
with market capitalizations of less than $1
billion at the time of purchase. In certain
countries, companies at the high end of the $1
billion capitalization range would be considered
to be mid cap or large cap companies.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

Foreign Securities Risks:

Political Risk: the risk that a change in a foreign government will occur
and that the

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of Investments."

13
<PAGE> 17

INTERNATIONAL GROWTH
FUND
Fact Sheet
- --------------------------------------------------------------------------------

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.

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: like all managed 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.

14
<PAGE> 18

INTERNATIONAL VALUE
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH OF CAPITAL AND
FUTURE INCOME THROUGH
INVESTMENTS IN NON-U.S.
ISSUERS
- -------------------------------------------------
Investment Category GROWTH

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

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Capital Guardian Trust Company

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.

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. The Fund may invest in securities of issuers located in emerging market
countries.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Foreign securities(2)
Equity securities, investment at least 65%
grade fixed income securities
- ----------------------------------------------------
Futures and options up to 90% of
Put and call options on the amount in
foreign currencies and forward foreign
currency contracts securities
- ----------------------------------------------------
Cash, cash equivalents, government up to 100%
securities, nonconvertible
preferred stocks, or investment
grade fixed income securities
- ----------------------------------------------------
(1) At the time of purchase.
(2) We may invest up to 10% of the Fund's assets in
the securities of foreign small capitalization
companies. The Fund also may invest in
securities of issuers located in emerging market
countries.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

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

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.

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.

Manager Risk: like all managed 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.

For additional
information about THE
FUND'S INVESTMENTS see
"Types of Investments".

15
<PAGE> 19

LARGE CAP GROWTH
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal LONG-TERM GROWTH
THROUGH INVESTMENTS IN
LARGE CAP U.S. ISSUERS.
DIVIDEND INCOME IS A
SECONDARY OBJECTIVE.
- -------------------------------------------------
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.

INVESTMENT STRATEGY
The Fund invests primarily 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.

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 benchmark. 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.

We follow the guidelines listed below for making the primary investments for the
Fund. For temporary defensive purposes, we may invest up to 100% of the Fund's
total assets in fixed income securities, including U.S. Government securities,
repurchase agreements collateralized by U.S. Government securities, commercial
paper rated at least A-2 by S&P or P-2 by Moody's, certificates of deposit,
bankers' acceptances, repurchase agreements, non-convertible preferred stocks,
non-convertible corporate bonds with a remaining maturity of less than one year.
The Sub-adviser will not necessarily dispose of a fixed income security when its
ratings are downgraded to below investment grade. Whenever the Fund assumes such
a defensive position, the Fund may not achieve its investment objective.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Equity securities of large cap at least 65%
U.S. issuers
- ----------------------------------------------------
Other equity securities of U.S. up to 25%
and foreign issuers(2), including
convertible securities, ADRs and
GDRs
- ----------------------------------------------------
Investment grade fixed income up to 100%
securities
- ----------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
(1) At time of purchase.
(2) This Fund may invest in the equity securities of
a foreign issuer only if the securities are
traded in the U.S.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

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.

16
<PAGE> 20

LARGE CAP GROWTH
FUND
Fact Sheet
- --------------------------------------------------------------------------------

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.

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.

Manager Risk: like all managed 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.

17
<PAGE> 21

LARGE CAP VALUE FUND
Fact Sheet
- -------------------------------------------------
Investment Goal TOTAL RETURNS EXCEEDING
THE RUSSELL 1000 VALUE
INDEX THROUGH INVESTMENTS
IN EQUITY SECURITIES
- -------------------------------------------------
Investment Category GROWTH

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

INVESTMENT ADVISER
VALIC

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

INVESTMENT OBJECTIVE
Seeks to provide total returns that exceed over time the Russell 1000(R) Value
Index (Index) through investment in equity securities.

INVESTMENT STRATEGY
Securities will be selected on the basis of a proprietary analytical model
developed by the Sub-adviser.

We follow the guidelines listed below for making the primary investments for the
Fund. For temporary defensive purposes, we may invest up to 100% of the Fund's
assets in high quality short-term fixed income securities such as U.S.
Government securities, repurchase agreements collateralized by these
obligations, variable amount master demand notes, commercial paper, band
certificates of deposit, bankers' acceptances and time deposits. Whenever the
Fund assumes such a defensive position, the Fund may not achieve its investment
objective.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------------
<S> <C>
Equity securities of large at least 65%
capitalization companies
- --------------------------------------------------
Securities lending up to 33 1/3%
- --------------------------------------------------
When issued securities up to 25%
- --------------------------------------------------
High quality short-term up to 100%
fixed income securities
- --------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* At time of purchase.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the Fund
will 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.

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

18
<PAGE> 22

MID CAP GROWTH FUND
Fact Sheet
- -------------------------------------------------
Investment Goal CAPITAL APPRECIATION
THROUGH INVESTMENTS IN
MEDIUM CAPITALIZATION EQUITY SECURITIES.
CURRENT INCOME IS A
SECONDARY OBJECTIVE.
- -------------------------------------------------
Investment Category GROWTH

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

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.

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.

INVESTMENT STRATEGY
This Fund will invest principally in the equity securities of medium
capitalization companies. Medium capitalization companies include companies with
a market capitalization of $1 to $7 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 we feel are
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. We use 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.

We follow the guidelines listed below for making the primary investments for
this Fund. For temporary defensive reasons, we may invest up to 100% of the
Fund's assets in money market instruments and cash and cash equivalents. We may
do this when we think economic and market conditions make it too risky to follow
its general guidelines.

Whenever the Fund assumes such a defensive position, the Fund may not achieve
its investment objective.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- ----------------------------------------------------
<S> <C>
Equity securities of medium at least 65%
capitalization companies
- ----------------------------------------------------
Other equity securities Common up to 35%
stocks, convertible preferred
stocks, preferred stocks and
convertible bonds traded on
domestic exchanges or in over-the-
counter markets
- ----------------------------------------------------
Money Market Securities up to 100%
- ----------------------------------------------------
</TABLE>

* At time of purchase.

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

19
<PAGE> 23

MID CAP VALUE FUND
Fact Sheet

- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS IN MEDIUM
CAPITALIZATION COMPANIES
- -------------------------------------------------
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.

INVESTMENT STRATEGY
This Fund invests principally 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(R) Index. As of June 30, 1999, the largest company included in the
Russell Midcap(R) Index had an approximate market capitalization of $
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.

We follow the guidelines listed below for making the primary investments for the
Fund. For temporary defensive reasons, we may invest up to 100% of the Fund's
assets in cash and cash equivalents, U.S. Government securities, commercial
paper and certain other money market instruments, including repurchase
agreements collateralized by the foregoing. We may do this when we think
economic and market conditions make it too risky to follow its general
investment guidelines. Whenever the Fund assumes such a defensive position, the
Fund may not achieve its investment objective.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- ----------------------------------------------------
<S> <C>
Equity securities of medium at least 65%
capitalization companies
- ----------------------------------------------------
Other equity securities up to 35%
Common stock, preferred stock,
convertible securities
- ----------------------------------------------------
Covered call options securities up to 35%
- ----------------------------------------------------
Cash and cash equivalents up to 100%
- ----------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* At time of purchase.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

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

Manager Risk: like all managed 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.

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

20
<PAGE> 24

MODERATE GROWTH
LIFESTYLE FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH AND CURRENT INCOME
THROUGH INVESTMENTS IN
SERIES COMPANY FUNDS
- -------------------------------------------------
Investment Category LIFESTYLE

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

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks growth and current income through investments in Series Company 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.

<TABLE>
<S> <C>
International Equity Securities 10%-20%
Small Capitalization Equity
Securities 10%-20%
Medium Capitalization Equity
Securities 10%-20%
Large Capitalization Equity
Securities 25%-35%
Bonds 20%-30%
</TABLE>

We intend to allocate the Fund's assets among the Series Company Funds as
follows:

<TABLE>
<S> <C>
American General International Value Fund 8%
American General International Growth Fund 7%
American General Small Cap Value Fund 8%
American General Small Cap Growth Fund 7%
American General Mid Cap Value Fund 8%
American General Mid Cap Growth Fund 7%
American General Large Cap Growth Fund 15%
American General Large Cap Value Fund 15%
American General Domestic Bond Fund 25%
</TABLE>

INVESTMENT RISK
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.

The Fund's performance is directly related to the performance of the Series
Company Funds in which it invests. Changes in the net asset values of the
Underlying Series Company 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 Series Company Funds to meet their investment objectives.

21
<PAGE> 25

MONEY MARKET FUND
Fact Sheet
- -------------------------------------------------
Investment Goal INCOME THROUGH
INVESTMENTS IN SHORT-TERM
MONEY MARKET SECURITIES
- -------------------------------------------------
Investment Category STABILITY

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

INVESTMENT ADVISER
VALIC

INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments.

INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. 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
minimize any fluctuation in the value of the Fund's portfolio.

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*

- - Rule 144A securities (liquid)
- ---------------
* Limited to 10% of the Fund's net assets at all times

INVESTMENT RISK
The short-term money market securities the Fund invests in are high-quality
investments posing low credit and interest rate risks. Because the risk to the
money you invest is low, the potential for profit is also low.

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

- - The rate of income varies daily depending on short-term interest rates

- - A significant change in interest rates or a default on a security held by
the Fund could cause the value of your investment to decline

- - 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
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

22
<PAGE> 26

SMALL CAP
GROWTH FUND
Fact Sheet
- -------------------------------------------------
Investment Goal LONG-TERM GROWTH
THROUGH INVESTMENTS IN
SMALL GROWTH COMPANIES
- -------------------------------------------------
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.

INVESTMENT STRATEGY
This Fund invests in small capitalization U.S. companies, which are companies
whose market capitalizations are greater than $150 million and less than $1.25
billion. 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.

We follow the guidelines listed below for making the primary investments for the
Fund. During severe market downturns, we may invest up to 100% of the Fund's
assets in investment grade short-term securities, including repurchase
agreements. Whenever the Fund assumes such a defensive position, the Fund may
not achieve its investment objective.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Equity securities of at least 65%
small capitalization
growth companies
including U.S. and
foreign common stocks,
convertible securities,
preferred stocks,
warrants and rights
- ----------------------------------------------------
Other equity securities up to 35%
of U.S. and foreign
large and medium
capitalization issuers
including common stocks,
convertible securities,
preferred stocks,
warrants, rights and
investment company
securities
- ----------------------------------------------------
Investment Grade short- up to 100%
term securities
- ----------------------------------------------------
</TABLE>

(1) At time of purchase.

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

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.

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

23
<PAGE> 27

SMALL CAP VALUE FUND
Fact Sheet
- -------------------------------------------------
Investment Goal MAXIMUM LONG-TERM
THROUGH INVESTMENTS IN
CAPITALIZATION COMPANIES
- -------------------------------------------------
Investment Category GROWTH

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

INVESTMENT ADVISER
VALIC

INVESTMENT SUBADVISER
Fiduciary Management Associates, Inc.

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.

INVESTMENT STRATEGIES

This Fund invests primarily in equity securities of small capitalization
companies, which are companies whose stock market capitalizations range from $50
million to $1 billion and companies included in the Index. One portion of the
Fund's investment portfolio will be actively managed and the other portion will
be passively managed. 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.

The passively-managed portion of the Fund's investment portfolio is comprised of
a sampling of stocks in the Russell 2000(R) Index (Index) that, as a group,
should reflect its performance. The stocks of the 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 stocks held by the Fund are
weighted to make the Fund's aggregate investment characteristics similar to
those of the Index as a whole. Since it may not be possible for this Fund to buy
every stock included in the Index or in the same proportions, we rely on
optimization to determine, of the stocks tracked by the index, how many and
which ones to buy.

We follow the guidelines listed below for making the primary investments for the
Fund.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Equity securities of small at least 65%
capitalization companies(2)
- ----------------------------------------------------
Short-term investments Foreign and up to 35%
domestic money market instruments,
certificates of deposit, bankers'
acceptances, time deposits, U.S.
Government obligations, U.S.
Government agency securities,
short-term corporate fixed income
securities(3), commercial paper
rated A -1 or A-2 by S&P or
Prime-1 or Prime-2 by Moody's or,
if unrated, of comparable quality,
repurchase agreements
- ----------------------------------------------------
(1) At time of purchase.
(2) This Fund will invest at least 65% of its total
assets in equity securities of companies whose
stock market capitalizations range from $50
million to $1 billion, including stocks in the
Russell 2000 Index.
(3) The Fund will not purchase short-term fixed
income securities rated below Baa by Moody's or
BBB by S&P. However, the Sub-adviser will not
necessarily dispose of a fixed income security
when its rating is down graded to below
investment grade.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

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

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

24
<PAGE> 28

SMALL CAP VALUE FUND
Fact Sheet
- --------------------------------------------------------------------------------

Manager Risk: like all managed 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. Also, the sub-adviser's investment approach could
fall out of favor with the investing public, resulting in lagging performance
versus other types of stock funds. A portion of this Fund's portfolio is
invested in a statistically-selected sampling of the 2000 stocks in the Index.
This part of the Fund's investment portfolio avoids the risks of individual
stock selection and seeks to achieve and exceed the return of the smaller-sized
company sector of the market. On the average, that return has been positive, but
has been negative at certain times. There is no assurance that a positive return
will occur in the future.

25
<PAGE> 29

SOCIALLY RESPONSIBLE
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS IN COMPANIES
MEETING SOCIAL CRITERIA
OF THE 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. The Fund does not invest in companies that are specifically 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 STRATEGY
We follow the guidelines listed below for making the primary investments for the
Fund.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- ---------------------------------------------------
<S> <C>
Equity securities of companies at least 80%
meeting the Fund's social
criteria
- ---------------------------------------------------
Other types of equity securities up to 20%
of companies meeting social
criteria including:
Foreign securities
Preferred stock
Convertible securities
- ---------------------------------------------------
High quality money market up to 20%
securities and warrants
- ---------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* At time of purchase.
</TABLE>

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), and special magazines and papers that publish this type of
information.

Since our definition of social criteria is not "fundamental," the Series
Company's Board of Trustees may change it without shareholder approval. When
deciding to make changes to the criteria, the Board will consider, among other
things, new or revised state laws that govern or affect the investments of
public funds. At least once a year, we survey state laws on this issue to look
for any new developments. If our 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.

INVESTMENT RISK
Most of the companies this Fund invests in are included in the S&P 500 Index.
This Fund may experience Market Risk. Market Risk is the risk that the value of
the securities purchased by the fund will decline as a result of economic,
political or market conditions or an issuer's financial circumstances. Like all
managed 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. Because of these principal risks the value of your investment may
fluctuate and you could lose money.

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.

Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".

26
<PAGE> 30

STRATEGIC BOND
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal HIGHEST POSSIBLE TOTAL
RETURN AND INCOME
CONSISTENT WITH
CONSERVATION OF CAPITAL
THROUGH INVESTMENTS IN
INCOME PRODUCING
SECURITIES
- -------------------------------------------------
Investment Category INCOME

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

INVESTMENT ADVISER
VALIC

INVESTMENT SUB-ADVISER
American General Investment Management, L.P.

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.

INVESTMENT STRATEGY
The Fund invests in a broad range of fixed income securities including
investment grade bonds, U.S. Government and agency obligations, mortgage backed
securities, high yield bonds, emerging market debt and non-dollar bonds, to
provide you with the highest possible total return from current income and
capital gains, while preserving your investment. A substantial portion of the
Fund may be invested in high yielding, high risk securities.

We follow the guidelines listed below for making the primary investment for the
Fund.

<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets(1)
- ----------------------------------------------------
<S> <C>
Investment grade fixed income at least 65%
securities(2), U.S. Government and
agency and mortgage related
securities, U.S., Canadian and
foreign high yield, high risk
fixed income securities rated C or
higher by Moody's or CC or higher
by S&P and comparable unrated
securities(3)
- ----------------------------------------------------
Foreign non-dollar bonds (currency up to 25%
exposure may be hedged or
unhedged)
- ----------------------------------------------------
Equity securities
preferred stocks, convertible up to 20%
securities, common stocks and
warrants
- ----------------------------------------------------
Rule 144A securities (liquid) up to 50%
- ----------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
(1) At time of purchase.
(2) The Sub-adviser will not necessarily dispose of
a fixed income security when its rating is down
graded to below investment grade.
(3) Commonly referred to as high yield, high risk,
junk or below investment grade fixed income
securities.
</TABLE>

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

Market Risk: the risk that the value of the securities purchased by the Fund
will decline as a result of economic, political or market conditions or an
issuer's financial circumstances.

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: the risk that fluctuations in interest rates may affect the
value of the Fund's interest-paying fixed income securities.

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.

Limited Information Risk: the risk that foreign companies may not be subject
to accounting standards or governmental

Additional information
about THE FUND'S
INVESTMENTS provided
under "Types of
Investments".

27
<PAGE> 31

STRATEGIC BOND
FUND
Fact Sheet
- --------------------------------------------------------------------------------

supervision comparable to U.S. companies and that less public information
about their operations may exist.

Manager Risk: like all managed 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.

28
<PAGE> 32

MORE ABOUT PORTFOLIO 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.

Stocks are one type of equity security. Generally, there are three types of
stocks:

Common stock -- Each share of common stock represents a part of the ownership of
the company. The holder of common stock participates in the growth of the
company through increasing stock price and receipt of dividends. If the company
runs into difficulty, the stock price can decline and dividends may not be paid.

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

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

All of the Funds, except the Lifestyle Funds and the Money Market Fund, may
invest in common, preferred, and convertible preferred stock in accordance with
their investment strategies.

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. More information about these equity securities is set forth herein or
contained in the Statement of Additional Information.

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.

All of the Funds, except the Lifestyle Funds, may invest in fixed income
securities in accordance with their investment strategies.

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 may invest in include, but are not limited to: U.S. Government bonds and
investment grade corporate bonds (the Mid Cap Value Fund, the Balanced Fund, the
Domestic Bond Fund, the High Yield Bond Fund, the Strategic Bond Fund and the
Core Bond Fund may also invest in below investment grade bonds). For a
description of investment grade bonds and below investment grade bonds see "A
Word about Risk -- Credit Risk" in this prospectus.

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. Most commercial paper matures in 50 days or less.

Bonds that are rated Baa by Moody's or BBB by S&P have speculative
characteristics. Bonds that are unrated or rated below Baa3 by Moody's or BBB-
by S&P (commonly referred to as high yield, high risk or "junk bonds") are
regarded, on balance, as predominantly speculative. Changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and principal in accordance with the terms of the
obligation than is the case with higher rated bonds. While such bonds may have
some quality and protective

ISSUED means the
Company (ISSUER) sold it
originally to the public.

For more information about
FIXED INCOME SECURITIES AND
THEIR RATINGS, see the Appendix
herein and the Statement
of Additional Information.

29
<PAGE> 33

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

characteristics, these are outweighed by uncertainties or risk exposures to
adverse conditions. Lower rated bonds may be more susceptible to real or
perceived adverse economic and individual corporate developments than would
investment grade bonds. See "A Word about Risk -- Risks Associated with Lower
Rated Fixed Income Securities" herein.

For example, a projected economic downturn or the possibility of an increase in
interest rates may affect prices because such an event might lessen the ability
of highly leveraged high yield issuers to meet their principal and interest
payment obligations, meet projected business goals, or obtain additional
financing. In addition, the secondary trading market for lower rated bonds may
be less liquid than the market for investment grade bonds. This potential lack
of liquidity may make it more difficult to accurately value certain of these
lower rated portfolio securities.

VALIC and the Sub-advisers will not necessarily dispose of a bond when its
ratings are down graded to below investment grade.

Bonds are not the only type of fixed income security. Other fixed income
securities include but are not limited to 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. For more information about specific fixed
income securities see the Statement of Additional Information.

U.S. GOVERNMENT SECURITIES

All 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,
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.

MORTGAGE-RELATED SECURITIES

Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed 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 (net of fees paid
to the issuer or guarantor of 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.,

For more information about
MORTGAGE-RELATED SECURITIES,
see the Statement of
Additional Information.

30
<PAGE> 34

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

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. 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, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Fund's diversification tests.

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 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.

Mortgage-related securities include mortgage pass-through securities described
above and securities that directly or indirectly represent a participation in,
or are secured by and payable from, mortgage loans on real property, such as
mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities.
These securities may be structured in classes with rights to receive varying
proportions of principal and interest.

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

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 the Funds in this prospectus, other than the Lifestyle Funds and the Mid Cap
Value Fund, may invest in loan participations.

VARIABLE AMOUNT DEMAND MASTER NOTES

The Mid Cap Growth Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the
Balanced Fund, the Domestic Bond Fund, the High Yield Bond Fund, the Strategic
Bond Fund and the Core Bond Fund may invest in 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.

VARIABLE RATE DEMAND NOTES

All Funds may invest in variable rate demand notes ("VRDNs"). 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 also may
invest in participation VRDNs, which provide the Fund with an undivided interest
in underlying VRDNs held by major investment banking institutions. Any purchase
of VRDNs will meet applicable diversification and concentration requirements,
and with respect to the Money Market Fund, the conditions established by the SEC
under which such securities may be considered to have remaining maturities of
397 days or less.

For more information about
LOAN PARTICIPANTS, see the
Statement of Additional
information.

For more information about
ASSET-BACKED SECURITIES, see the
Statement of Additional
information.

31
<PAGE> 35

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

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, the Domestic Bond Fund, the High Yield Bond Fund, the
Strategic Bond Fund and the Core Bond Fund may invest in structured securities.

REAL ESTATE SECURITIES

All of the Funds in this prospectus, except the Lifestyle Funds and the Domestic
Bond Fund, may invest in real estate securities. Real estate securities are
securities issued by companies that invest in real estate or interests therein.
Certain Funds also may invest in 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. More information
about REITs and real estate securities generally is contained in the Statement
of Additional Information.

FOREIGN SECURITIES

All of the Funds, except the Lifestyle Funds, may invest in securities of
foreign issuers. Such foreign securities 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.

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 "Depository Receipts" below.

DEPOSITORY RECEIPTS

All of the Funds in this prospectus, except the Lifestyle Funds, may invest in
ADRs. 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.

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 International Growth
Fund, the Small Cap Growth Fund, the International Value Fund, the High Yield
Bond Fund, the Strategic Bond Fund, and the MidCap Value Fund may invest in EDRs
and/or GDRs. The Large Cap Growth Fund may invest in GDRs but may not invest in
EDRs.

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. The International Growth Fund, the Large Cap
Growth Fund, the Small Cap Growth Fund, the International Value Fund and the Mid
Cap Value Fund may invest in investment funds.

FOREIGN CURRENCY

All of the Funds, except the Lifestyle Funds, the Large Cap Value Fund, the
Small Cap Value Fund, the Large Cap Growth Fund, the Mid Cap Growth Fund, the
Small Cap Growth Fund, the Balanced Fund, the Domestic Bond Fund, the Core Bond
Fund and the Money Market Fund, may buy and sell foreign currencies the same way
they buy and sell other investments. 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.

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.

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

For more information about
FOREIGN CURRENCY, see the
Statement of Additional
Information.

For more information about
ILLIQUID SECURITIES see the
Statement of Additional
Information.

For more information about
REAL ESTATE SECURITIES see the
Statement of Additional
Information.

For more information about
FOREIGN SECURITIES,
see the Statement of
Additional Information.

32
<PAGE> 36

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

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 Directors. 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.

All the Funds, except the Lifestyle Funds, may buy illiquid and restricted
securities, but are restricted as to how much money they may invest in them. See
chart below.

WHEN-ISSUED SECURITIES

When-issued securities are those investments that have been announced by the
issuer and will be on the market soon. 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, other than the Lifestyle Funds, the Money Market Fund and the
Mid Cap Value Fund, may buy when-issued securities in accordance with their
investment strategy.

MONEY MARKET SECURITIES

All of the Funds may invest part of their assets in high quality money market
securities payable in U.S. dollars. A listing of the types of money market
securities in which the Money Market Fund may invest is in that Fund's Fact
Sheet. 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.

These high quality money market securities may 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

INVESTMENT COMPANIES

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.

FUTURES AND OPTIONS

Unlike stocks and bonds that represent actual ownership of that stock or bond,
derivatives are investments which "derive" their value from securities issued by
a company, government, or government agency. In certain cases, derivatives may
be purchased for non-speculative investment purposes or to protect ("hedge")
against a change in the price of the underlying security. There are some
investors who take higher risk ("speculate") and buy derivatives to profit from
a change in price of the underlying security. We may purchase derivatives to
hedge the investment portfolios and to earn additional income in order to help
achieve the Funds' objectives. Generally, we do not buy derivatives to
speculate.

The Funds, other than the Lifestyle Funds, the Money Market Fund, the Mid Cap
Growth Fund and the International Growth Fund may buy and sell derivatives, such
as futures and/or options.

The Funds use stock and bond futures to invest cash and cash equivalents. When
certain levels are reached the Fund will sell the futures and buy stocks or
bonds.

All of the Funds except the Lifestyle Funds, the Money Market Fund, the Mid Cap
Growth Fund, and the International Growth Fund may invest in one or more of the
following types of futures and options:

- - 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.

The International Value Fund, the Large Cap Value Fund, the High Yield Bond
Fund, the Strategic Bond Fund, the Core Bond Fund and the Small Cap Growth Fund
may write and purchase put and call options on securities and stock indices that
are not traded on an exchange.

For more information about
WHEN-ISSUED SECURITIES, see the
Statement of Additional
information.

For more information about
MONEY MARKET SECURITIES OF
FOREIGN ISSUERS, see the
Statement of Additional
information.

For more information on
FUTURES AND OPTIONS,
see the Statement of
Additional Information.

33
<PAGE> 37

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

The Funds, except the Lifestyle Funds, the Large Cap Value Fund, the Small Cap
Value Fund, the Large Cap Growth Fund, the Mid Cap Growth Fund, the Small Cap
Growth Fund, the Core Bond Fund and the Money Market Fund, may write and
purchase options on foreign currencies. These Funds also may purchase forward
foreign currency exchange contracts to protect against a decline in the value of
the U.S. dollar, to effect cross-hedges involving two non-U.S. currencies, or
for, settlement purposes.

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. Additional
information about swap agreements is contained in the Statement of Additional
Information.

The Core Bond Fund, the Domestic Bond Fund, the Strategic Bond Fund, the Small
Cap Value Fund and the Small Cap Growth Fund may enter into swap agreements.

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.

The International Growth Fund, the Large Cap Value Fund, the Large Cap Growth
Fund, the Small Cap Value Fund, the International Value Fund, the Balanced Fund,
the Domestic Bond Fund, the High Yield Bond Fund, the Strategic Bond Fund, the
Core Bond Fund and the Small Cap Growth Fund are authorized to use warrants or
rights.

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). 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.

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 discussion of
repurchase agreements, illiquid securities and Fund limitations is contained in
the Statement of Additional Information.

REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS AND BORROWINGS

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.
The Fund generally will segregate assets determined to be liquid by VALIC or a
Sub-adviser. In effect, these assets cover the Fund's obligations under reverse
repurchase agreements.

Certain Funds also 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. The time period from the date of sale to the date of
purchase under a dollar roll is known as the roll period. A Fund foregoes
principal and interest paid during the roll period on the securities sold in a
dollar roll. However, a Fund receives an amount equal to the difference between
the current sales price and the lower price for the future purchase as well as
by any interest earned on the proceeds of the securities sold.

If a Fund's positions in reverse repurchase agreements, dollar rolls or similar
transactions are not covered by liquid assets in a segregated account, as
described above, such transactions would be subject to the Funds' limitations on
borrowings. Apart from such transactions, a Fund will not borrow money, except
as provided in its investment restrictions. See "Investment Restrictions" in the
Statement of Additional Information for a complete listing of each Fund's
investment restrictions.

For more information about
SWAP AGREEMENTS,
see the Statement of
Additional Information.

For more information about
REPURCHASE AGREEMENTS,
see the Statement of
Additional Information.

For more information about
REVERSE REPURCHASE AGREEMENTS,
DOLLAR ROLLS AND BORROWINGS, see
the Statement of Additional
Information.

34
<PAGE> 38

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

Shown below are certain additional investment restrictions applicable to certain
of the Funds

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FUTURES
ILLIQUID RULE 144A AND REAL ESTATE UNSEASONED FOREIGN
SECURITIES(A) SECURITIES OPTIONS SECURITIES(B) COMPANIES SECURITIES WARRANTS
------------- ---------- ------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund 15% 15%
Core Bond Fund 15% 30%
Domestic Bond Fund 15% 15%
High Yield Bond Fund 15% 30%
International Growth
Fund 15% 25%
International Value
Fund 15% 15%
Large Cap Growth Fund 15% 25% 5% 5% 5%
Large Cap Value Fund 15% 15% 10%(c) 5%(d) 5%(a)
Mid Cap Growth Fund 10% 25% 10% 10%
Mid Cap Value Fund 15% 25% 40%(e) 15%(f)
Small Cap Growth Fund 15% 30% 25% 5%
Small Cap Value Fund 15% 10% 20% 10% 5%(g)
Socially Responsible
Fund 10% 20% 33%
Strategic Bond Fund 15% 50%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)Percent of the Fund's net assets applied at all times.
(b)These Funds may not invest directly in real estate, but rather, in interests
in or readily marketable securities issued by companies that invest in real
estate, including real estate investment trusts (REITs).
(c)Includes up to 5% in covered put and call options on securities and put and
call options on securities indices and up to 5% in initial margin deposits on
futures and premiums for options and futures.
(d)ADRs.
(e)Includes up to 35% in covered call options and 5% in options on foreign
currencies.
(f)Includes up to 5% in foreign currency transactions and 10% in foreign
currencies.
(g)Will not exceed 2% of its assets with respect to warrants not listed on the
New York or American Stock Exchanges.

A WORD ABOUT RISK

There are several basic types of investment risk you may be subject to:

- - Market Risk

- - Value Investing Risk

- - Credit (Financial) Risk

- - Risks Associated with Lower Rated Fixed Income Securities

- - Interest Rate Risk

- - Derivatives Risk

- - Manager Risk

- - Prepayment Risk

- - Risk Associated with Foreign Securities

- - Year 2000 Risk

Generally, stocks are considered to be subject to market risk, while fixed
income securities, such as U.S. government bonds and money market securities are
subject to interest rate risk. Other fixed income securities, such as corporate
bonds, involve both interest rate and credit (financial) risk. Lastly, risks
associated with foreign securities can involve political, currency and limited
information risks. Each of these types of investment risks, including manager
risk, is discussed below.

Market Risk

Market risk refers to the 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 to fall in price.
When this happens, even though a company is experiencing growth in profits, the
price of its stock could fall.

Value Investing Risk

Value investing risk refers to the risk that the portfolio manager's judgements
that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.

Credit (Financial) Risk

Credit risk refers to the risk that the issuer of a fixed income security may
default or be unable to pay interest or principal due on a fixed income
security.

To help the Funds' Investment Adviser or Sub-advisers decide which U.S.
corporate and foreign fixed income securities to buy, they rely on Moody's and
S&P (two nationally recognized bond rating services), and on VALIC's and/or a
Sub-adviser's own research. This research lowers the risk of buying a fixed
income security of a company that may not pay the interest and principal on the
fixed income security.

Certain of the Funds in this prospectus may buy fixed income securities that are
rated as investment grade. There are four different levels of investment grade,
from AAA to BBB; see Description of Bond Ratings herein. All fixed income
securities with these ratings are considered to have adequate ability to pay
interest and principal.

All of the Funds in this prospectus may buy fixed income securities issued by
the U.S. Government. The U.S. Government guarantees it will always pay principal
and interest.

35
<PAGE> 39

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

Risks Associated with Lower Rated Fixed Income Securities

Certain of the Funds also may purchase 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.

The lower rated but higher yielding fixed income securities purchased by the
Funds 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.

An economic downturn or increase in interest rates is likely to have a greater
negative effect on the ability of the issuers of lower rated fixed income
securities to pay principal and interest, meet projected business goals, and
obtain additional financing. These circumstances also may result in a higher
incidence of defaults compared to higher rated securities. As a result, adverse
changes in economic conditions and increases in interest rates may adversely
affect the market for lower rated fixed income securities, the value of such
securities in a Fund's portfolio, and, therefore, the Fund's net asset value. As
a result, investment in a Fund in lower rated fixed income securities is more
speculative than investment in a fund that invests primarily in higher rated
fixed income securities.

Although certain Funds intend generally to purchase lower rated securities that
have secondary markets, these markets may be less liquid and less active than
markets for higher rated securities. These factors may limit the ability of a
Fund to sell lower rated securities at their expected value. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of lower rated fixed income securities,
especially in a thinly traded market. If market quotations are not readily
available for the Fund's lower rated or non-rated securities, these securities
will be valued by a method VALIC or the Sub-adviser believes accurately reflects
fair value. Judgment plays a greater role in valuing lower rated fixed income
securities than it does in valuing securities for which more extensive
quotations and last sale information are available.

See the Appendix to the prospectus for a description for corporate bond ratings.

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. If a Fund sells a bond
before it matures, it may lose money, even if the bond is guaranteed by the U.S.
Government. Say, for example, a Fund bought an intermediate government bond last
year that was paying interest at a fixed rate of 6%. Now, intermediate
government bonds are paying interest at a rate of 7%. If the Fund wants to sell
the bond paying 6%, it will have to sell it at a discount (and realize a loss)
to attract buyers because they can buy new bonds paying 7% interest.

Derivatives Risk

Derivatives risk refers to 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.

Manager Risk

Manager risk refers to 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.

Prepayment Risk

Prepayment risk refers to the risk that issuers of fixed income securities will
make prepayments earlier than anticipated during periods of falling interest
rates requiring the Fund to invest in new securities with lower interest rates.
This will reduce the stream of cash payments that flow through the Fund.

36
<PAGE> 40

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

Risk Associated with Foreign Securities

Certain Funds may, subject to limits stated in the Fund's Fact Sheet, invest in
foreign securities including ADRs, EDRs and GDRs and securities of companies
domiciled in emerging market countries. 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 -- 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.

Year 2000 Risk

Like other mutual funds, financial and business organizations and individuals
around the world, the Series Company could be adversely affected if the computer
systems of VALIC and the Sub-advisers and other service providers, over which
the Series Company may have no control, do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly referred to as the "Year 2000 Problem."

When the Year 2000 arrives, the Series Company operations could be adversely
affected if the computer systems used by VALIC or the Sub-advisers, their
service providers and other third parties they do business with are not Year
2000 ready. For example, the Funds and operational areas could be impacted,
including securities trade processing, securities pricing, reporting, custody
functions and others. The Series Company could experience difficulties in
effecting transactions if any of its foreign subcustodians, or foreign
broker/dealers or foreign markets are not ready for Year 2000.

When evaluating current and potential portfolio positions, Year 2000 is one of
the factors that VALIC may consider. VALIC may rely upon public filings and
other statements made by companies regarding their year 2000 readiness. Issuers
in countries outside of the U.S., particularly in emerging markets, may be more
susceptible to Year 2000 problems and may not be required to make the same level
of disclosure regarding year 2000 readiness as is required in the U.S. VALIC, of
course, cannot audit any company or their major suppliers to verify Year 2000
readiness. If a company in which any Fund is invested is adversely affected by
year 2000 problems, it is likely that the price of its security will also be
adversely affected. A decrease in the value of one or more of a Fund's holdings
will have similar impact of the Fund's performance.

VALIC is taking steps that it believes are reasonably designed to address the
Year 2000 Problem with respect to computer systems that it uses. VALIC is also
seeking assurances that its Sub-advisers and other service providers are taking
similar steps as well. However, it is impossible to know exactly how the Year
2000 Problem will affect the administration of the Series Company, performance
of the Funds' portfolios or securities markets in general.

INVESTMENT PRACTICES

Limitations

Each Fund has limitations on the percentage of its assets that it may allocate
to certain investments. These limits are determined by the Fund's investment
objectives and risk level.

Some Funds are restricted from buying certain types of investments altogether.
For example, the Money Market Fund may not invest in futures and options.

Each Fund's limitations are shown in the Investment Strategy section of its Fact
Sheet and under "More About Portfolio Investments."

For more information about
FOREIGN SECURITIES AND
EMERGING MARKETS,
see the Statement of
Additional Information.

For more information about
INVESTMENT LIMITATIONS,
see the Statement of
Additional Information.

37
<PAGE> 41

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

Lending Portfolio Securities

Each Fund, except the Lifestyle Funds, may lend its investment securities to
broker-dealers and other financial institutions to earn more money for the Fund.
Assets are placed in a special account by the borrower to cover the market value
of the securities on loan. The assets serving as collateral for the loan are
valued daily.

A risk of lending portfolio investments is that there may be a delay in the Fund
getting its investments back when a loaned security is sold.

The Funds will only make loans to broker-dealers and other financial
institutions approved by its Custodian, as monitored by VALIC and authorized by
the Board of Trustees.

Diversification

Each Fund's diversification policy limits the amount that the Fund may invest in
certain securities. Each Fund's diversification policy is also designed to
comply with the diversification requirements of the Internal Revenue Code (the
"Code") as well as the 1940 Act.

The Lifestyle Funds are "non-diversified" under the 1940 Act, which means that
the Lifestyle Funds are not limited in the proportion of their assets that may
be invested in the securities of a single issuer.

For more information about
LENDING PORTFOLIO
SECURITIES, see the
Statement of Additional
Information.

38
<PAGE> 42

ABOUT THE SERIES COMPANY'S MANAGEMENT
- --------------------------------------------------------------------------------

INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960. VALIC, as of June 30, 1999, had over $12 billion in assets
under management. VALIC has been the Investment Adviser for the Funds that
comprise the Series Company since their inception.

VALIC and American General Investment Management, L.P., ("AGIM") are members of
the American General Corporation group of companies. Both entities are
SEC-registered investment advisors and have been providing these services for
over years. VALIC's principal officers, directors and portfolio managers hold
similar positions with AGIM. The American General Corporation group of Companies
is a leading provider of retirement services, life insurance and consumer loans.
Members of the American General Corporation group of companies operate in each
of the 50 states and Canada. As of , 1999, the two investment
advisory firms managed approximately in assets.

As Investment Adviser, VALIC oversees the Fund's day to day operations. Also,
VALIC supervises the purchase and sale of Fund investments and performs the cash
management function. For the International Growth Fund, the Large Cap Growth
Fund, the Mid Cap Growth Fund, the Small Cap Growth Fund, the International
Value Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the Small Cap
Value Fund, the Balanced Fund, the High Yield Bond Fund, the Strategic Bond
Fund, the Domestic Bond Fund, and the Core Bond Fund, VALIC employs Investment
Sub-advisers who make investment decisions for such Fund(s). However, VALIC
makes investment decisions for, and is directly responsible for the day to day
management of, the Socially Responsible Fund, the Money Market Fund and the
Lifestyle Funds. VALIC serves as Investment Adviser through an Investment
Advisory Agreement it entered into with the Series Company. The Investment
Advisory Agreement 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 (e.g., daily calculation of the net asset value).
The Series Company allocates these expenses to each Fund in a manner approved by
the Board of Trustees. After the second year, this agreement will be renewed
once each year by the Series Company's Board of Trustees.

Investment decisions for the Socially Responsible Fund and the passively managed
portion of the Small Cap Value Fund are made by a team of portfolio managers,
assistant portfolio managers and analysts organized for that purpose. The teams
meet regularly to review portfolio holdings and discuss purchase and sale
activity.

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 ("AGSPC Money Market Fund").

The Lifestyle Funds are managed by a team led by William Trimbur, Jr. Mr.
Trimbur has been this Fund's portfolio manager and Vice President and Investment
Officer of the Series Company since its inception. Since 1987, Mr. Trimbur has
served as Vice President and Investment Officer of American General Series
Portfolio Company, a registered investment company managed by VALIC. Kirsten E.
Mires and Jeanie G. Weathington assist Mr. Trimbur in the management of the
Fund. Ms. Mires, Investment Analyst, joined VALIC in October 1997. Prior to
this, Ms. Mires was an Investment Officer at Chase Securities of Texas from
November 1995 to October 1997. From June 1995 to November 1995, Ms. Mires was
employed as an Investment Account Executive at Copeland Companies. Prior to
this, Ms. Mires was a Marketing Specialist at Transamerica Investment Management
from July 1993 to June 1995. Ms. Weathington, Investment Analyst, joined VALIC
in April 1998. Prior to this, Ms. Weathington was a Financial Analyst at Bank
One from December 1996 to April 1998. From July 1994 to December 1996, Ms.
Weathington was Director-Portfolio Management at Goodman Financial Corporation.
Prior to this, Ms. Weathington was a Portfolio Analyst at JMC Capital
Management, Inc. from February 1994 to July 1994. Prior to this, Ms. Weathington
studied for a Bachelor of Science degree in finance at the University of New
Orleans.

For more information about the Advisory Agreement, see the "Investment Adviser"
section in the Statement of Additional Information.

INVESTMENT SUB-ADVISERS

For some of the Funds, VALIC works with investment Sub-advisers, financial
service companies that specialize in certain types of investing. However, VALIC
still retains ultimate responsibility for managing the Funds. The Sub-

VALIC'S ADDRESS is
2929 Allen Parkway,
Houston, Texas 77019.

39
<PAGE> 43

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

adviser's role is to make investment decisions for the Funds according to each
Fund's investment objectives and restrictions.

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-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 to each Sub-adviser.

The Series Company was issued an exemptive order by the Securities and Exchange
Commission (the "SEC") on September 9,1998 for an exemption (the "Exemption")
from certain provisions of the Investment Company Act of 1940 ("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 the 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
will disclose in this prospectus the existence, substance and effect of the
Exemption; and (5) the Trustees, including a majority of the "independent"
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, by written consent dated
August 26, 1998, voted 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.

The Sub-advisers are:

AMERICAN GENERAL INVESTMENT MANAGEMENT, L.P. ("AGIM")

AGIM is the Sub-adviser for the Core Bond Fund, the Strategic Bond Fund and the
High Yield Bond Fund. AGIM is an indirect wholly-owned subsidiary of American
General Corporation. AGIM provides investment management and advisory services
to pension and profit sharing plans, financial institutions and other investors.

Robert N. Kase, CF, 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 and High Yield Bond Fund are
made by a team of portfolio managers, assistant portfolio managers and analysts
headed by Steven Guterman organized for that purpose. The team meets regularly
to review portfolio holdings and discuss purchase and sale activity.

BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL MANAGEMENT")

Brown Capital Management is the Sub-adviser for the Mid Cap Growth Fund.
Established as a Maryland corporation in 1983, Brown Capital Management served
as investment adviser to approximately $4.7 billion in assets as of June 30,
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")

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 June 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.

AMERICAN GENERAL
INVESTMENT MANAGEMENT'S
PRINCIPAL OFFICES
are located at
2929 Allen Parkway,
Houston, Texas
02109.

BROWN CAPITAL
MANAGEMENT'S
PRINCIPAL OFFICES
are located at
809 Cathedral Street,
Baltimore, Maryland
21201.

CAPITAL GUARDIAN'S
PRINCIPAL OFFICES
are located at
333 South Hope Street,
Los Angeles, California
90071.

40
<PAGE> 44

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

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.

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.

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")

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, and provides investment management services to
corporations, foundations, endowments, pension and profitsharing plans, trusts,
estates and other institutions as well as individuals. As of June 30, 1999, FMA
had over $1.3 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")

GSAM is the Sub-adviser for the Large Cap Growth Fund. GSAM is a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"). 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 June 30, 1999, GSAM and its affiliates served as
investment adviser or distributor for assets exceeding $191.1 billion.

FMA'S PRINCIPAL OFFICES
are located at
55 West Monroe Street,
Suite #2550,
Chicago, Illinois 60603.

GSAM'S PRINCIPAL OFFICES
are located at
32 Old Slip,
New York, New York 10005.

41
<PAGE> 45

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

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. From 1987 to 1989, he was the senior
quantitative analyst in the Goldman Sachs Investment Research Department and the
author of the monthly Stock Selection publication. Mr. Clark, Vice President,
joined the Sub-adviser's quantitative equity management team in 1992. Prior to
joining the Sub-adviser, Mr. Clark studied for a Ph.D in finance at the
University of Chicago. Mr. Pinter, Vice President, joined the Sub-adviser in
1990. From 1985 to 1990, he was a project manager in the Sub-adviser's
Information Technology Division. 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")

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 June 30, 1999, J.P. Morgan and
its affiliates employed over 380 analysts and portfolio managers around the
world and had more than $326 billion in assets under management.

Candice Eggerss, Saira Malik and Carolyn Jones are the members of the
Sub-adviser's team who will be primarily responsible for the day-to-day
management of the Small Cap Growth Fund. Ms. Eggerss, who has been with the
Sub-adviser since 1996, is a Vice President and specializes in portfolio
investments in small capitalization technology companies. Prior to this, Ms.
Eggerss was employed at Weiss, Peck and Greer from April 1993 to April 1996 and
at Equitable Capital Management prior to 1993. Ms. Malik joined the Sub-adviser
in 1995 as a small company equity analyst and portfolio manager after completing
her graduate studies at the University of Wisconsin. Ms. Jones has been with the
Sub-adviser since July 1998. Prior to this, Ms. Jones served as a portfolio
manager in J.P. Morgan's private banking group and as a product specialist at
Merrill Lynch Asset Management.

JACOBS ASSET MANAGEMENT

Jacobs Asset Management is the Sub-adviser for the International Growth Fund.
Jacobs Asset Management is a Delaware limited partnership. United Asset
Management Corporation 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 June 30, 1999, Jacobs Asset Management had more than $432 million 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")

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 June 30, 1999, NB Management and its affiliates managed
approximately $56 billion in aggregate net assets, including approximately $20
billion in mutual fund assets.

Michael M. Kassen, Robert I. Gendelman, and S. Basu Mullick serve as co-managers
of the Mid Cap Value Fund. Messrs. Kassen, Gendelman, and Mullick are Vice
Presidents of the Sub-adviser and Messrs. Kassen and Gendelman are managing
directors of Neuberger Berman, LLC. Messrs. Kassen, Gendelman and Mullick have
been associated with the Sub-adviser since 1990, 1994, and 1998, respectively.
Prior to NeubergerBerman, Messrs. Gendelman and Mullick were portfolio managers
for other mutual fund managers.

STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")

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 $575
billion under management as of June 30, 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.

These financial service companies act as Investment Sub-advisers through an
agreement each entered into with VALIC. For more information on these agreements
and on these Sub-advisers, see the "Investment Sub-Advisers" section in the
Statement of Additional Information.

According to the agreements we have with the Sub-advisers, we will receive
investment advice

NB MANAGEMENT'S
PRINCIPAL OFFICES
are located at
605 Third Avenue,
Second Floor, New York,
New York 10158-0180.

J.P. MORGAN'S
PRINCIPAL OFFICES
are located at
522 Fifth Avenue,
New York, New York 10036.

STATE STREET
GLOBAL ADVISOR'S
PRINCIPAL OFFICES
are located at
2 International Place,
Boston, Massachusetts
02110.

JACOBS ASSET MANAGEMENT'S
PRINCIPAL OFFICES
are located at
200 East Broward Boulevard,
Suite 1920,
Fort Lauderdale, Florida
33301.

42
<PAGE> 46

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

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 can not 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 are 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 type of
transactions for commissions. The 1940 Act generally prohibits a Sub-adviser or
a Sub-adviser's affiliate, acting as principal, from engaging in securities
transactions with a Fund, without an exemptive order from the SEC.

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

HOW VALIC IS PAID FOR ITS SERVICES

VALIC

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.

Here is a list of the percentages each Fund pays VALIC.

<TABLE>
<CAPTION>
Advisory Fee Paid
(as a % of average
Fund Name daily net assets)
--------- -------------------------------------
<S> <C>
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
Large Cap Growth Fund 0.55%
</TABLE>

<TABLE>
<CAPTION>
Advisory Fee Paid
(as a % of average
Fund Name daily net assets)
--------- -------------------------------------
<S> <C>
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
Small Cap Growth Fund 0.85%
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 Value Fund 0.50%
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
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
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
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% 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
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Money Market Fund 0.25%
Conservative Growth Lifestyle
Fund 0.10%
Moderate Growth Lifestyle Fund 0.10%
Growth Lifestyle Fund 0.10%
</TABLE>

The Investment Advisory Agreement VALIC entered into with each Fund does not
limit how much the Funds pay in monthly expenses each year.

As shareholders of other Series Company Funds, the Lifestyle Funds incur their
proportionate share of the underlying Series Company Funds' fees and expenses,
including the fees paid to VALIC.

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 to
the extent of, or bearing expenses in excess of, such limitations as they may
establish.

43
<PAGE> 47

ABOUT THE SERIES COMPANY
- --------------------------------------------------------------------------------

SERIES COMPANY SHARES

The Series Company is an open-end mutual fund and may offer shares of the Funds
for sale at any time. However, the Series Company offers shares of the Funds
only to registered and unregistered separate accounts of VALIC, and its
affiliates, or employee thrift plans maintained by VALIC or American General
Corporation.

As a participant, you do not directly buy shares of the Funds that make up the
Series Company. Instead, you buy units in either a registered or unregistered
separate account of VALIC or of its affiliates. When you buy these units, you
specify which Funds you want the separate account to invest your money in. The
separate account, in turn, buys the shares of the Funds according to your
instructions. Share certificates are not available. See your contract prospectus
for more information on the separate account associated with your contract.

When the separate accounts buy, sell, or transfer shares of the Funds, they do
not pay any charges related to these transactions.

None of the Funds currently foresees any disadvantages to participants arising
out of the fact that it may offer its shares to separate accounts of various
insurance companies to serve as the investment medium for their variable annuity
and variable life insurance contracts. Nevertheless, the Board of Trustees
intends to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. If such a conflict were to occur, one or
more insurance companies' separate accounts might be required to withdraw their
investments in one or more Funds and shares of another Fund may be substituted.
This might force a Fund to sell portfolio securities at disadvantageous prices.
In addition, the Board of Trustees may refuse to sell shares of any Fund to any
separate account or may suspend or terminate the offering of shares of any Fund
if such action is required by law or regulatory authority or is in the best
interests of the shareholders of the Fund.

For more information on how to participate, see your contract prospectus.

NET ASSET VALUE OF THE SERIES
COMPANY SHARES

How Net Asset Value is Calculated

Here is how the Series Company calculates the net asset value of each Fund's
shares:

Step 1:

<TABLE>
<S> <C> <C>
Total value of the
Fund's assets*
(including money owed
to the fund but not yet The Fund's
collected) = Total
- -- The Fund's liabilities Net Asset Value
(including money owed
by the Fund but not yet
paid)
Step 2:
The Fund's total net
asset value (from
Step 1) NET ASSET VALUE
/ The total number of the = PER SHARE
Fund's shares that are
outstanding.
</TABLE>

* The Series Company uses the fair market value of a Fund's investments to
calculate the Fund's total value. However, it uses the amortized cost method
to determine the values of all the Money Market Fund's investments and of any
other Fund's short-term security maturing within 60 days. The amortized cost
method approximates fair market value.

If a Fund's portfolio includes investments that are not sold often or are not
sold on any exchanges, the Series Company's Board of Trustees or its delegate
will, in good faith, estimate fair market value of these investments.

When Net Asset Value is Calculated

The Series Company calculates the net asset value of each Fund's shares at
approximately 4pm EST each day the New York Stock Exchange is open. (The New
York Stock Exchange is open Monday through Friday but is closed on certain
federal and other holidays.)

Some foreign exchanges trade on weekends or other days when the Funds do not
price their shares. For Funds with substantial investments in those markets the
net asset value of the Fund's shares may change on days when the separate
account may not be able to purchase or redeem Fund shares.

DIVIDENDS AND CAPITAL GAINS

Dividends from Net Investment Income

Net investment income generally includes stock dividends received and bond
interest earned less expenses paid by a Fund. Each Fund pays dividends from net
investment income occasionally. Dividends from net investment income are
automatically reinvested for you into additional shares of the Fund. Each Fund,
except the Money Market Fund pays dividends quarterly. The Money Market Fund
pays dividends daily.

Distributions from Capital Gains

When a Fund sells a security for more than it paid for that security, a capital
gain results. Once a year, each Fund pays distributions from capital gains, as
long as total capital gains exceed total capital losses. Distributions from

44
<PAGE> 48

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

capital gains are automatically reinvested for you into additional shares of the
Fund.

TAX CONSEQUENCES

As the owner of a Contract or a participant under your employer's Contract, you
will not be directly affected by the federal income tax consequences of
distributions, sales or redemptions of Fund shares. You should consult the
prospectus for your Contract for further information concerning the federal
income tax consequences to you of investing in the Funds.

See the Statement of Additional information and your contract prospectus for
further tax discussions. You should also consult your tax advisor before
investing.

45
<PAGE> 49

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance. Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned on an investment in the Fund (assuming reinvestment
of all dividends and distributions).
Per share data assumes that you held each share from the beginning to the end of
each fiscal year. Total return assumes that you bought additional shares with
dividends paid by the Fund. Total returns not annualized.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
--------------------------------------------------------------
AMERICAN AMERICAN AMERICAN
GENERAL AMERICAN GENERAL GENERAL
AMERICAN CONSERVATIVE GENERAL DOMESTIC GROWTH
GENERAL LIFESTYLE CORE BOND BOND LIFESTYLE
BALANCED FUND FUND FUND FUND
-------- ------------ --------- -------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net investment income 0.25 0.25 0.50 0.52 0.08
Net realized & unrealized gain 2.39 1.65 (0.39) (0.44) 2.74
------ ------ ------ ------ ------
Total from investment operations 2.64 1.90 0.11 0.08 2.82
------ ------ ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.25) (0.17) (0.50) (0.52) (0.05)
Net realized gains (0.07) -- (0.03) (0.13) --
------ ------ ------ ------ ------
Total distributions to shareholders (0.32) (0.17) (0.53) (0.65) (0.05)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $12.32 $11.73 $ 9.58 $ 9.43 $12.77
====== ====== ====== ====== ======
TOTAL RETURN 26.49% 19.00% 1.12% 0.59% 28.28%
====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.80% 0.10% 0.80% 0.77% 0.10%
Net investment income to average net assets 2.15% 2.29% 5.06% 5.41% 0.76%
Portfolio turnover rate 78% 94% 489% 156% 9%
Net assets at end of year (000's) $8,537 $7,429 $5,119 $8,252 $8,480
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
------------------------------------------------------------------
AMERICAN AMERICAN AMERICAN AMERICAN AMERICAN
GENERAL GENERAL GENERAL GENERAL GENERAL
HIGH YIELD INTERNATIONAL INTERNATIONAL LARGE CAP LARGE CAP
BOND GROWTH VALUE GROWTH VALUE
FUND FUND FUND FUND FUND
---------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $ 10.00 $10.00
------ ------ ------ ------- ------
INVESTMENT OPERATIONS
Net investment income 0.87 0.13 0.09 0.01 0.13
Net realized & unrealized gain (0.31) 1.09 4.65 3.96 2.85
------ ------ ------ ------- ------
Total from investment operations 0.56 1.22 4.74 3.97 2.98
------ ------ ------ ------- ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.87) -- (0.02) (0.01) (0.13)
Net realized gains -- -- -- -- --
------ ------ ------ ------- ------
Total distributions to shareholders (0.87) -- (0.02) (0.01) (0.13)
------ ------ ------ ------- ------
NET ASSET VALUE, END OF PERIOD $ 9.69 $11.22 $14.72 $ 13.96 $12.85
====== ====== ====== ======= ======
TOTAL RETURN 5.50% 12.20% 47.41% 39.77% 29.87%
====== ====== ====== ======= ======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.98% 1.13% 1.01% 0.81% 0.80%
Net investment income to average net assets 8.51% 1.40% 0.67% 0.13% 1.10%
Portfolio turnover rate 74% 87% 60% 76% 93%
Net assets at end of year (000's) $5,397 $6,815 $8,148 $19,309 $7,856
</TABLE>

46
<PAGE> 50

FINANCIAL HIGHLIGHTS -- CONTINUED

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
--------------------------------------------------------------
AMERICAN AMERICAN AMERICAN AMERICAN
GENERAL GENERAL GENERAL AMERICAN GENERAL
MID CAP MID CAP MODERATE GENERAL SMALL CAP
GROWTH VALUE LIFESTYLE MONEY MARKET GROWTH
FUND FUND FUND FUND FUND
-------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $ 10.00 $ 1.00 $ 10.00
------ ------- ------- ------ -------
INVESTMENT OPERATIONS
Net investment income (0.03) 0.08 0.17 0.05 (0.05)
Net realized & unrealized gain 2.48 4.11 2.18 -- 4.96
------ ------- ------- ------ -------
Total from investment operations 2.45 4.19 2.35 0.05 4.91
------ ------- ------- ------ -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.08) (0.11) (0.05) --
Net realized gains -- (0.29) -- -- (0.05)
------ ------- ------- ------ -------
Total distributions to shareholders -- (0.37) (0.11) (0.05) (0.05)
------ ------- ------- ------ -------
NET ASSET VALUE, END OF PERIOD $12.45 $13.82 $ 12.24 $ 1.00 $ 14.86
====== ======= ======= ====== =======
TOTAL RETURN 24.50% 42.38% 23.52% 4.66% 48.82%
====== ======= ======= ====== =======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.77% 1.03% 0.10% 0.54% 1.11%
Net investment income to average net assets (0.24)% 0.73% 1.60% 4.43% (0.45)%
Portfolio turnover rate 38% 197% 13% N/A 126%
Net assets at end of year (000's) $7,394 $9,039 $10,349 $9,784 $10,843
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
-----------------------------------
AMERICAN AMERICAN AMERICAN
GENERAL GENERAL GENERAL
SMALL CAP SOCIALLY STRATEGIC
VALUE RESPONSIBLE BOND
FUND FUND FUND
--------- ----------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $ 10.00 $10.00
------ ------- -------
INVESTMENT OPERATIONS
Net investment income 0.13 0.14 0.69
Net realized & unrealized gain 0.61 3.45 (0.16)
------ ------- -------
Total from investment operations 0.74 3.59 0.53
------ ------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.13) (0.14) (0.65)
Net realized gains (0.13) (0.57) (0.02)
------ ------- -------
Total distributions to shareholders (0.26) (0.71) (0.67)
------ ------- -------
NET ASSET VALUE, END OF PERIOD $10.48 $ 12.88 $ 9.86
====== ======= =======
TOTAL RETURN 7.34% 36.27% 5.33%
====== ======= =======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.96% 0.55% 0.88%
Net investment income to average net assets 1.28% 1.10% 6.76%
Portfolio turnover rate 102% 29% 143%
Net assets at end of year (000's) $6,414 $10,304 $5,296
</TABLE>

47
<PAGE> 51

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

AMERICAN GENERAL BALANCED FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE BALANCED FUND
AND THE LEHMAN BROTHERS GOVERNMENT & CORPORATE S&P 500 INDEX, AND A BLENDED
BENCHMARK (40% LEHMAN AND 60% S&P 500

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
23.77%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Balanced Fund's inception date was September 21, 1998. However, the Balanced
Fund's investment objectives, policies and strategies are substantially similar,
but not necessarily identical, to those employed by the Sub-adviser with respect
to discretionary investment accounts ("Discretionary Accounts") managed by the
Sub-adviser. Although managed in substantially the same manner as the Balanced
Fund, the Discretionary Accounts may not invest as great a percentage of their
assets in fixed income senior securities as the Balanced Fund. As a result, the
Balanced Fund may have, or may in the past have had, greater exposure to fixed
income senior securities than the Discretionary Accounts. The chart at right
shows the historical investment performance for a composite of all of the
Sub-adviser's Discretionary Accounts ("Sub-adviser Composite") which were
managed by the Sub-adviser in substantially the same manner as the Balanced
Fund. The Sub-adviser Composite represents the total return of all Discretionary
Accounts net of the highest management fee charged and other account fees and
expenses. The inception dates of the Discretionary Accounts comprising
Sub-adviser Composite range from December 31, 1974 to September 30, 1997.

The Discretionary Accounts in the Sub-adviser Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Discretionary Accounts included in the Sub-adviser
Composite had been subject to the requirements imposed on mutual funds, their
performance might have been lower.

Total fees (after expense reimbursements) for the Balanced Fund are higher than
the highest management fees and other fees historically incurred by the
Discretionary Accounts comprising the Sub-adviser Composite. Consequently, the
performance results for the Sub-adviser Composite would have been lower if the
Sub-adviser Composite had the same expenses as the Balanced Fund. The
performance of the Sub-adviser Composite has been calculated in accordance with
SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME
MANNER AS THE BALANCED FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE BALANCED
FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
SUB-ADVISER COMPOSITE

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE JULY 1, 1988

[CHART]

PERIOD ENDED JUNE 30, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract or variable
life policy for mortality and expense guarantees, administrative fees or
surrender charges.

48
<PAGE> 52

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

AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE CONSERVATIVE GROWTH LIFESTYLE FUND
AND THE S&P 500 & BLENDED INDEX*

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
15.99%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.

The Blended Index is calculated by including the pro rata portion of each of
the Underlying Fund's respective indices.

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract or variable
life policy for mortality and expense guarantees, administrative fees or
surrender charges.

49
<PAGE> 53

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

AMERICAN GENERAL CORE BOND FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE CORE BOND FUND
AND THE LEHMAN BROTHERS AGGREGATE INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
-0.17%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31, 1998
The Core Bond Fund's inception date was September 21, 1998. However, the Fund's
investment objectives, policies and strategies will be substantially similar to
those employed by the Sub-adviser with respect to the Canada Life Commingled
Fund, which was managed by Robert N. Kase, the Core Bond Fund's portfolio
manager, from January 1, 1993 to July 1998. The Canada Life Commingled Fund has
substantially similar, though not necessarily identical investment objectives,
policies and strategies as the Core Bond Fund. The chart herein shows the
historical investment performance for the period February 1, 1993 through March
31, 1998, net of the Canada Life Commingled Fund fees and expenses.

The Canada Life Commingled Fund was not subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the 1940 Act and Subchapter M of the Internal Revenue Code. If the
Canada Life Commingled Fund had been subject to the requirements imposed on
registered mutual funds, its performance might have been lower.

Total fees (after expense reimbursements) for the Core Bond Fund are higher than
the total fees incurred by the Canada Life Commingled Fund. Consequently, the
performance results for the Canada Life Commingled Fund would have been lower if
the Canada Life Commingled Fund had the same expenses as the Core Bond Fund. The
performance of the Canada Life Commingled Fund has been calculated in accordance
with SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON THE CANADA LIFE
COMMINGLED FUND WHICH WAS MANAGED IN SUBSTANTIALLY THE SAME MANNER AND BY THE
SAME INDIVIDUAL AS THE CORE BOND FUND AND DOES NOT REFLECT THE PERFORMANCE OF
THE CORE BOND FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
CANADA LIFE COMMINGLED FUND

<TABLE>
<CAPTION>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEARS
- ---------------------------------------------------------
<S> <C> <C>
10.42% 7.57% 7.69%
- ---------------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE FEBRUARY 1, 1993

[CHART]

PERIOD ENDED MARCH 31, 1998

50
<PAGE> 54

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

AMERICAN GENERAL DOMESTIC BOND FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE DOMESTIC BOND FUND
AND THE LEHMAN BROTHERS AGGREGATE INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
-1.19%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Domestic Bond Fund's inception date was September 21, 1998. However, the
Domestic Bond Fund's investment objectives, policies and strategies are
substantially similar, but not necessarily identical, to those employed by the
Sub-adviser with respect to discretionary investment accounts ("Discretionary
Accounts") managed by the Sub-adviser. The chart at right shows the historical
investment performance for a composite of all of the Sub-adviser's Discretionary
Accounts ("Sub-adviser Composite") which were managed by the Sub-adviser in
substantially the same manner as the Domestic Bond Fund. The Sub-adviser
Composite represents the total return of all Discretionary Accounts, net of the
highest management fee charged and other account fees and expenses. The
inception dates of the Discretionary Accounts comprising Sub-adviser Composite
range from December 31, 1972 to August 1, 1998.

Total fees (after expense reimbursements) for the Domestic Bond Fund are higher
than the highest management fees and other fees historically incurred by the
Discretionary Accounts comprising the Sub-adviser Composite. Consequently, the
performance results for the Sub-adviser Composite would have been lower if the
Sub-adviser Composite had the same expenses as the Domestic Bond Fund. The
performance of the Sub-adviser Composite has been calculated in accordance with
SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME
MANNER AS THE DOMESTIC BOND FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE
DOMESTIC BOND FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
SUB-ADVISER COMPOSITE

<TABLE>
<CAPTION>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEARS
- ---------------------------------------------------------
<S> <C> <C>
9.79% 6.59% 9.31%
- ---------------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE JULY 1, 1988

[CHART]

PERIOD ENDED JUNE 30, 1998

51
<PAGE> 55

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

AMERICAN GENERAL GROWTH LIFESTYLE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE GROWTH LIFESTYLE FUND
AND THE S&P 500 & BLENDED INDEX*

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
26.38%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.

The Blended Index is calculated by including the pro rata portion of each of
the Underlying Fund's respective indices.

52
<PAGE> 56

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

AMERICAN GENERAL HIGH YIELD BOND FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE HIGH YIELD BOND FUND
AND THE SALOMON BROTHERS HIGH YIELD MARKET INDEX*

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
5.40%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.

53
<PAGE> 57

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

AMERICAN GENERAL INTERNATIONAL GROWTH FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE INTERNATIONAL GROWTH FUND AND
THE SALOMON BROTHERS PRIMARY MARKET INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
19.11%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

54
<PAGE> 58

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

THE SEPARATE ACCOUNT PERFORMANCE INFORMATION
The International Growth Fund's inception date was September 21, 1998. However,
the Fund's investment objectives, policies and strategies are substantially
similar, though not necessarily identical, to those employed by the Sub-adviser
with respect to separately managed accounts of the Sub-adviser ("Separately
Managed Accounts"). The chart [at right] shows the historical investment
performance for a composite of the Sub-adviser's Separately Managed Accounts
("Sub-adviser Composite") which were managed by the Sub-adviser in substantially
the same manner and by the same individuals who manage the International Growth
Fund. The Sub-adviser Composite represents the total return, net of all fees and
expenses, of all Separately Managed Accounts of the Sub-adviser. The inception
date of the Sub-adviser Composite was October 1, 1995.

The Separately Managed Accounts in the Sub-adviser Composite were not subject to
the investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Separately Managed Accounts included in the
Sub-adviser Composite had been subject to the requirements imposed on registered
mutual funds, their performance might have been lower.

Total fees (after expense reimbursements) for the International Growth Fund are
higher than the total fees incurred by the Separately Managed Accounts
comprising the Sub-adviser Composite. Consequently, the performance results for
the Sub-adviser Composite would have been lower if the Sub-adviser's Separately
Managed Accounts had the same expenses as the International Growth Fund. The
performance of the Sub-adviser Composite has been calculated in accordance with
SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S SEPARATELY MANAGED ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE
SAME MANNER AND BY THE SAME INDIVIDUALS WHO MANAGE THE INTERNATIONAL GROWTH FUND
AND DOES NOT REFLECT THE PERFORMANCE OF THE INTERNATIONAL GROWTH FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN
OF SUB-ADVISER COMPOSITE

<TABLE>
<S> <C>
- ---------------------------------------------------
1 YEAR SINCE INCEPTION
- ---------------------------------------------------
-13.74% 10.30%
- ---------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE OCTOBER 1, 1995

[CHART]

PERIOD ENDED AUGUST 31, 1998

55
<PAGE> 59

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

AMERICAN GENERAL INTERNATIONAL VALUE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE INTERNATIONAL VALUE FUND
AND THE SALOMON BROTHERS PRIMARY MARKET INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
55.82%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The International Value Fund's inception date was September 21, 1998. However,
the International Value Fund's investment objectives, policies and strategies
are substantially similar, but not necessarily identical, to those employed by
the Sub-adviser with respect to discretionary investment accounts
("Discretionary Accounts") managed by the Sub-adviser. The chart at right shows
the historical investment performance for a composite of the Sub-adviser's
Discretionary Accounts ("Sub-adviser Composite") which were managed by the
Sub-adviser in substantially the same manner as the International Value Fund.
The Sub-adviser Composite represents the total return of all Discretionary
Accounts, net of the highest management fee charged and other account fees and
expenses. The inception dates of the Discretionary Accounts comprising the Sub-
Adviser Composite range from December 31, 1978 to March 31, 1998.

The Discretionary Accounts in the Sub-adviser Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Discretionary Accounts included in the Sub-Adviser
Composite had been subject to the requirements imposed on registered mutual
funds, their performance might have been lower.

Total fees (after expense reimbursements) for the International Value Fund are
higher than the highest management fees and other fees historically incurred by
the Discretionary Accounts comprising the Sub-adviser Composite. Consequently,
the performance results for the Sub-adviser Composite would have been lower if
the Sub-adviser Composite had the same expenses as the International Value Fund.
The performance of the Sub-adviser Composite has been calculated in accordance
with SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME
MANNER AS THE INTERNATIONAL VALUE FUND AND DOES NOT REFLECT THE PERFORMANCE
OF THE INTERNATIONAL VALUE FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
SUB-ADVISER COMPOSITE

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1988

[CHART]

PERIOD ENDED AUGUST 31, 1998

56
<PAGE> 60

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

AMERICAN GENERAL LARGE CAP GROWTH FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE LARGE CAP GROWTH FUND
AND THE RUSSELL 1000 GROWTH

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
38.11%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Large Cap Growth Fund's inception date was September 21, 1998. However, the
Large Cap Growth Fund's investment objective, policies and strategies are
substantially similar to those employed by the Sub-adviser with respect to 22
accounts ("Combined Accounts"), including fourteen advisory accounts
("Accounts") and 6 registered mutual funds ("Funds"). The chart at right shows
the historical investment performance for a composite of the Combined Accounts
("Combined Accounts Composite"), which were managed by the Sub-adviser in
substantially the same manner and by the same individuals who manage the Large
Cap Growth Fund. The Combined Accounts Composite includes all Combined Accounts,
net of average fees and expenses charged by the Accounts and the Funds. These
expenses include investment advisory fees but do not include custodial fees
(other than for the mutual funds), which, if included, could lessen the
performance presented. The inception dates of the Combined Accounts comprising
the Combined Accounts Composite range from November 11, 1991 to January 30,
1998.

The Accounts included in the Combined Accounts Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Accounts included in the Combined Accounts
Composite had been subject to the requirements imposed on registered mutual
funds, their performance might have been lower.

Total fees (after expense reimbursements) for the Large Cap Growth Fund are
higher than the total fees historically incurred by the Combined Accounts
comprising the Combined Accounts Composite. Consequently, the performance
results for the Combined Accounts Composite would have been lower if the
Combined Accounts Composite had the same expenses as the Large Cap Growth Fund.
The performance of the Combined Accounts Composite has been calculated in
accordance with SEC performance standards. See "Performance and Yield
Information" in the Statement of Additional Information for a description of SEC
performance standards. The performance information herein is based on a
composite of the Sub-adviser's Combined Accounts which are managed in
substantially the same manner and by the same individuals as the Large Cap
Growth Fund and does not reflect the performance of the Large Cap Growth Fund
itself.

AVERAGE ANNUAL TOTAL RETURN
OF COMBINED ACCOUNTS COMPOSITE

<TABLE>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
2.48% 21.87% 18.31%
- ---------------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE NOVEMBER 11, 1991

[CHART]

PERIOD ENDED AUGUST 31, 1998

57
<PAGE> 61

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

AMERICAN GENERAL LARGE CAP VALUE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE LARGE CAP VALUE FUND
AND THE RUSSELL 1000 VALUE INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
21.26%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Large Cap Value Fund's inception date was September 21, 1998. However, the
Large Cap Value Fund is managed by the Sub-adviser in substantially the same
manner and by the same individuals as those who manage discretionary accounts
(the "Discretionary Accounts") with substantially similar investment objectives,
policies and strategies.

The chart at right shows the investment performance for all Discretionary
Accounts, net of account fees and expenses. The inception dates for the
Discretionary Accounts range from August 1, 1992 through August 1, 1997. The
Discretionary Accounts are not subject to the investment limitations,
diversification requirements and the other restrictions imposed on registered
mutual funds by the 1940 Act and Subchapter M of the Internal Revenue Code. If
the Discretionary Accounts had been subject to the requirements imposed on
registered mutual funds, their performance might have been lower.

Total fees (after expense reimbursements) for the Large Cap Value Fund are
higher than the total fees incurred by the Discretionary Accounts. Consequently,
the performance results for the Discretionary Accounts would have been lower if
the Discretionary Accounts had the same expenses as the Large Cap Value Fund.
The performance of the Discretionary Accounts has been calculated in accordance
with SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON THE SUB-ADVISER'S
DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME MANNER AND BY
THE SAME INDIVIDUALS AS THE LARGE CAP VALUE FUND AND DOES NOT REFLECT THE
PERFORMANCE OF THE LARGE CAP VALUE FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
DISCRETIONARY ACCOUNTS

<TABLE>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
4.78% 18.15% 18.61%
- ---------------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE AUGUST 1, 1992

[CHART]

PERIOD ENDED AUGUST 31, 1998

58
<PAGE> 62

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

AMERICAN GENERAL MID CAP GROWTH FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MID CAP GROWTH FUND
AND THE RUSSELL MIDCAP GROWTH INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
16.36%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Mid Cap Growth Fund's inception date was September 21, 1998. However, the
Mid Cap Growth Fund's investment objective, policies and strategies are
substantially similar to those employed by the Sub-adviser with respect to
discretionary investment management accounts under their management ("Combined
Accounts"). The chart at right shows the investment performance for a composite
of these Combined Accounts ("Combined Accounts Composite") which were managed by
the Sub-adviser in substantially the same manner and by the same individuals who
manage the Mid Cap Growth Fund. The Combined Accounts Composite includes all
Combined Accounts, net of account fees and expenses. The inception dates of the
Combined Accounts comprising the Combined Accounts Composite range from January
1, 1993 to August 31, 1998.

The Combined Accounts in the Combined Accounts Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Combined Accounts included in the Combined
Accounts Composite had been subject to the requirements imposed on mutual funds,
their performance might have been lower.

Total fees (after expense reimbursements) for the Mid Cap Growth Fund are higher
than the total fees historically incurred by the Combined Accounts comprising
the Combined Accounts Composite. Consequently, the performance results for the
Combined Accounts Composite would have been lower if the Combined Accounts
Composite had the same expenses as the Mid Cap Growth Fund. The performance of
the Combined Accounts Composite has been calculated in accordance with SEC
performance standards. See "Performance and Yield Information" in the Statement
of Additional Information for a description of SEC performance standards. THE
PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE SUB-ADVISER'S
COMBINED ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME MANNER AND BY THE
SAME INDIVIDUALS AS THE MID CAP GROWTH FUND AND DOES NOT REFLECT THE PERFORMANCE
OF THE MIDCAP GROWTH FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
COMBINED ACCOUNTS COMPOSITE

<TABLE>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
0.04% 16.80% 14.95%
- ---------------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE JANUARY 1, 1993

[CHART]

PERIOD ENDED AUGUST 31, 1998

59
<PAGE> 63

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

AMERICAN GENERAL MID CAP VALUE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MID CAP VALUE FUND
AND THE RUSSELL MIDCAP VALUE INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
35.60%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31
The Mid Cap Value Fund's inception date was September 21, 1998. However, the Mid
Cap Value Fund's investment objectives, policies and strategies are
substantially similar, though not necessarily identical, to those of Neuberger
Berman Partners Fund and it is managed by the Sub-adviser in substantially the
same manner and by the same individuals as Neuberger Berman Partners Fund.
Neuberger Berman Partners Fund seeks to achieve its objective by investing
principally in common stocks of medium to large capitalization companies. As a
result, Neuberger Berman Partners Fund may in the future have, or in the past
have had, greater exposure to larger capitalization companies than the Mid Cap
Value Fund will have. The chart at right shows the investment performance for
Neuberger Berman Partners Fund for the period April 1, 1988 through August 31,
1998, net of Neuberger Berman Partners Fund's fees and expenses. The date the
Sub-Adviser assumed management of Neuberger Berman Partners Fund was January 20,
1975.

The Mid Cap Value Fund is subject to investment limitations, diversification
requirements and other restrictions imposed on registered mutual funds by the
1940 Act and Subchapter M of the Internal Revenue Code.

Total fees after (expense reimbursements) for the Mid Cap Value Fund are higher
than the total fees incurred by Neuberger Berman Partners Fund. Consequently,
the performance results for Neuberger Berman Partners Fund would have been lower
if Neuberger Berman Partners Fund had the same expenses as the Mid Cap Value
Fund. The performance of Neuberger Berman Partners Fund has been calculated in
accordance with SEC performance standards. See "Performance and Yield
Information" in the Statement of Additional Information for a description of SEC
performance standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON
NEUBERGERBERMAN PARTNERS FUND WHICH IS MANAGED IN SUBSTANTIALLY THE SAME MANNER
AND BY THE SAME INDIVIDUALS AS THE MID CAP VALUE FUND AND DOES NOT REFLECT THE
PERFORMANCE OF THE MID CAP VALUE FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
NEUBERGERBERMAN PARTNERS FUND

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1988

[CHART]

PERIOD ENDED AUGUST 31, 1998

60
<PAGE> 64

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

AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MODERATE GROWTH LIFESTYLE FUND
AND THE S&P 500 INDEX & BLENDED INDEX*

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
20.39%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.

The Blended Index is calculated by including the pro rata portion of each of
the Underlying Fund's respective indices.

61
<PAGE> 65

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

AMERICAN GENERAL MONEY MARKET FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE LARGE CAP GROWTH FUND
AND THE NYC 30 DAY PRIMARY CD RATE

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
4.66%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Money Market Fund's inception date was September 21, 1998. However, the
Money Market Fund's investment objectives, policies and strategies are
substantially similar, although not identical, to those of the AGSPC Money
Market Fund and it is managed by VALIC in substantially the same manner and by
the same individuals as the AGSPC Money Market Fund. The chart at right shows
the historical investment performance for the AGSPC Money Market Fund for the
period of April 1, 1988 through August 31, 1998, net of AGSPC Money Market
Fund's fees and expenses. The inception date for the AGSPC Money Market Fund was
December 16, 1985.

The AGSPC Money Market Fund is subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the 1940 Act and Subchapter M of the Internal Revenue Code.

Total fees (after expense reimbursements) for the Money Market Fund are higher
than the total fees incurred by the AGSPC Money Market Fund. Consequently, the
performance results for the AGSPC Money Market Fund would have been lower if the
AGSPC Money Market Fund had the same expenses as the Money Market Fund. The
performance of the AGSPC Money Market Fund has been calculated in accordance SEC
performance standards. See "Performance and Yield Information" in the Statement
of Additional Information for a description of SEC performance standards. THE
PERFORMANCE INFORMATION HEREIN IS BASED ON THE AGSPC MONEY MARKET FUND WHICH IS
MANAGED IN SUBSTANTIALLY THE SAME MANNER AND BY THE SAME INDIVIDUALS AS THE
MONEY MARKET FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE MONEY MARKET FUND
ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
AGSPC MONEY MARKET FUND

<TABLE>
<CAPTION>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEARS
- ---------------------------------------------------------
<S> <C> <C>
5.23% 4.77% 5.39%
- ---------------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1988

[CHART]

PERIOD ENDED AUGUST 31, 1998

62
<PAGE> 66

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

AMERICAN GENERAL SMALL CAP GROWTH FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SMALL CAP GROWTH FUND
AND THE RUSSELL 2000 GROWTH INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
38.31%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Small Cap Growth Fund's inception date was September 21, 1998. However, the
Small Cap Growth Fund's investment objective, policies and strategies are
substantially similar to those employed by the Sub-adviser and its affiliates
with respect to discretionary investment management accounts under their
management ("Combined Accounts"). The chart at right shows the historical
investment performance for a composite of these Combined Accounts ("Combined
Accounts Composite") which was managed by the Sub-adviser in substantially the
same manner as the Small Cap Growth Fund. The Combined Accounts Composite
includes all Combined Accounts, net of the highest management fee charged and
other account fees and expenses. The inception dates of the Combined Accounts
comprising the Combined Accounts Composite range from September 1, 1994 to June
1, 1997.

The Combined Accounts in the Combined Accounts Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Combined Accounts included in the Combined
Accounts Composite had been subject to the requirements imposed on registered
mutual funds, their performance might have been lower.

Total fees (after expense reimbursements) for the Small Cap Growth Fund are
higher than the highest management fees and other fees historically incurred by
the Combined Accounts comprising the Combined Accounts Composite. Consequently,
the performance results for the Combined Accounts Composite would have been
lower if the Combined Accounts Composite had the same expenses as the Small Cap
Growth Fund. The performance of the Combined Accounts Composite has been
calculated in accordance with SEC performance standards. See "Performance and
Yield Information" in the Statement of Additional Information for a description
of SEC performance standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A
COMPOSITE OF THE SUB-ADVISER'S COMBINED ACCOUNTS WHICH ARE MANAGED IN
SUBSTANTIALLY THE SAME MANNER AND BY THE SAME INDIVIDUALS AS THE SMALL CAP
GROWTH FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE SMALL CAP GROWTH FUND
ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
COMBINED ACCOUNTS COMPOSITE

<TABLE>
<CAPTION>
- ---------------------------------------------------
1 YEAR SINCE INCEPTION
- ---------------------------------------------------
<S> <C>
-19.90% 13.46%
- ---------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1994

[CHART]

PERIOD ENDED AUGUST 31, 1998

63
<PAGE> 67

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

AMERICAN GENERAL SMALL CAP VALUE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SMALL CAP VALUE FUND
AND THE RUSSELL 2000 VALUE INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
3.61%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

64
<PAGE> 68

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

AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SOCIALLY RESPONSIBLE FUND
AND THE S&P 500 INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
27.83%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

The Socially Responsible Fund's inception date was September 21, 1998. However,
the Socially Responsible Fund's investment objectives, policies and strategies
are substantially similar to those of the AGSPC Social Awareness Fund and it is
managed by VALIC in substantially the same manner as the AGSPC Social Awareness
Fund. The chart at right shows the historical investment performance for the
AGSPC Social Awareness Fund for the period of October 2, 1989 through August 31,
1998, net of AGSPC Social Awareness Fund's fees and expenses. The inception date
for the AGSPC Social Awareness Fund was October 2, 1989.

The AGSPC Social Awareness Fund is subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the 1940 Act and Subchapter M of the Internal Revenue Code.

Total fees (after expense reimbursements) for the Socially Responsible Fund are
higher than the total fees incurred by the AGSPC Social Awareness Fund.
Consequently, the performance results for the AGSPC Social Awareness Fund would
have been lower if the AGSPC Social Awareness Fund had the same expenses as the
Socially Responsible Fund. The performance of the AGSPC Social Awareness Fund
has been calculated in accordance with SEC performance standards. See
"Performance and Yield Information" in the Statement of Additional Information
for a description of SEC performance standards. THE PERFORMANCE INFORMATION
HEREIN IS BASED ON THE AGSPC SOCIAL AWARENESS FUND WHICH IS MANAGED IN
SUBSTANTIALLY THE SAME MANNER AS THE SOCIALLY RESPONSIBLE FUND AND DOES NOT
REFLECT THE PERFORMANCE OF THE SOCIALLY RESPONSIBLE FUND ITSELF.

AVERAGE ANNUAL TOTAL RETURN OF
AGSPC SOCIAL AWARENESS FUND

<TABLE>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
7.43% 17.21% 13.97%
- ---------------------------------------------------------
</TABLE>

VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE OCTOBER 2, 1989

[CHART]

PERIOD ENDED AUGUST 31, 1998

65
<PAGE> 69

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

AMERICAN GENERAL STRATEGIC BOND FUND

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE STRATEGIC BOND FUND AND THE
LEHMAN BROTHERS AGGREGATE INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION
- -------------------------------------------------
4.09%
- -------------------------------------------------

[CHART]

FISCAL YEAR ENDED AUGUST 31

66
<PAGE> 70

APPENDIX -- DESCRIPTION OF BOND RATINGS
- --------------------------------------------------------------------------------

MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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 which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.

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

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

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

Caa: Bonds which 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 which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C: Bonds which 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.

Nonrated: Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.

3. There is a lack of essential data pertaining to the issue or issuer.

4. The issue was privately placed, in which case the rating is not published in
Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.

STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

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

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

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

BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as

67
<PAGE> 71

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

predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.

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

D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

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.

NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.

PREFERRED STOCK RATINGS
Both Moody's and Standard & Poor's use the same designations for corporate bonds
as they do for preferred stock, except in the case of Moody's preferred stock
ratings, the initial letter rating is not capitalized. While the descriptions
are tailored for preferred stocks, the relative quality distinctions are
comparable to those described above for corporate bonds.

68
<PAGE> 72

APPENDIX -- DESCRIPTION OF
COMMERCIAL PAPER RATINGS
- --------------------------------------------------------------------------------

A AND PRIME COMMERCIAL PAPER RATINGS
Commercial paper rated A by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated
"A" or better, although, in some cases "BBB" credits may be allowed. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. The rating is described by S&P as the investment grade category,
the highest rating classification. Relative strength or weakness of the above
factors determine whether the issuer's commercial paper is rated A-1, A-2 or
A-3.

Among the factors considered by Moody's in assigning commercial paper ratings
are the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative differences in
strengths and weaknesses in respect of these criteria establish a rating in one
of three classifications. The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Its other two ratings, Prime-2 and Prime-3 are
designated Higher Quality and High Quality, respectively.

69
<PAGE> 73

Please tear off, complete and return the form below to Suite A3-01,
Communications Unit, The Variable Annuity Life Insurance Company, 2929 Allen
Parkway, Houston, Texas 77019 to order a Statement of Additional Information for
the Company. A Statement of Additional Information may also be ordered by
calling 1-800-44-VALIC.

Please send me a free copy of the Statement of Additional Information for
American General Series Portfolio Company 3.

<TABLE>
<S> <C>
Name: ________________________________________ GA. #: ______________________________
Address: _____________________________________ Policy #: ______________________________
______________________________________________
Social Security Number: ______________________
</TABLE>

<PAGE> 74

INTERESTED IN LEARNING MORE?
- --------------------------------------------------------------------------------

The Statement of Additional Information incorporated by reference into this
prospectus contains additional information about the Series Company's
operations.

Further information about the Funds' investments is available in the Series
Company's annual and semi-annual reports to shareholders. The Series Company's
annual report discusses market conditions and investment strategies that
significantly affected the Series Company's performance results during its last
fiscal year.

VALIC can provide you with a free copy of these materials or other information
about the Series Company. You may reach VALIC by calling 1-800-424-VALIC or by
writing VALIC at 2929 Allen Parkway, Houston, Texas 77019.

The Securities and Exchange Commission also maintains copies of these documents:

To view information online: Access the SEC's web site at http://www.sec.gov.

To review a paper filing or to request that documents be mailed to you,
contact:

SEC Public Reference Room
Washington, D.C. 20549-6009
1-800-SEC-0330

A duplicating fee will be assessed for all copies provided.

The Trust's Investment Company Act filing number is 811-08789.

Printed Matter
Printed in U.S.A.
VA10832________VER. 1/2000 Recycled Paper
LOGO
<PAGE> 75

AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3

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 VALUE FUND
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
AMERICAN GENERAL MONEY MARKET FUND
AMERICAN GENERAL SMALL CAP GROWTH FUND
AMERICAN GENERAL SMALL CAP VALUE FUND
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
AMERICAN GENERAL STRATEGIC BOND FUND

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

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------

PART B

JANUARY 3, 2000

This Statement of Additional Information is not a prospectus and contains
information in addition to that in the Prospectus for American General Series
Portfolio Company 3 (the "Series Company"). It should be read in conjunction
with the Prospectus. The Statement of Additional Information and the related
Prospectus are dated January 3, 2000. For an individual interested in a variable
annuity contract issued by The Variable Annuity Life Insurance Company ("VALIC")
a Prospectus may be obtained by calling 1-800-44-VALIC or writing the Series
Company or American General Distributors, Inc. (the "Distributor") at 2929 Allen
Parkway, Houston, Texas 77019. Shares in the Series Company are available to the
public only through the purchase of certain variable annuity contracts or
variable life insurance policies issued and employee thrift plans maintained by
VALIC and its affiliates.

<PAGE> 76

TABLE OF CONTENTS

<TABLE>
<S> <C>
General Information and History............................. 4
Performance and Yield Information........................... 4
Average Annual Total Return............................... 4
Portfolio Total Return.................................... 5
Index Total Return........................................ 5
Seven Day Yields.......................................... 5
30 Day Current Yield...................................... 5
Performance Returns of the Funds.......................... 6
Performance Returns of Certain Investment Companies and
Private Accounts Other Than the Funds.................. 8
Investment Restrictions..................................... 10
American General Balanced Fund............................ 10
American General Conservative Growth Lifestyle Fund....... 13
American General Core Bond Fund........................... 13
American General Domestic Bond Fund....................... 11
American General Growth Lifestyle Fund.................... 13
American General High Yield Bond Fund..................... 13
American General International Growth Fund................ 14
American General International Value Fund................. 16
American General Large Cap Growth Fund.................... 17
American General Large Cap Value Fund..................... 18
American General Mid Cap Growth Fund...................... 20
American General Mid Cap Value Fund....................... 21
American General Moderate Growth Lifestyle Fund........... 13
American General Money Market Fund........................ 23
American General Small Cap Growth Fund.................... 24
American General Small Cap Value Fund..................... 25
American General Socially Responsible Fund................ 26
American General Strategic Bond Fund...................... 13
Investment Practices........................................ 28
Adjustable Rate Securities................................ 28
Asset-Backed Securities................................... 29
Bank Obligations.......................................... 29
Borrowing, Reverse Repurchase Agreements and Dollar
Rolls.................................................. 30
Brady Bonds............................................... 31
Convertible Securities.................................... 32
Emerging Markets.......................................... 32
Euro Conversion........................................... 33
Eurodollar Obligations.................................... 33
Fixed Income Securities................................... 33
Lower Rated Fixed Income Securities.................... 34
Zero Coupon Fixed Income Securities.................... 34
Inflation-Indexed Bonds................................ 35
Hybrid Instruments..................................... 36
Catastrophe Bonds...................................... 36
Foreign Currency Exchange Transactions.................... 37
Foreign Securities........................................ 37
Money Market Securities of Foreign Issuers................ 38
Illiquid Securities....................................... 38
International Bonds....................................... 38
Lending Portfolio Securities.............................. 39
</TABLE>

2
<PAGE> 77

<TABLE>
<S> <C>
Loan Participations......................................... 39
Mortgage-Related Securities............................... 39
Mortgage Pass-Through Securities.......................... 39
Collateralized Mortgage Obligations (CMOs)................ 41
Commercial Mortgage-Backed Securities..................... 41
Other Mortgage-Related Securities......................... 42
CMO Residuals..................................... 42
Stripped Mortgage-Backed Securities............... 42
Options and Future Contracts.............................. 43
Options on Securities and Securities Indices...... 43
Writing Covered Call and Put Options and
Purchasing Call and Put Options.................... 44
Financial Futures Contracts....................... 46
Options on Financial Futures Contracts............ 47
Certain Additional Risks of Options and Financial
Futures Contracts.................................. 48
Limitations....................................... 49
Performance Indexed Paper................................. 49
Real Estate Securities and Real Estate Investment
Trusts................................................. 50
Repurchase Agreements..................................... 50
Rule 144A Securities...................................... 51
Short Sales and Short Sales Against the Box............... 51
Sovereign Debt Obligations................................ 52
Standard and Poor's Depository Receipts................... 52
Structured Notes.......................................... 52
Swap Agreements........................................... 53
Temporary Defensive Position.............................. 54
Warrants.................................................. 54
When-Issued Securities.................................... 54
Investment Adviser.......................................... 54
Investment Sub-Advisers..................................... 56
Portfolio Transactions and Brokerage........................ 58
Offering, Purchase and Redemption of Fund Shares............ 60
Determination of Net Asset Value............................ 61
Calculation of Yield for the Money Market Fund.............. 62
Accounting and Tax Treatment................................ 63
Calls and Puts............................................ 63
Financial Futures Contracts............................... 63
Subchapter M of the Internal Revenue Code of 1986......... 63
Section 817(h) of the Code................................ 64
Other Information........................................... 65
Shareholder Reports....................................... 65
Voting and Other Rights................................... 65
Custody of Assets......................................... 65
Independent Auditors...................................... 66
Transfer Agent............................................ 66
Management of the Series Company............................ 67
Compensation of Trustees and Certain Officers............. 71
Financial Statements........................................ 71
</TABLE>

3
<PAGE> 78

GENERAL INFORMATION AND HISTORY

American General Series Portfolio Company 3 (the "Series Company") was
organized as a Delaware business trust on May 6, 1998, by VALIC and is
registered under the Investment Company Act of 1940, as amended, (the "1940
Act") as an open-end, management investment company. Pursuant to an Investment
Advisory Agreement with the Series Company and subject to the authority of the
Series Company's Board of Trustees, VALIC serves as the Series Company's
investment adviser and conducts the business and affairs of the Series Company.
Additionally, VALIC has engaged investment sub-advisers to provide investment
sub-advisory services for each Fund other than the American General Socially
Responsible Fund, the American General Money Market Fund, the American General
Conservative Growth Lifestyle Fund, the American General Moderate Growth
Lifestyle Fund and the American General Growth Lifestyle Fund, subject to
VALIC's control, direction and supervision. The Series Company consists of
eighteen separate investment portfolios (hereinafter collectively referred to as
the "Funds" or individually as a "Fund"), each of which is, in effect, a
separate mutual fund issuing its own separate class of shares of beneficial
interest.

The Series Company issues shares of interest of each Fund to registered and
unregistered separate accounts of VALIC and its affiliates to fund variable
annuity or variable life contracts (the "Contracts"). Currently the Series
Company acts as an investment vehicle for assets of VALIC's Separate Account, a
unit investment trust registered as an investment company under the 1940 Act.
Additionally, retirement plans maintained by VALIC and American General
Corporation may own shares of certain of the Funds.

The Series Company, VALIC and each sub-adviser have Codes of Ethics which
establish for their officers, directors or trustees, and certain employees
procedures and restrictions as to those individual's personal investment trading
activities.

PERFORMANCE AND YIELD INFORMATION

The Series Company's inception date was September 21, 1998. Accordingly,
the performance information for each Fund for periods prior to that inception
date included in the Prospectus is the performance of either: (i) a mutual fund
with similar investment objectives, policies and strategies as the Fund that is
currently managed by the same individuals; (ii) an unregistered discretionary
account of the Sub-adviser with similar investment objectives, policies and
strategies; and/or (iii) a composite of such registered management investment
companies or unregistered discretionary accounts. The inception date indicated
is that of the other mutual fund, account or composite. See the Prospectus for
detailed information relating to the mutual fund, unregistered discretionary
account or composite.

The total return of a fund, mutual fund, discretionary account or composite
("Average Annual Total Return"), is the total return of the mutual fund,
discretionary account or composite before expenses ("Portfolio Total Return").
The Series Company may compare Portfolio Total Return or average annual total
return to the total return of the fund, mutual fund, discretionary account or
composite's benchmark index ("Index Total Return"). The difference between
Portfolio Total Return or average annual 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. If you invest in a Fund through an annuity contract, you should be aware
the performance presented does not reflect contract charges or separate account
charges which will reduce Fund values which are available to Participants.
Information about separate account performance is available in the applicable
contract prospectus.

AVERAGE ANNUAL TOTAL RETURN

Average Annual Total Return quotations for periods of 1, 5, and 10 years,
or, since inception of a mutual fund, discretionary account or composite, are
calculated according to the following formula:

P (1+T)(n) = ERV

4
<PAGE> 79

Where:

<TABLE>
<S> <C>
P = A hypothetical initial Purchase Payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value of a hypothetical $1,000 Purchase
Payment made at the beginning of the first period.
</TABLE>

Average Annual Total Return reflects the deduction of mutual fund,
discretionary account or composite expenses and assumes that all dividends and
distributions are reinvested when paid.

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's 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.

INDEX TOTAL RETURN

Index Total Return quotations for periods of 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.

SEVEN DAY YIELDS

The American General 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]

30 DAY CURRENT YIELD

The American General Domestic Bond Fund, the American General High Yield
Bond Fund, the American General Strategic Bond Fund and the American General
Core Bond Fund may quote a 30 Day Current Yield which is determined based on the
current 30 day period, according to the following standardized formula:

Yield = 2[(1 + NII)(6)-1]
S X NAV

Where:

<TABLE>
<S> <C> <C>
NII = Net investment income (interest income, plus dividend
income, plus other income, less fund expenses.
S = Average daily shares outstanding.
NAV = Net asset value per share on the last day of the period.
</TABLE>

5
<PAGE> 80

PERFORMANCE RETURNS OF THE FUNDS
AS OF AUGUST 31, 1999

<TABLE>
<CAPTION>
INCEPTION SINCE
DATE INCEPTION
--------- ---------
<S> <C> <C>
AMERICAN GENERAL BALANCED FUND 9/21/98
Average Annual Total Return 23.77%
Portfolio Total Return 24.53%
S&P 500 30.57%
Lehman Brothers Corporate and Government Bond Index (1.21)%
Benchmark(1) 17.08%
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND 9/21/98
Average Annual Total Return 15.99%
Portfolio Total Return 16.09%
S&P 500 30.57%
Benchmark(2)(3) 14.59%
AMERICAN GENERAL CORE BOND FUND 9/21/98
Average Annual Total Return (0.17)%
Portfolio Total Return 0.59%
Lehman Brothers Aggregate (0.42)%
AMERICAN GENERAL DOMESTIC BOND FUND 9/21/98
Average Annual Total Return (1.19)%
Portfolio Total Return (0.47)%
Lehman Brothers Aggregate (0.42)%
AMERICAN GENERAL GROWTH LIFESTYLE FUND 9/21/98
Average Annual Total Return 26.38%
Portfolio Total Return 26.48%
S&P 500 30.57%
Benchmark(4)(3) 23.33%
AMERICAN GENERAL HIGH YIELD BOND FUND 9/21/98
Average Annual Total Return 5.40%
Portfolio Total Return 6.33%
Salomon Brothers High Yield Market Index(3) 4.30%
AMERICAN GENERAL INTERNATIONAL GROWTH FUND 9/21/98
Average Annual Total Return 19.11%
Portfolio Total Return 20.18%
Salomon Brothers Primary Market 31.58%
AMERICAN GENERAL INTERNATIONAL VALUE FUND 9/21/98
Average Annual Total Return 55.82%
Portfolio Total Return 56.79%
Salomon Brothers Primary Market 31.58%
AMERICAN GENERAL LARGE CAP GROWTH FUND 9/21/98
Average Annual Total Return 38.11%
Portfolio Total Return 38.87%
Russell 1000 Growth 37.26%
AMERICAN GENERAL LARGE CAP VALUE FUND 9/21/98
Average Annual Total Return 21.26%
Portfolio Total Return 22.02%
Russell 1000 Value 22.44%
AMERICAN GENERAL MID CAP GROWTH FUND 9/21/98
Average Annual Total Return 16.36%
Portfolio Total Return 17.08%
Russell MidCap Growth 36.92%
AMERICAN GENERAL MID CAP VALUE FUND 9/21/98
Average Annual Total Return 35.60%
Portfolio Total Return 36.57%
Russell MidCap Value 14.71%
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND 9/21/98
Average Annual Total Return 20.39%
Portfolio Total Return 20.49%
S&P 500 30.57%
Benchmark(5)(3) 18.55%
</TABLE>

6
<PAGE> 81

<TABLE>
<CAPTION>
INCEPTION SINCE
DATE INCEPTION
--------- ---------
<S> <C> <C>
AMERICAN GENERAL MONEY MARKET FUND 9/21/98
Average Annual Total Return 4.66%
Portfolio Total Return 5.18%
30-day Certificate of Deposit Primary Offering Rate by New
York City Banks 4.11%
AMERICAN GENERAL SMALL CAP GROWTH FUND 9/21/98
Average Annual Total Return 38.31%
Portfolio Total Return 39.35%
Russell 2000 Growth 30.72%
AMERICAN GENERAL SMALL CAP VALUE FUND 9/21/98
Average Annual Total Return 3.61%
Portfolio Total Return 4.51%
Russell 2000 Value 8.34%
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND 9/21/98
Average Annual Total Return 27.83%
Portfolio Total Return 28.35%
S&P 500 30.57%
AMERICAN GENERAL STRATEGIC BOND FUND 9/21/98
Average Annual Total Return 4.09%
Portfolio Total Return 4.92%
Lehman Brothers Aggregate (0.42)%
</TABLE>

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

(1) Benchmark: Consists of 60% S&P 500 Index and 40% Lehman Brothers Corporate
and Government Bond Index.

(2) Benchmark: Consists of 5% EAFE, 5% Salomon Brothers Primary Market Index,
15% S&P 500 Index, 15% Russell 1000 Value, 5% Russell Mid Cap Growth, 5%
Russell Mid Cap Value, 40% Lehman Brothers Aggregate Index, 5% Russell 2000
Growth, and 5% Russell 2000 Value.

(3) Return period from 10/01/98 to 8/31/99.

(4) Benchmark: Consists of 15% EAFE, 15% Salomon Brothers Primary Market Index,
13% S&P 500 Index, 12% Russell 1000 Value, 7% Russell Mid Cap Growth, 8%
Russell Mid Cap Value, 10% Lehman Brothers Aggregate Index, 10% Russell 2000
Growth, and 10% Russell 2000 Value.

(5) Benchmark: Consists of 7% EAFE, 8% Salomon Brothers Primary Market Index,
15% S&P 500 Index, 15% Russell 1000 Value, 7% Russell Mid Cap Growth, 8%
Russell Mid Cap Value, 25% Lehman Brothers Aggregate Index, 7% Russel 2000
Growth, and 8% Russell 2000 Value.

7
<PAGE> 82

PERFORMANCE RETURNS OF CERTAIN INVESTMENT COMPANIES
AND PRIVATE ACCOUNTS OTHER THAN THE FUNDS
AS OF AUGUST 31, 1998

<TABLE>
<CAPTION>
10 YEAR
INCEPTION OR SINCE
DATE 1 YEAR 5 YEAR INCEPTION
--------- ------ ------ ---------
<S> <C> <C> <C> <C>
AMERICAN GENERAL BALANCED FUND(4)
Composite Average Annual Total Return 12/31/74 20.32% 16.38% 14.35%
Composite Portfolio Total Return 21.03% 17.02% 14.97%
S&P 500 Index 8.11% 18.25% 17.05%
Lehman Brothers Government and Corporate Bond Index 11.42% 5.60% 8.76%
Blended Benchmark: 60% S&P 500 Index & 40% Lehman Brothers
Government and Corporate Bond Index 10.03% 13.25% 13.87%
AMERICAN GENERAL CORE BOND FUND(2)
Canada Life Commingled Fund Average Annual Total Return 2/1/93 10.42% 7.57% 7.69%
Lehman Brothers Aggregate 12.00% 6.94% 8.94%
AMERICAN GENERAL DOMESTIC BOND FUND(3)
Composite Average Annual Total Return 12/31/72 9.79% 6.59% 9.31%
Composite Portfolio Total Return 10.18% 6.96% 9.69%
Lehman Brothers Aggregate 10.56% 6.78% 9.29%
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
Composite Average Annual Return 10/1/95 (13.74)% -- 10.30%
Composite Portfolio Total Return (12.99)% -- 11.05%
Salomon Brothers Primary Market Index 3.90% -- 13.90%
AMERICAN GENERAL INTERNATIONAL VALUE FUND
Composite Average Annual Total Return 12/31/78 (3.53)% 9.19% 10.34%
Composite Portfolio Total Return (2.62)% 10.05% 11.17%
Salomon Brothers Primary Market Index 3.90% 12.60% N/A(4)
AMERICAN GENERAL LARGE CAP GROWTH
Composite Average Annual Total Return 11/11/91 2.48% 21.87% 18.31%
Composite Portfolio Total Return 3.15% 22.44% 18.87%
Russell 1000 Growth Index 8.26% 18.83% 19.70%
AMERICAN GENERAL LARGE CAP VALUE FUND
Discretionary Account Average Annual Total Return 8/1/92 4.78% 18.15% 18.61%
Discretionary Account Portfolio Total Return 5.16% 18.45% 18.92%
Russell 1000 Value Index 3.89% 15.87% 16.78%
AMERICAN GENERAL MID CAP GROWTH FUND
Composite Average Annual Total Return 1/1/93 0.04% 16.80% 14.95%
Composite Portfolio Total Return 0.35% 17.38% 15.53%
Russell MidCap Growth Index (11.48)% 11.30% 11.12%
AMERICAN GENERAL MID CAP VALUE FUND
Neuberger Berman Partners Fund Average Annual Total Return 1/20/75 (10.03)% 14.09% 14.75%
Neuberger Berman Partners Fund Portfolio Total Return (9.22)% 14.95% 15.56%
Russell MidCap Value Index (3.37)% 13.17% 14.45%
AMERICAN GENERAL MONEY MARKET FUND
American General Series Portfolio Company Money Market
Fund Average Annual Total Return 1/16/86 5.23% 4.77% 5.39%
American General Series Portfolio Company Money Market
Fund Portfolio Total Return 5.77% 5.40% 6.27%
30-Day Certificate of Deposit Primary Offering Rate by New
York City Banks 4.80% 4.37% 5.15%
AMERICAN GENERAL SMALL CAP GROWTH FUND
Composite Average Annual Total Return 9/1/94 (19.90)% -- 13.46%
Composite Portfolio Total Return (18.10)% -- 14.96%
Russell 2000 Growth Index (26.31)% -- 5.11%
</TABLE>

8
<PAGE> 83

<TABLE>
<CAPTION>
10 YEAR
INCEPTION OR SINCE
DATE 1 YEAR 5 YEAR INCEPTION
--------- ------ ------ ---------
<S> <C> <C> <C> <C>
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
American General Series Portfolio Company Social Awareness
Fund Average Annual Total Return 10/2/89 7.43% 17.21% 13.97%
American General Series Portfolio Company Social Awareness
Fund Portfolio Total Return 7.99% 17.84% 14.20%
S&P 500 Index 8.11% 18.25% 15.04%
</TABLE>

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

(1) Inception date of benchmark 6/1/89.

(2) As of 3/31/98.

(3) As of 6/30/98.

9
<PAGE> 84

INVESTMENT RESTRICTIONS

The Funds have each adopted certain fundamental investment restrictions
which, unlike the other investment objective(s), 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.

Calculation of each Fund's total assets for compliance with any of the
following fundamental or non-fundamental investment restrictions or any other
investment restrictions set forth in the Series Company's Prospectus or
Statement of Additional Information will not include cash collateral held in
connection with securities lending activities.

The fundamental and, in certain cases, 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.

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 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.

10
<PAGE> 85

(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) 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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's 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; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has 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 VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.

(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 DOMESTIC BOND FUND ("DOMESTIC BOND FUND") INVESTMENT
RESTRICTIONS

As a matter of fundamental policy, the Domestic Bond Fund may not:

(2) (a) Issue senior securities except in connection with investments in
options and futures contracts; or (b) borrow from banks or enter into
repurchase agreements, or employ similar investment techniques, and pledge
its assets in

11
<PAGE> 86

connection therewith, unless immediately after each borrowing there is
asset coverage of 300%.

(3) Acquire real estate, real estate contracts or real estate securities.

(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 Domestic Bond Fund may not:

12
<PAGE> 87

AMERICAN GENERAL GROWTH LIFESTYLE FUND ("GROWTH LIFESTYLE FUND"); AMERICAN
GENERAL MODERATE GROWTH LIFESTYLE FUND ("MODERATE GROWTH LIFESTYLE FUND"); AND
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND ("CONSERVATIVE GROWTH
LIFESTYLE FUND") INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Growth Lifestyle Fund, the Moderate
Growth Lifestyle Fund and the Conservative 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.

(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 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 HIGH YIELD BOND FUND ("HIGH YIELD BOND FUND"); AMERICAN GENERAL
STRATEGIC BOND FUND ("STRATEGIC BOND FUND"); AND AMERICAN GENERAL CORE BOND FUND
("CORE BOND FUND") INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the High Yield Bond Fund, the Strategic
Bond Fund and the Core 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. 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

13
<PAGE> 88

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) 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 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 High Yield Fund, the Strategic
Bond Fund and the Core Bond Fund may not:

(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.

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

14
<PAGE> 89

(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 20% 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 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 Securities and Exchange Commission ("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 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
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's 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; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has 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 VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has de-

15
<PAGE> 90

termined that the commercial paper is of equivalent quality and is liquid.

(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:

(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.

16
<PAGE> 91

portion of the securities and other assets owned by any such company.

As a matter of non-fundamental policy, the International Value Fund may
not:

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.

(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) 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 securi-

17
<PAGE> 92

ties 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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's 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; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has 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 VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.

(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 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

18
<PAGE> 93

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.

19
<PAGE> 94

termined that the commercial paper is of equivalent quality and is liquid.

(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.

(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.

20
<PAGE> 95

(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.

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 Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's 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; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has 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 VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.

(8) Purchase foreign securities, except the Fund may invest up to 10% of total
assets in foreign securities sold as American Depository 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 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 liabili-

21
<PAGE> 96

ties (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.

(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").

22
<PAGE> 97

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; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has 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 VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.

AMERICAN GENERAL MONEY MARKET FUND ("MONEY MARKET FUND") INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Money Market Fund may not:

(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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repur-

23
<PAGE> 98

chase agreements not maturing within seven days or restricted securities,
but excluding (a) Rule 144A securities that have been determined to be
liquid by VALIC or the Sub-adviser, in accordance with guidelines adopted
by the Series Company's 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; (ii) is rated in one of the two
highest categories by at least two nationally recognized statistical rating
organizations and VALIC or the Sub-Adviser, in accordance with guidelines
adopted by the Series Company's Board of Trustees, has 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 VALIC
or the Sub-adviser, in accordance with guidelines adopted by the Series
Company's Board of Trustees, has determined that the commercial paper is of
equivalent quality and is liquid.

(4) Purchase any security which matures 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.

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.

(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 State-

24
<PAGE> 99

ment 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) Make loans to other persons, except in accordance with the Fund's
investment objectives and policies and to the extent permitted by
applicable law.

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.

(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 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.

(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
portfo-

25
<PAGE> 100

lio 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.

(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.

As a matter of non-fundamental policy, the Small Cap Value Fund may not:

AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND ("SOCIALLY RESPONSIBLE FUND")
INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Socially Responsible Fund may not:

26
<PAGE> 101

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 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.

(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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's 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; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is

27
<PAGE> 102

rated in one of the two highest categories by one nationally recognized
statistical rating agency and VALIC or the Sub-adviser, in accordance with
guidelines adopted by the Series Company's Board of Trustees, has
determined that the commercial paper is of equivalent quality and is
liquid.

INVESTMENT PRACTICES

ADJUSTABLE RATE SECURITIES

Certain of the Funds may invest in adjustable rate money market 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 day's
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.

Certain Funds 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,

28
<PAGE> 103

the market values of such securities will generally be more volatile than the
market value of fixed-rate securities.

ASSET-BACKED SECURITIES

Certain Funds may invest in asset-backed securities (unrelated to first
mortgage loans) that 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 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.

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 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 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

29
<PAGE> 104

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
possibility that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations 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.

BORROWING, REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS

A Fund, subject to its investment restrictions, may borrow money. 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.

In addition to borrowing for temporary purposes, certain Funds may enter
into reverse repurchase agreements, mortgage dollar rolls, and economically
similar transactions. A reverse repurchase agreement involves the sale of a
portfolio-eligible security by a Fund, coupled with 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. The Fund typically
will segregate assets determined to be liquid by VALIC or a Sub-adviser in
accordance with procedures established by the Board of Trustees, equal (on a
daily mark-to-market basis) to its obligations under reverse repurchase
agreements. However, reverse repurchase agreements involve the risk that the
market value of securities retained by the Fund may decline below the repurchase
price of the securities sold by the Fund which it is obligated to repurchase. To
the extent that positions in reverse repurchase agreements are not covered
through the segregation of liquid assets at least equal to the amount of any
forward purchase commitment, such transactions would be subject to the Funds'
limitations on borrowings.

A "mortgage dollar roll" is similar to a reverse repurchase agreement in
certain respects. In a "dollar roll" transaction, a Fund sells a
mortgage-related

30
<PAGE> 105

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 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. Furthermore, because dollar
roll transactions may be for terms ranging between one and six months, dollar
roll transactions may be deemed "illiquid" and subject to a Fund's overall
limitations on investments in illiquid securities.

BRADY BONDS

The Domestic Bond Fund, the Balanced Fund, the High Yield 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 introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented in a number of countries, including:
Argentina, Bulgaria, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay,
and Venezuela.

Brady Bonds have been issued only recently, and accordingly do not have a
long payment history. 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. 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").

Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.

Brady Bonds involve various risk factors including residual risk and the
history of defaults with

31
<PAGE> 106

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.

CONVERTIBLE SECURITIES

Certain Funds may invest in convertible securities of foreign or domestic
issuers. 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.

EMERGING MARKETS

Investments in companies domiciled in emerging market countries 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 recent 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.

Another risk is that the small current size of the markets for such
securities and the currently low or nonexistent volume of trading 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 market countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and 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 market countries

32
<PAGE> 107

may not have developed structures governing private or foreign investment and
may not allow for judicial redress for injury to private property.

EURO CONVERSION

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, and Spain are members of the European Economic and
Monetary Union (the "EMU"). The EMU has established a common European currency
for participating countries which is known as the "euro." Each participating
country supplemented its existing currency with the euro on January 1, 1999, and
will replace its existing currency with the euro on July 1, 2002. Any other
European country which is a member of the EMU may elect to participate in the
EMU and may supplement its existing currency with the euro.

EURODOLLAR OBLIGATIONS

Certain Funds, in accordance with their investment objective(s), policies,
and investment program, 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.

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.

Certain Funds also 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.

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

33
<PAGE> 108

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, high risk"
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.

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. The Sub-adviser will not necessarily dispose of a portfolio security
when its ratings have been changed.

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 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

34
<PAGE> 109

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 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. Such 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.

Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or 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.

35
<PAGE> 110

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 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 Strategic Bond Fund, the Balanced 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 of 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 company-wide 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.

36
<PAGE> 111

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.

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.

FOREIGN SECURITIES

All Funds, other than the Lifestyle Funds, may invest in 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
depository receipts: American Depository Receipts (ADRs), European Depositary
Receipts (EDRs) and Global Depository Receipts (GDRs). Depository 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 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, certain Funds may invest in other types of depositary securities such
as international depository receipts, global depository shares, European
depository shares and international depository 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

37
<PAGE> 112

and traded exclusively in foreign markets or (2) registered domestically and
issued in foreign markets (e.g., Eurodollar securities). In addition, all the
Funds, except the Lifestyle Funds, the Large Cap Growth Fund, the Large Cap
Value Fund, and the Money Market Fund, may invest in non-U.S. dollar-denominated
foreign securities, in accordance with their specific investment objective(s),
investment programs, policies, and restrictions.

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.

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.

ILLIQUID SECURITIES

The Funds will not invest more than 10% (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 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 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 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.

INTERNATIONAL BONDS

Certain Funds also 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

38
<PAGE> 113

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.

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.

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 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.

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.

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

39
<PAGE> 114

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 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. Certain 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

40
<PAGE> 115

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 MidCap 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.)

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
VA. 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 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. 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.
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
secu-

41
<PAGE> 116

rities 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.

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.
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 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 securi-

42
<PAGE> 117

ties 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.

OPTIONS AND FUTURE CONTRACTS

Options on Securities and Securities Indices

Each Fund, other than the Mid Cap Growth Fund, the International Growth
Fund, the Lifestyle Funds and the Money Market Fund, may write covered call and
put options on securities and securities indices. The Mid Cap Value Fund may
write covered call options and purchase call options in related closing
transactions only. 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.

Certain Funds 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 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.

Each Fund, except the Mid Cap Growth Fund, the Lifestyle Funds, the
International Growth Fund, the International Value Fund, the Mid Cap Value Fund,
and the 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. Certain

43
<PAGE> 118

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 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.

Writing Covered Call and Put Options and Purchasing Call and Put Options

All of the Funds, except the Mid Cap Growth Fund, the International Growth
Fund, the Large Cap Growth Fund, the Lifestyle Funds and the 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.

Certain Funds, in accordance with their investment objective(s) and
investment programs, 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

44
<PAGE> 119

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 the Mid Cap Growth Fund, the International Growth
Fund, the Lifestyle Funds and the Money Market 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 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
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 regarding movements in securities prices, currencies

45
<PAGE> 120

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 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 Euro. It is expected that other futures contracts will be developed and
traded in the future.

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.

46
<PAGE> 121

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
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."

Certain Funds may hold financial futures contracts in accordance with their
investment policies. A Fund may not adhere to its policy in circumstances where
the Fund is required to invest a large cash infusion. In this circumstance the
Fund's total invested position, including the security value of the financial
futures contracts may not exceed 100% of the Fund's net assets.

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 profit or loss.

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 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 require-

47
<PAGE> 122

ments 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 the following
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 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

48
<PAGE> 123

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. See "Other Information -- Custody of Assets" in
this Statement of Additional Information. 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.

In addition, 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.

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

49
<PAGE> 124

maximum values of the spot exchange rate two business days prior to maturity.

REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS")

Each Fund, other than the Lifestyle Funds and the Domestic Bond Fund, may
invest in real estate securities. 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.

Certain Funds also may invest in REITs. 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 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.

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 NRSROs (Nationally Recognized Statistical Rating Organization) (except
for the International Growth Fund, the International Value Fund, the Strategic
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, 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, usually 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

50
<PAGE> 125

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. The Funds will not invest in repurchase agreements that do not
mature within seven days if any such investment, together with any illiquid
assets held by a Fund, exceeds 10% of the value of that Fund's total assets (15%
in the case of the International Growth Fund, the Large Cap Growth Fund, the
Small 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).

RULE 144A SECURITIES

Each Fund, other than the Lifestyle Funds, may purchase securities which,
while privately placed, 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 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 (in accordance with each
Fund's investment restrictions as listed in the prospectus) that have been
determined to be liquid by Board approved guidelines.

SHORT SALES AND SHORT SALES AGAINST THE BOX

Certain Funds 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. A Fund may also engage in
short sales against the box, which involves selling a security the Fund

51
<PAGE> 126

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).

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 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.

STANDARD AND POOR'S DEPOSITORY RECEIPTS

Each of the International Growth Fund, Large Cap Growth Fund, Mid Cap
Growth Fund, Small Cap Growth Fund, International Value Fund, Large Cap Value
Fund, Mid Cap Value Fund, Small Cap Value Fund, Socially Responsible Fund and
Balanced Fund may, consistent with its objectives, purchase Standard & Poor's
Depository 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 Funds as the price movement of the instrument
does not perfectly correlate with the price action of the underlying index.

Investments in SPDRs are subject to the Funds' limitations on investments
in investment companies.

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.

52
<PAGE> 127

SWAP AGREEMENTS

Certain Funds may enter into interest rate, index and currency exchange
rate 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.

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

53
<PAGE> 128

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.

TEMPORARY DEFENSIVE POSITION

Under normal market conditions, none of the Funds other than the Money
Market Fund, intends to have a substantial portion of its assets invested in
cash or money market instruments. However, when VALIC or a Sub-adviser
determines that adverse market conditions exist, certain of the Funds may adopt
a temporary defensive position and invest entirely in cash, and money market
instruments, including domestic bank obligations and repurchase agreements.

WARRANTS

Certain Funds may invest in or acquire warrants to purchase equity or fixed
income securities. 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.

WHEN-ISSUED SECURITIES

Each of the Funds except the Lifestyle Funds, the Money Market Fund and the
Mid Cap Value Fund may purchase securities 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.

INVESTMENT ADVISER

VALIC serves as the investment adviser to each of the Funds pursuant to an
Investment Advisory Agreement with each Fund dated August 26, 1998, that was
approved by the Board of Trustees on August 26, 1998. Under the Investment
Advisory Agreement, each Fund pays VALIC an annual fee, payable monthly, based
on its average daily net asset value.

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

54
<PAGE> 129

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.

Pursuant to an Accounting Services Agreement dated August 26, 1998
("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. For the fiscal year ended August 31, 1999, the Series Company paid
VALIC $30,278 for accounting services provided by VALIC.

For the fiscal year ended August 31, 1999, the Series Company paid the
following advisory fees to VALIC for each of the following Funds: International
Growth Fund, $51,153; Large Cap Growth Fund, $60,346; Mid Cap Growth Fund,
$43,155; Small Cap Growth Fund, $66,613; International Value Fund, $64,076;
Large Cap Value Fund, $33,827; Mid Cap Value Fund, $54,453; Small Cap Value
Fund, $43,369; Socially Responsible Fund, $19,258; Balanced Fund, $54,692; High
Yield Bond Fund, $37,138; Strategic Bond Fund, $31,455; Domestic Bond Fund,
$38,602; Core Bond Fund, $25,633; Money Market Fund, $17,307; Growth Lifestyle
Fund, $6,654; Moderate Growth Lifestyle Fund, $7,522; Conservative Growth
Lifestyle Fund, $6,345.

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.

55
<PAGE> 130

INVESTMENT SUB-ADVISERS

Pursuant to Investment Sub-advisory Agreements dated August 26, 1998 with
each Sub-adviser, VALIC has engaged American General Investment Management, L.P.
("AGIM") to provide sub-advisory services to the High Yield Bond Fund, the
Strategic Bond Fund and the Core Bond Fund. In addition, 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. ("NB 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 and J.P. Morgan Investment Management Inc.
("JP Morgan") provides sub-advisory services for the Small Cap Growth Fund
pursuant to separate sub-advisory Agreements, as well. AGIM, Bankers Trust,
Capital Guardian, Jacobs Asset Management, State Street Global Advisors, GSAM,
NB Management, Brown Capital Management, FMA and JP Morgan (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
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 August 26, 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.

56
<PAGE> 131

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 of the Core Bond Fund, 0.35% of the first
$200 million, 0.25% of the next $300 million and 0.20% of average daily net
asset values over $500 million of the Strategic Bond Fund and 0.45% of the first
$200 million, 0.35% of the next $300 million and 0.30% of average daily net
asset values over $500 million of the High Yield Bond Fund.

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 J.P. 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.

VALIC shall pay to NB Management, for the services rendered to the Mid Cap
Value Fund and expenses paid by NB 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.

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 Se-

57
<PAGE> 132

ries 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.

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 "About the Series Company's Management."

Virtually all of the over-the-counter transactions by the actively managed
portion of the Small Cap Value Fund, the High Yield Bond Fund, the Strategic
Bond Fund, the Domestic Bond Fund and the Mid Cap Growth Fund, are principal
transactions with issuers and dealers at net prices which entail no brokerage
commissions. The International Value Fund, the Mid Cap Value Fund, and the
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, the Balanced Fund, the Mid Cap Growth Fund, the Small
Cap Value Fund, and the Large Cap Value Fund engage in over-the-counter
transactions with principals and transactions with national securities 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

58
<PAGE> 133

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 quarterly by the Series
Company's Board of Trustees.

For the fiscal year ended August 31, 1999, the Series Company paid the
following brokerage commissions for each of the following Funds: Balanced Fund,
$8,381; International Growth Fund, $42,589; International Value Fund, $25,375;
Large Cap Growth Fund, $16,448; Large Cap Value Fund, $11,843; Mid Cap Growth
Fund, $10,081; Mid Cap Value Fund, $45,395; Small Cap Growth Fund, $12,012;
Small Cap Value Fund, $23,628; Socially Responsible Fund, $6,662.

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 commissions
paid and the related transaction totals: Balanced Fund, $ ,
$ ; International Growth Fund, $ , $ ; International
Value Fund, $ , $ ; Large Cap Growth Fund, $16,691,
$ ; Large Cap Value Fund, $ , $ ; Mid Cap Growth
Fund, $ , $ ; Mid Cap Value Fund, $ , $ ;
Small Cap Growth Fund, $ , $ ; Small Cap Value Fund,
$ , $ ; Socially Responsible Fund, $ , $ .

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 August 31, 1999, the Series Company paid the
following brokerage com-

59
<PAGE> 134

missions to affiliated brokers for each of the
following Funds: Balanced Fund, $ to ; International Growth
Fund, $ to ; International Value Fund, $ to
; Large Cap Growth Fund, $ to ; Large Cap Value
Fund, $ to ; Mid Cap Growth Fund, $ to ;
Mid Cap Value Fund, $ to ; Small Cap Growth Fund, $
to ; Small Cap Value Fund, $ to ; Socially
Responsible Fund, $ to .

OFFERING, PURCHASE AND REDEMPTION OF FUND SHARES

Pursuant to a Distribution and Service Agreement, the Distributor acts
without remuneration as the Series Company's agent in the distribution of Fund
Shares to registered and unregistered separate accounts of VALIC and its
affiliates. The Distributor's address is the same as that of VALIC.

The Distribution and Service Agreement between the Distributor and the
Series Company provides that it shall continue in force from year to year, after
the initial two year term, 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' (as defined in the 1940 Act)
of the Series Company by votes cast in person at a meeting called for such
purpose. The distribution and service agreement 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
distribution and service agreement also automatically terminates in the event of
an assignment.

Pursuant to the Distribution and Service Agreement 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). VALIC reimburses the Distributor for
these expenses. Thus all such expenses incurred by the Distributor are passed
directly on to VALIC, its parent. 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.

As explained in the prospectus for the Contracts, payments of surrender
values, as well as lump sum payments available under the annuity options of the
Contracts, may be suspended or postponed at any time when redemption of shares
is suspended. Normally, the Series Company redeems Fund shares within seven days
of receipt of request therefor, but may postpone redemptions beyond seven days
when: (1) the New York Stock Exchange is closed for other than weekends and
customary holidays, or trading on the New York Stock Exchange becomes
restricted; (2) an emergency exists making disposal or valuation of a Fund's
assets not reasonably practicable; or (3) the SEC has so permitted by order for
the protection of the Series Company's shareholders.

The Series Company normally redeems Fund shares for cash. Although the
Series Company, with respect to each Fund, may make full or partial payment by
assigning to investors, Series Company portfolio securities at their value used
in determining the redemption price (i.e. by redemption-in-kind), the Series
Company, pursuant to Rule 18f-1 under the 1940 Act, has filed a notification of
election on Form 18f-1. Pursuant to this election, the Series Company has
committed itself to pay investors, in cash, all redemptions made during any 90
day period, up to the lesser of $250,000 or 1% of the Series Company's net asset
value. The securities to be paid in-kind to an investor will be selected in such
manner as the Board of Trustees deems fair and equitable. In such cases,
investors would incur brokerage expenses should they wish to liquidate these
portfolio securities.

All shares are offered for sale and redeemed at net asset value. Net asset
value per share is determined by dividing the net assets of a Fund by the number
of that Fund's outstanding shares at such time.

60
<PAGE> 135

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 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.

Publicly-traded corporate bonds are valued at prices obtained from Merrill
Lynch Pierce Fenner & Smith and Interactive Data Corporation.

Short-term debt 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 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 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

61
<PAGE> 136

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 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 Money Market
Fund's net asset value might still decline.

CALCULATION OF YIELD FOR THE MONEY MARKET FUND

The yield of the Money Market Fund is its net income expressed as a
percentage of assets on an annualized basis for a seven day period. Rule 482
under the 1933 Act requires that a yield quotation set forth in an advertisement
for a money market fund be computed by a standardized method based on an
historical seven calendar day period. The current yield is computed by
determining the net change (exclusive of realized gains and losses from the sale
of securities and unrealized appreciation and depreciation) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, and then dividing the net change in account value by the value of
the account at the beginning of the base period to obtain the base period
return. The base period return is then multiplied by (365/7) to annualize the
yield figure. The determination of net change in account value reflects the
value of additional shares purchased with dividends from the original share,
dividends declared on both the original share and such additional shares, and
any fees that are charged to all shareholder accounts, in proportion to the
length of the base period and the Money Market Fund's average account size. The
Money Market Fund may also calculate its compound effective yield by compounding
the unannualized base period return (calculated as described above) by adding
one to the base period return, raising the sum to a power equal to 365 divided
by 7, and subtracting one.

The yield quoted by the Money Market Fund at any time represents the amount
being earned on a current basis for the indicated period and is a function of
the types of instruments in the Money Market Fund's portfolio, their quality and
length of maturity, and the Money Market Fund's operating expenses. The length
of maturity for the portfolio is the average dollar weighted maturity of the
portfolio. In other words, the portfolio has an average maturity for all of its
issues, stated in numbers of days and weighted according to the relative value
of each investment.

The yield fluctuates daily as the income earned on the investments of the
Money Market Fund fluctuates. Accordingly, neither the Series Company nor VALIC
can assure the yield quoted on any given occasion will remain constant for any
period of time. For example, the Money Market Fund's yield will change if it
experiences a net inflow of new assets which it then invests in securities whose
yield is higher or lower than that being currently earned on investments.
Investments in the Money Market Fund are not insured and investors comparing
results of the Money Market Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand this
distinction. In addition, other money market funds as well as banks and savings
and loan associations may calculate their yields on a different basis and the
yield quoted by the Money Market Fund from time-to-time could vary upwards or
downwards if another method of calculation or base period were used.

62
<PAGE> 137

ACCOUNTING AND TAX TREATMENT

CALLS AND PUTS

When a Fund writes a call or put option, an amount equal to the premium
received by it is included in that Fund's Statement of Assets and Liabilities as
an asset and as an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded. If a call option
which a Fund has written either expires on its stipulated expiration date, or if
a Fund enters into a closing purchase transaction, it realizes a gain (or loss
if the cost of the closing transaction exceeds the premium received when the
option was sold) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. If a call
option which a Fund has written is exercised, the Fund realizes a capital gain
or loss from the sale of the underlying security and proceeds from such sale are
increased by the premium originally received.

The premium paid by a Fund for the purchase of a put option is included in
the asset section of its Statement of Assets and Liabilities as an investment
and subsequently adjusted daily to the current market value of the option. For
example, if the current market value of the option exceeds the premium paid, the
excess would be unrealized appreciation and, conversely, if the premium exceeds
the current market value, such excess would be unrealized depreciation. The
current market value of a purchased option is the last sale price on the
principal Exchange on which such option is traded. If a put option which a Fund
has purchased expires unexercised it realizes a capital loss equal to the cost
of the option. If a Fund exercises a put option, it realizes a capital gain or
loss from the sale of the underlying security and the proceeds from such sale
will be decreased by the premium originally paid.

FINANCIAL FUTURES CONTRACTS

Accounting for financial futures contracts will be in accordance with
generally accepted accounting principles. Initial margin deposits made upon
entering into financial futures contracts will be recognized as assets due from
the FCM (the Fund's agent in acquiring the futures position). During the period
the financial futures contract is open, changes in the value of the contract
will be recognized as unrealized gains or losses by "marking-to-market" on a
daily basis to reflect the market value of the contract at the end of each day's
trading. Variation (or maintenance) margin payments will be made or received,
depending upon whether gains or losses are incurred. Financial futures contracts
held by a Fund at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes (that is, treated as having been sold at
market value).

SUBCHAPTER M OF THE INTERNAL REVENUE CODE OF 1986

Each Fund of the Series Company intends to qualify annually as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). A Fund must meet several requirements to obtain and
maintain its status as a regulated investment company. Among these requirements
are that: (i) at least 90% of a Fund's gross income be derived from dividends,
interest, payments with respect to securities loans and gains from the sale or
disposition of securities; and (ii) at the close of each quarter of a Fund's
taxable year (a) at least 50% of the value of the Fund's assets consist of cash,
government securities, securities of other regulated investment companies and
other securities (such other securities of any one issuer being not greater than
5% of the value of a Fund and the Fund holding not more than 10% of the
outstanding voting securities of any such issuer) and (b) not more than 25% of
the value of a Fund's assets be invested in the securities of any one issuer
(other than United States government securities or securities of other regulated
investment companies). Each Fund of the Series Company is treated as a separate
entity for federal income tax purposes.

The Internal Revenue Service ("Service") has ruled publicly that an
exchange-traded call option is a security for purposes of the 50% of assets test
and that its issuer is the issuer of the underlying security, not the writer of
the option, for purposes of the diversification requirements. It has ruled
privately (at the request of a taxpayer other than the Series Company) that
income from closing financial futures contracts is considered gain from a
disposition of securities for purposes of the 90% of gross income test. However,
since taxpayers other than the taxpayer requesting a particular private ruling
are not

63
<PAGE> 138

entitled to rely on such ruling, the Series Company intends to keep its Funds'
activity in futures contracts and options at a low enough volume such that gains
from closing futures contracts will not exceed 10% of a Fund's gross income
until the Service rules publicly on the issues or the Series Company is
otherwise satisfied that those gains are qualifying income.

If a Fund fails to qualify as a regulated investment company or fails to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as a ordinary corporation on its taxable income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge of 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated in order to qualify as a
regulated investment company in a subsequent year).

SECTION 817(h) OF THE CODE

Each of the Funds intends to comply with Section 817(h) of the Code and the
regulations issued thereunder. Section 817(h) of the Code and Treasury
Department regulations thereunder impose certain diversification requirements on
variable annuity contracts based upon segregated asset accounts. These
requirements are in addition to the diversification requirements of Subchapter M
and the 1940 Act and may affect the securities in which a Fund may invest.
Failure to meet the requirements of Section 817(h) could result in immediate
taxation of the Contract Owner to the extent of appreciation on investment under
the Contract.

The Section 817(h) diversification requirements do not apply to pension
plan contracts. "Pension plan contracts" for these purposes generally means
annuity contracts issued with respect to plans qualified under Section 401(a) or
403(a) of the Code, Section 403(b) annuities, Individual Retirement Accounts,
Individual Retirement Annuities and annuities issued with respect to Section 457
plans.

The Secretary of the Treasury may, in the future, issue additional
regulations that will prescribe the circumstances in which a Contract Owner's
control of the investments of the separate accounts investing in the Series
Company may cause the Contract Owner to be taxable with respect to assets
allocated to the separate account, before distributions are actually received
under the Contract.

In order to comply with the requirements of Section 817(h) and the
regulations thereunder, the Series Company may find it necessary to take action
to ensure that a Contract funded by the Series Company continues to qualify as
such under federal tax laws. The Series Company, for example, may be required to
alter the investment objectives of a Fund or Funds, or substitute the shares of
one Fund for those of another. No such change of investment objectives or
substitution of securities will take place without notice to the shareholders of
the affected Fund, and the approval of a majority of such shareholders (as
defined in the 1940 Act) and without prior approval of the SEC, to the extent
legally required.

It is not feasible to comment on all of the federal income tax consequences
concerning the Funds. Each owner of a Contract funded by the Series Company
should consult a qualified tax adviser for more complete information. The reader
should refer to the appropriate prospectus related to his or her Contracts for a
more complete description of the taxation of the separate account and of the
owner of the particular Contract.

64
<PAGE> 139

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 Contract Owners, annuitants, or
beneficiaries as appropriate.

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 18 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. VALIC, as the initial
sole shareholder of each of the Funds as of the commencement date of the Series
Company, controls each Fund. VALIC does not anticipate that its initial control
of each Fund will adversely effect the rights of future shareholders.

Each outstanding share has one vote on all matters that shareholders vote
on. Participants vote on these matters indirectly by voting their units. The way
participants vote their units depends on their contract. See the contract
prospectus for specific details. When a matter comes up for vote, the separate
account will vote its shares in the same proportion as the unit votes it
actually receives. If VALIC determines that it may, under the current
interpretation of the 1940 Act, vote shares directly instead of voting through
its units, it may decide to vote that way.

VALIC, as the initial sole shareholder of the Funds as of the commencement
date of the Series Company, controls each Fund. VALIC does not anticipate that
its initial control of each Fund will adversely effect the rights of future
shareholders.

Delaware law does not require the Series Company to hold regular, annual
shareholder meetings. But, the Series Company must hold shareholder meetings on
the following matters: (a) to approve certain agreements as required by the 1940
Act; (b) to change fundamental investment objectives in the Diversification
section and to change fundamental investment restrictions, above; and (c) to
fill vacancies on the Series Company's Board of Trustees if the shareholders
have elected less than a majority of the Trustees.

The Series Company will assist in shareholder communications.

VALIC's ownership of more than 25% of the outstanding shares may result in
VALIC's being deemed a controlling entity of each of those Funds as that term is
defined in the 1940 Act. Such control will dilute the effect of the votes of
other shareholders and contract owners.

As of August 31, 1999, VALIC Separate Account A owned of record the
following percentage of the outstanding shares of each Fund (only Funds of which
VALIC owned of record at least 5% are shown): 25.94% of the American General
Balanced Fund, 19.82% of the American General Conservative Growth Lifestyle
Fund, 6.08% of the American General Domestic Bond Fund, 24.66% of the American
General Growth Lifestyle Fund, 4.59% of the American General International
Growth Fund, 59.19% of the American General Large Cap Growth Fund, 6.54% of the
American General Large Cap Value Fund, 9.59% of the American General Mid Cap
Growth Fund, 17.99% of the American General Mid Cap Value Fund, 40.27% of the
American General Moderate Growth Lifestyle Fund, 46.57% of the American General
Money Market Fund, 28.42% of the American General Small Cap Growth Fund, 33.86%
of the American General Socially Responsible Fund.

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 domestically are maintained in the custody of the

65
<PAGE> 140

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 the Custodian until
released or sold or otherwise disposed of in accordance with or under the terms
of such agreement, (2) that such assets 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 the Custodian 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.

INDEPENDENT AUDITORS

Ernst & Young LLP, One Houston Center, 1221 McKinney, Suite 2400, Houston,
Texas 77010, serve as independent auditors of the Series Company.

TRANSFER AGENT

VALIC serves as the Series Company's transfer agent, shareholder service
agent and dividend disbursement agent. VALIC performs these service at cost.

66
<PAGE> 141

MANAGEMENT OF THE SERIES COMPANY

The Board of Trustees manages the business activities of the Series Company
in accordance with Series Company's Declaration of Trust and Applicable Delaware
Law. The Board elects officers who are responsible for the day-to-day operations
of the Series Company and who execute policies formulated by the Board. The
names and ages of the Trustees and officers of the Series Company, their
address, present positions and principal occupations during the past five years
are set forth below:

<TABLE>
<CAPTION>
NAME POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
----------- ---------------- -----------------------
<S> <C> <C>
Thomas L. West, Jr.*.............. Chairman of the Formerly Chairman of the Board, VALIC and
2929 Allen Parkway Board and Trustee American General Annuity Insurance Company
Houston, Texas 77019 since 1998, ("AGAIC") (1999-Present) and Vice Chairman
Date of Birth: 06/07/37 President (1998- and Group Executive, Retirement Services,
1999) American General Corporation ("American
General") (1998-Present). Formerly, Chairman
and Chief Executive Officer of VALIC
(1998-1999); President of VALIC
(1994-1998).(1)
Kent E. Barrett*.................. Executive Vice Executive Vice President and Chief Financial
2929 Allen Parkway President and Officer, VALIC and AGAIC (1999-Present),
Houston, Texas 77019 Trustee since 1999 Executive Vice President and Chief Financial
Date of Birth: 09/20/56 Officer, American General Life & Accident
Insurance Company ("AGLA") (1998-1999),
Senior Vice President -- Finance and
Treasurer, AGLA (1997-1998), Senior Vice
President-Controller and Treasurer, AGLA
(1994-1997).(1)
Dr. Judith L. Craven.............. Trustee since 1998 Retired Administrator. Formerly, President,
3212 Ewing Street United Way of Texas Gulf Coast (1992-1998).
Houston, Texas 77004 Director, Houston Branch, Federal Reserve
Date of Birth: 10/06/45 Bank of Dallas (1992-Present), Compaq
Computer Corporation (1998-Present), Luby's
Inc. (1998-Present), A.H. Belo Corporation
(journalism, TV and radio) (1993-Present),
and Sysco Corporation (marketing and
distribution of food) (1996-Present).
Formerly, Director, Sisters of Charity of
Incarnate Word (1996-1999).(1)
Dr. Timothy J. Ebner.............. Trustee since 1998 Professor and Head, Department of
17994 NW Union Blvd. Neuroscience and Visscher Chair of
Elk River, Minnesota 55330 Physiology (1998-Present), Professor,
Date of Birth: 07/15/49 Departments of Neurosurgery and Physi-
ology, and Director, Graduate Program in
Neuroscience, University of Minnesota
(1991-1999). Formerly, Consultant to EMPI
Inc. (manufacturing of medical products)
(1994-1995) and Medtronic Inc. (manufacturer
of medical products) (1997-1998).(1)
Judge Gustavo E.
Gonzales, Jr.................... Trustee since 1998 Municipal Court Judge, Dallas, Texas
3731 Gilbert Ave. A (1995-Present); Director, Downtown Dallas
Dallas, Texas 75219 YMCA Board (1996-Present); Director, Dallas
Date of Birth: 07/27/40 Easter Seals Society (1997-Present).
Formerly, private attorney (litigation)
(1980-1995).(1)
</TABLE>

67
<PAGE> 142

<TABLE>
<CAPTION>
NAME POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
----------- ---------------- -----------------------
<S> <C> <C>
Dr. Norman Hackerman.............. Trustee since 1998 Chairman -- Scientific Advisory Board for
2001 Pecos Street The Robert A. Welch Foundation
Austin, Texas 78703 (1983-Present), Director, Electrosource,
Date of Birth: 03/02/12 Inc. (develops, manufactures and markets
energy storage products), President
Emeritus, Rice University, Houston, Texas.
Formerly, President, Rice University,
Houston, Texas (1970-1985), Professor
Emeritus, University of Texas, Austin, Texas
(1970-1985).(1)
Alice T. Kane*.................... President and President of American General Fund Group
One Maiden Lane Trustee since 1999 (1999- Present). Formerly, Executive Vice
New York, New York President, American General Investment
Date of Birth: 01/16/48 Management, L.P. (1998-99). Formerly,
Executive Vice President, New York Life
Insurance Company (1994-1998). President of
other investment companies advised by
VALIC.(1)
Dr. John Wm. Lancaster............ Trustee since 1998 Pastor Emeritus and Director of Planned
4624 Braeburn Giving, First Presbyterian Church, Houston,
Bellaire, Texas 77401 Texas (1996- Present). Formerly, Pastor,
Date of Birth: 12/15/23 First Presbyterian Church, Houston, Texas
(1961-1990).(1)
Ben H. Love....................... Trustee since 1998 Retired. Formerly, Director, Mid-American
4407 Eaton Circle (waste products) (1993-1997) and Chief
Colleyville, Texas 76034 Executive, Boy Scouts of America.
Date of Birth: 09/26/30 (1985-1993).(1)
Dr. John E. Maupin, Jr............ Trustee since 1998 President, Meharry Medical College,
Meharry Medical College Nashville, Tennessee (1994-Present),
1005 D.B. Todd Blvd. Nashville Advisory Board Member, First
Nashville, Tennessee 37208 American National Bank (1996-Present),
Date of Birth: 10/28/46 Director, Monarch Dental Corporation
(1997-Present), LifePoint Hospitals, Inc.
(1998-Present). Formerly, Executive Vice
President, Morehouse School of Medicine,
Atlanta, Georgia (1989-1994).(1)
Dr. F. Robert Paulsen............. Trustee since 1998 Dean and Professor Emeritus, University of
2801 N. Indian Ruins Arizona, Tucson, Arizona. Formerly, Dean and
Tucson, Arizona 85715 Professor, University of Connecticut,
Date of Birth: 07/05/22 Storrs, Connecticut and Carnegie Fellow,
University of Michigan, Ann Arbor,
Michigan.(1)
</TABLE>

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

* Interested persons of the Series Company as defined in the 1940 Act
specifically because of their capacity as officers, directors or consultants
of the Series Company, VALIC or American General Corporation.

(1) A Director or Trustee of American General Series Portfolio Company ("AGSPC")
and American General Series Portfolio Company 2 ("AGSPC 2"), each an
open-end investment company, and USLife Income Fund, Inc., a closed-end
investment company, for which VALIC serves as the investment adviser.

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 incurred, if any.

68
<PAGE> 143

Listed below are the Series Company's officers and their principal
occupations. All are affiliates of VALIC and are located at 2929 Allen Parkway,
Houston, Texas 77019, except for Ms. Kane who is located at 125 Maiden Lane, New
York, New York 10038. Each officer serves until his or her successor is elected
and shall qualify. Each officer serves in the same or a similar capacity to
AGSPC and AGSPC2, open-end investment companies which are managed by VALIC.

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- ---------------- -----------------------
<S> <C> <C>
John E. Arant..................... Executive Vice Executive Vice President -- VALIC Sales
Date of Birth: 09/07/44 President since (1998- Present) and Senior Vice President
1998 (1998), VALIC and AGAIC. Chairman and
President, the Distributor (1998-Present).
Peter V. Tuters................... Senior Investment Executive Vice President, Trading and
Date of Birth: 04/18/52 Officer since 1998 Portfolio Management, AGIM (1998-Present);
Vice President and Investment Officer
(1998-Present), Vice President and Chief
Investment Officer (1993-1998), VALIC and
AGAIC (1998-Present). Formerly Director,
VALIC, Senior Vice President and Chief
Investment Officer, American General Corpo-
ration (1993-1998).
Teresa S. Moro.................... Vice President and Trader -- VALIC. Formerly, Money Market
Date of Birth: 08/14/60 Investment Officer Trader, VALIC (1986-1990).
since 1998
William Trimbur, Jr............... Vice President and Portfolio Manager, VALIC. Formerly, Second
Date of Birth: 06/15/51 Investment Officer Vice President, VALIC (1985-1990);
since 1998 Controller, VALIC (1985-1986); Assistant
Controller, VALIC (1982-1985) and Assistant
Treasurer, VALIC (1982-1986).
Maruti D. More.................... Vice President -- Vice President, Investments, VALIC
Date of Birth: 02/02/44 Investments since (1998-Present), Portfolio Manager, American
1998 General Corporation (1996-1998). Formerly,
Managing Director, Marketable Securities,
Paul Revere Investment Management
Corporation (1993-1995); Senior Portfolio
Manager, Dewey Square Investors; Invest-
ment Vice President, New York Life Insurance
Company.
Cynthia A. Toles.................. Vice President and Senior Vice President, General Counsel and
Date of Birth: 03/28/51 Secretary since Secretary, VALIC and AGAIC (1998-Present).
1998 Director and Secretary, the Distributor.
Formerly, Senior Associate General Counsel &
Secretary, VALIC (1990-1998); Vice
President, Associate General Counsel &
Secretary, VALIC (1988-1989); Second Vice
President, Associate General Counsel and As-
sistant Secretary, VALIC (1986-1988);
Assistant Vice President, Assistant General
Counsel and Assistant Secretary, VALIC
(1983-1986).
Gregory R. Seward................. Treasurer since Vice President -- Variable Product
Date of Birth: 06/27/56 1998 Accounting, AGIM; (1998-Present) Assistant
Controller, VALIC (1991-1998) and AGAIC
(1998-Present).
</TABLE>

69
<PAGE> 144

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- ---------------- -----------------------
<S> <C> <C>
Kathryn A. Pearce................. Controller since Associate Director of Fund Accounting, AGIM
Date of Birth: 02/05/47 1998 (1996-Present). Formerly,
Supervisor -- Mutual Fund Accounting, Van
Kampen American Capital, Inc. (1977-1996).
Pauletta P. Cohn.................. Vice President Associate General Counsel and Assistant
Date of Birth: 06/06/48 since 1999 Secretary, American General Life Companies
(1998-Present), Senior Attorney, American
General (1993-1998).
Nori L. Gabert.................... Vice President and Associate General Counsel, VALIC (1997-Pre-
Date of Birth: 08/15/53 Assistant Secretary sent). Formerly, Of Counsel, Winstead
since 1998 Sechrest & Minick P.C. (1997); Vice
President and Associate General Counsel of
Van Kampen American Capital, Inc.
(1981-1996).
Cynthia A. Gibbons................ Assistant Vice Senior Compliance Analyst, VALIC (1996-
Date of Birth: 12/06/67 President since Present).
1998
Jaime M. Sepulveda................ Assistant Treasurer Director -- Variable Product Accounting and
Date of Birth: 01/09/52 since 1998 Financial Reporting, AGIM (1998-Present).
Formerly, Accounting Manager, Metro
Networks, Inc. (1997-1998); Controller and
Investment Officer, Port of Houston
Authority (1994-1997).
Donna L. Hathaway................. Assistant Manager -- Variable Product Accounting,
Date of Birth: 09/17/64 Controller since AGIM. Formerly, Gas Revenue Accountant,
1998 Texaco Inc.; Accounting Manager, Hewitt
Associates, LLC; Revenue Accounting Manager,
Trans Texas Gas.
Heriberto Valdez.................. Assistant Treasurer Associate Director -- Mutual Fund
Date of Birth: 04/25/57 since 1999 Accounting, AGIM (1999-Present), Manager,
Mutual Fund Accounting (1998-1999),
Manager -- Variable Product Accounting
(1997-1998), Staff Accountant -- Variable
Product Division (1989-1997), VALIC.
Gregory R. Kingston............... Assistant Treasurer Vice President, Fund Accounting, AGIM
Date of Birth: 06/27/56 since 1999 (October 1999). Formerly, Assistant
Treasurer, First Investor Management Company
(1994-1999).
</TABLE>

The officers conduct and supervise the daily business operations of the
Series Company, while the trustees, in addition to their functions set forth
under "Investment Adviser," review such actions and decide on general policy.

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 nine 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.

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 as of the commencement of
operations.

70
<PAGE> 145

COMPENSATION OF TRUSTEES AND CERTAIN OFFICERS

The following table sets forth information regarding the estimated
compensation and benefits to be earned by the Trustees for the fiscal year
ending August 31, 1999.

COMPENSATION TABLE
FISCAL YEAR ENDING AUGUST 31, 1999

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL
AGGREGATE ACCRUED AS COMPENSATION
COMPENSATION PART OF FROM FUND
FROM SERIES COMPANY COMPLEX(4)
NAME OF PERSON, POSITION(1) SERIES COMPANY EXPENSES PAID TO TRUSTEES
- --------------------------- -------------- -------------- -----------------
<S> <C> <C> <C>
Kent E. Barrett, Trustee(2)......................... $ 0 NA $ 0
Dr. Judith Craven, Trustee.......................... $ 8,644 NA $44,225
Dr. Timothy Ebner, Trustee.......................... $ 8,611 NA $43,725
Judge Gustavo Gonzales, Trustee..................... $ 8,645 NA $44,475
John A. Graf, Former Trustee(3)..................... $ 0 NA $ 0
Dr. Norman Hackerman, Trustee....................... $11,003 NA $60,932
Alice T. Kane, Trustee(2)........................... $ 0 NA $ 0
Dr. John Wm. Lancaster, Trustee..................... $11,220 NA $61,682
Ben L. Love, Trustee................................ $11,285 NA $61,932
Dr. John Maupin, Trustee............................ $ 8,568 NA $43,725
Dr. F. Robert Paulsen, Trustee...................... $11,220 NA $61,682
Craig R. Rodby, Former Trustee(3)................... $ 0 NA $ 0
Dr. R. Miller Upton, Trustee........................ $11,220 NA $61,682
Thomas L. West, Jr., Chairman....................... $ 0 NA $ 0
</TABLE>

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

(1) Messrs. Barrett, Graf, Rodby and West and Ms. Kane are affiliated persons
of VALIC and are not eligible for compensation or retirement benefits from
the Fund.

(2) Ms. Kane and Mr. Barrett were elected by the Board on July 27, 1999 to
serve as Trustees of the Fund.

(3) Messrs. Rodby and Graf resigned as Trustees of the Fund on April 19, 1999
and July 26, 1999, respectively.

(4) The Fund is part of a fund complex which also includes AGSPC, AGSPC2 and
USLIFE Income Fund, Inc.

FINANCIAL STATEMENTS

[to come]

71
<PAGE> 146

AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3

PART C. OTHER INFORMATION

ITEM 23. EXHIBITS

<TABLE>
<S> <C>
1. (a) 1. Agreement and Declaration of Trust(1)
2. Amendment to Agreement and Declaration of Trust(2)

(b) Certificate of Designation For:
(1) American General International Growth Fund(1)
(2) American General Large Cap Growth(1)
(3) American General Mid Cap Growth Fund(1)
(4) American General Small Cap Growth Fund(1)
(5) American General International Value Fund(1)
(6) American General Large Cap Value Fund(1)
(7) American General Mid Cap Value Fund(1)
(8) American General Small Cap Value Fund(1)
(9) American General Socially Responsible Fund(1)
(10) American General Balanced Fund(1)
(11) American General High Yield Bond Fund(2)
(12) American General Strategic Bond Fund(2)
(13) American General Domestic Bond Fund(1)
(14) American General Core Bond Fund(2)
(15) American General Money Market Fund(1)
(16) American General Growth Lifestyle Fund(1)
(17) American General Moderate Growth Lifestyle Fund(1)
(18) American General Conservative Growth Lifestyle Fund(1)
(19) American General S&P 500 Index Fund(1)
(20) American General Mid Cap Index Fund(1)
(21) American General Small Cap Index Fund(1)
(c) Certificate of Termination For:
(1) American General S&P 500 Index Fund(2)
(2) American General Mid Cap Index Fund(2)
(3) American General Small Cap Index Fund(2)

2. Bylaws(1)

3. Not Applicable

4. Not Applicable
</TABLE>

C-1
<PAGE> 147

<TABLE>
<C> <S>
5. (a) Investment Advisory Agreement between the Registrant and The Variable
Annuity Life Insurance Company ("VALIC")(2)
(b) Form of Investment Sub-Advisory Agreements between VALIC and each
Sub-Adviser on behalf of the following Funds:
(1) American General International Growth Fund(2)
(2) American General Large Cap Growth(2)
(3) American General Mid Cap Growth Fund(2)
(4) American General Small Cap Growth Fund(2)
(5) American General International Value Fund, American General
Balanced Fund and American General Domestic Bond Fund(2)
(6) American General Large Cap Value Fund(2)
(7) American General Mid Cap Value Fund(2)
(8) American General Small Cap Value Fund(2)
(9) American General High Yield Bond Fund, American General
Strategic Bond Fund and American General Core Bond Fund(2)

6. Form of Distribution Agreement between the Registrant and The Variable
Annuity Marketing Company ("VAMCO)"(2)

7. Not Applicable

8. (a) Form of Custodian Agreement between Registrant and State Street Bank and
Trust Company(2)
(b) Form of Securities Lending Authorization Agreement between Registrant
and State Street Bank and Trust Company(2)

9. (a) Form of Transfer Agency and Services Agreement between Registrant and
The Variable Annuity Life Insurance Company(2)
(b) Form of Data Access Services Agreement between Registrant and State
Street Bank and Trust Company(2)
(c) Form of Accounting Services Agreement between Registrant and The
Variable Annuity Life Insurance Company(2)
(d) Form of Administrative Services Agreement among Registrant and VALIC(2)

10. Not Applicable

11. Not Applicable

12. Not Applicable

13. Subscription Agreements(2)

14. Not Applicable

15. Not Applicable

16. Not Applicable

17. Not Applicable

18. Not Applicable
</TABLE>

C-2
<PAGE> 148

<TABLE>
<C> <S>
19. (a) Powers of Attorney for Messrs. West, Rodby, Graf, Hackman, Lancaster,
Paulsen, Upton and Love.(1)

(b) Powers of Attorney for Messrs. Ebner, Gonzales and Maupin and Ms.
Craven.(2)
</TABLE>

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

1 Incorporated herein by reference to the Registrant's Form N-1A registration
statement filed with the Securities and Exchange Commission on July 6, 1998
(File No. 333-53589).

2 Incorporated herein by reference to the Registrant's Form N-1A registration
statement filed with the Securities and Exchange Commission on September 2,
1998 (File No. 333-53589).

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

No person is controlled by or under common control with the Registrant. All
of the outstanding common stock of the Registrant is, or will be, owned by
VALIC, a Texas life insurance corporation, VALIC Separate Account A, a separate
account of VALIC which is registered as a unit investment trust under the
Investment Company Act of 1940 (File No. 811-3240/33-75292).

C-3
<PAGE> 149

ITEM 25. INDEMNIFICATION

Incorporated herein by reference to Pre-Effective Amendment Number 2 to the
Registrant's Form N-1A Registration Statement filed with the Securities and
Exchange Commission on September 2, 1998 (File No. 333-53589/811-08789).

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER

See "About the Series Company Management" in Part A and "Investment
Adviser" and "Investment Sub-Advisers" in the Statement of Additional
Information regarding the businesses of VALIC and the Sub-advisers.

Set out below is a list of each director and officer of VALIC indicating
each other business, profession, vocation, or employment of a substantial nature
in which each such person has been, at any time during the past two fiscal
years, engaged for his or her own account or in the capacity of director,
officer, partner, or trustee. Unless otherwise specified, the principal business
address of VALIC is 2929 Allen Parkway, Houston, Texas 77019. See also the
information set out under the caption "Trustees and Officers" in Part B of this
Registration Statement, which is incorporated herein by reference to the extent
applicable. Companies, other than VALIC, identified in the list below are
American General Distributors, Inc. ("AG Distributors"), American General
Annuity Insurance Company ("AGAIC") and American General Corporation ("AG
Corporation").

C-4
<PAGE> 150

<TABLE>
<CAPTION>
NAME COMPANY TITLE
---- ------- -----
<S> <C> <C>
Robert M. Devlin.................. VALIC, AGAIC Director
AG Director, Chairman and Chief Executive
Corporation Officer
Jon P. Newton..................... VALIC, AGAIC Director and Senior Chairman of the Board
AG Director and Vice Chairman of the Board
Corporation
John A. Graf...................... VALIC, AGAIC Director, President and Chief Executive Officer
Kent E. Barrett................... VALIC, AGAIC Director, Executive Vice President and
Chief Financial Officer
Bruce R. Abrams................... VALIC, AGAIC Director and Executive Vice President -- AGAIC Sales
John E. Arant, III................ VALIC, AGAIC Director and Executive Vice President -- VALIC Sales
Robert P. Condon.................. VALIC, AGAIC Director and Executive Vice President -- Institutional Marketing
Carl J. Santillo.................. VALIC, AGAIC Director and Executive Vice President -- Operations
Kathleen Adamson.................. VALIC, AGAIC Senior Vice President -- Customer Service
Michael J. Akers.................. VALIC, AGAIC Senior Vice President and Chief Actuary
Dick Baily........................ VALIC, AGAIC Senior Vice President -- Planning & Expense Management
Michael A. Betts.................. VALIC, AGAIC Senior Vice President -- Systems
Rebecca G. Campbell............... VALIC, AGAIC Director and Senior Vice President -- Human Resources
Dwight L. Cramer II............... VALIC, AGAIC Senior Vice President -- AG Fund Group
Patrick E. Grady.................. VALIC, AGAIC Senior Vice President and Treasurer
Stephen G. Kellison............... VALIC, AGAIC Senior Vice President -- Product Management
Richard J. Lindsay................ VALIC, AGAIC Senior Vice President -- Marketing
Cynthia A. Toles.................. VALIC, AGAIC Senior Vice President, General Counsel and
Secretary
AG Distributors Director and Secretary
James D. Bonsall.................. VALIC, AGAIC Vice President -- Financial Reporting
Gregory S. Broer.................. VALIC, AGAIC Vice President -- Actuarial
Richard A. Combs.................. VALIC, AGAIC Vice President -- Actuarial
Neil J. Davidson.................. VALIC, AGAIC Vice President -- Actuarial
David H. denBoer.................. VALIC, AGAIC Vice President -- Compliance
Stephen R. Duff................... VALIC, AGAIC Vice President -- New Account
Acquisitions
Daniel Fritz...................... VALIC, AGAIC Vice President -- Actuarial
Michael D. Gifford................ VALIC, AGAIC Vice President -- Case Development
Joseph P. Girgenti................ VALIC, AGAIC Vice President -- Sales Support
Sharla A. Jackson................. VALIC, AGAIC Vice President -- Customer Service - Amarillo
Jeff S. Johnson................... VALIC, AGAIC Vice President -- Marketing Communications
Kent W. Lamb...................... VALIC, AGAIC Vice President -- Financial Reporting
Traci P. Langford................. VALIC, AGAIC Vice President -- Account Management
James J. Michel................... VALIC, AGAIC Vice President -- Operations Support/Controller
Maruti More....................... VALIC, AGAIC Vice President -- Investments
Thomas G. Norwood................. VALIC, AGAIC Vice President -- Broker/Dealer Operations
Stephen J. Poston................. VALIC, AGAIC Vice President -- Training & National Accounts
Steven D. Rubinstein.............. VALIC, AGAIC Vice President -- Financial Planning and
Reporting
Richard W. Scott.................. VALIC, AGAIC Vice President and Chief Investment
Officer
AG Executive Vice President and Chief Investment
Corporation Officer
Gary N. See....................... VALIC, AGAIC Vice President -- Group Actuarial
Gregory R. Seward................. VALIC, AGAIC Vice President -- Variable Product Accounting
Norman A. Skinrood, Jr. .......... VALIC, AGAIC Vice President -- Investment Products Group
David Snyder...................... VALIC, AGAIC Vice President -- Electronic Commerce
Paula F. Snyder................... VALIC, AGAIC Vice President -- AGRS Marketing Communications
Robert E. Steele.................. VALIC, AGAIC Vice President -- Specialty Products
Kenneth R. Story.................. VALIC, AGAIC Vice President -- Information Technology
Brian R. Toldan................... VALIC, AGAIC Vice President and General Auditor
Michael A. Tompkins............... VALIC, AGAIC Vice President -- PR Acquisitions
Peter V. Tuters................... VALIC, AGAIC Vice President and Investment Officer
AG Senior Vice President -- Investments
Corporation
William C. Vetterling............. VALIC, AGAIC Vice President -- Marketing Administration
</TABLE>

<TABLE>
<CAPTION>
NAME COMPANY TITLE
---- ------- -----
<S> <C> <C>
William A. Wilson................. VALIC, AGAIC Vice President -- Government Affairs
Jane E. Bates..................... VALIC Chief Compliance Officer
Roger E. Hahn..................... VALIC, AGAIC Investment Officer
C. Scott Inglis................... VALIC, AGAIC Investment Officer
Craig R. Mitchell................. VALIC, AGAIC Investment Officer
Julia S. Tucker................... VALIC, AGAIC Investment Officer
AG Senior Vice President -- Investments
Corporation
Rembert R. Owen, Jr............... VALIC, AGAIC Real Estate Investment Officer and Assistant
Secretary
W. Lary Mask...................... VALIC, AGAIC Real Estate Investment Officer
and Assistant Secretary
D. Lynne Walters.................. VALIC, AGAIC, Tax Officer
AG Distributors
AG Vice President -- Taxes
Corporation
W. Joan Farmer.................... VALIC, AGAIC Assistant Secretary
Otto B. Gerlach, III.............. VALIC, AGAIC Assistant Secretary
Cheryl G. Hemley.................. VALIC, AGAIC Assistant Secretary
Susan Miller...................... VALIC, AGAIC Assistant Secretary
Connie E. Pritchett............... VALIC, AGAIC Assistant Secretary
Daniel R. Cricks.................. VALIC, AGAIC Assistant Tax Officer
Terry Festervand.................. VALIC, AGAIC Assistant Treasurer
Eric Alexander.................... VALIC, AGAIC Assistant Treasurer
James L. Gleaves.................. VALIC, AGAIC Assistant Treasurer
AG Vice President and Treasurer
Corporation
Kristy L. McWilliams.............. VALIC, AGAIC Assistant Treasurer
William H.Murray.................. VALIC, AGAIC Assistant Treasurer
Tara S. Rock...................... VALIC, AGAIC Assistant Treasurer
Carolyn Roller.................... VALIC, AGAIC Assistant Treasurer
Barbara G. Trygstad............... VALIC, AGAIC Assistant Treasurer
Marylyn S. Zlotnick............... VALIC, AGAIC Assistant Controller
Leslie K. Bates................... VALIC, AGAIC Administrative Officer
Mary C. Birmingham................ VALIC, AGAIC Administrative Officer
Donald L. Davis................... VALIC, AGAIC Administrative Officer
Robert A. Demchak................. VALIC, AGAIC Administrative Officer
Ruby K. Donelson.................. VALIC, AGAIC Administrative Officer
David E. Green.................... VALIC, AGAIC Administrative Officer
Ted D. Hennis..................... VALIC, AGAIC Administrative Officer
William L. Hinkle................. VALIC, AGAIC Administrative Officer
Joan M. Keller.................... VALIC, AGAIC Administrative Officer
William R. Keller, Jr............. VALIC, AGAIC Administrative Officer
Fred M. Lowery.................... VALIC, AGAIC Administrative Officer
James F. McCulloch................ VALIC, AGAIC Administrative Officer
Michael E. Mead................... VALIC, AGAIC Administrative Officer
Elliott L. Shifman................ VALIC, AGAIC Administrative Officer
Nancy K. Shumbera................. VALIC, AGAIC Administrative Officer
Kathryn T. Smith.................. VALIC, AGAIC Administrative Officer
John M. Stanton................... VALIC, AGAIC Administrative Officer
James P. Steele................... VALIC, AGAIC Administrative Officer
</TABLE>

C-5
<PAGE> 151

ITEM 27. PRINCIPAL UNDERWRITERS

(a) American General Distributors, Inc. (the "Distributor") acts as
exclusive distributor and principal underwriter of the Registrant and as
principal underwriter for VALIC Separate Account A, American General Series
Portfolio Company and American General Series Portfolio Company 2.

(b) The following information is furnished with respect to each officer and
director of the Distributor.

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DISTRIBUTOR WITH THE REGISTRANT
------------------ --------------------- ---------------------
<S> <C> <C>
(*)
Bruce R. Abrams...................... Director, Chief Executive --
Officer and President
(*)
Patrick E. Grady..................... Director, Chief Financial --
Officer and Treasurer
(*)
Cynthia A. Toles..................... Director and Secretary Vice President and Secretary
(*)
D. Lynne Walters..................... Tax Officer --
(*)
V. Keith Roberts..................... Chief Compliance Officer --
(*)
Cheryl G. Hemley..................... Assistant Secretary --
(*)
Daniel R. Cricks..................... Assistant Tax Officer --
(*)
Terry Festervand..................... Assistant Treasurer --
(*)
James L. Gleaves..................... Assistant Treasurer --
(*)
Tara S. Rock......................... Assistant Treasurer --
(*)
Gregory R. Seward.................... Assistant Treasurer Treasurer
(*)
Barbara Trygstad..................... Assistant Treasurer --
(*)
Marylyn S. Zlotnick.................. Assistant Treasurer --
</TABLE>

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

(*) 2929 Allen Parkway, Houston, Texas 77019

C-6
<PAGE> 152

ITEM 28. LOCATION OF BOOKS AND RECORDS

The books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the Rules promulgated thereunder will be
in the physical possession of either:

THE DEPOSITOR:

The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019

THE PRINCIPAL UNDERWRITER:

American General Distributors, Inc.
2929 Allen Parkway
Houston, Texas 77019

THE CUSTODIAN:

The State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110

INVESTMENT SUB-ADVISERS:

American General Investment Management, L.P.
2929 Allen Parkway
Houston, Texas 77019

Brown Capital Management
809 Cathedral Street
Baltimore, Maryland 21201

Capital Guardian Trust Company
11100 Santa Monica Boulevard
Los Angeles, California 90025

Fiduciary Management Associates, Inc.
211 Congress Street
Boston, Massachusetts 02110

Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004

Jacobs Asset Management, Inc.
211 Congress Street
Boston, Massachusetts 02110

JP Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036

Neuberger Berman Management Inc.
605 Third Avenue
New York, New York 10158

State Street Bank and Trust Company
2 International Place
Boston, Massachusetts 02110

ITEM 29. MANAGEMENT SERVICES

There is no management-related service contract not discussed in Parts A or
B of this Form N-1A

ITEM 30. UNDERTAKINGS

Not Applicable

C-7
<PAGE> 153

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, American General Series
Portfolio Company 3, has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Houston, and State of Texas, on the 4th day of November, 1999.

AMERICAN GENERAL SERIES
PORTFOLIO COMPANY 3

By: /s/ THOMAS L. WEST, JR.
--------------------------------
Thomas L. West, Jr.
Chairman of the Board of

Trustees

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ THOMAS L. WEST, JR. Chairman of the Board of November 4, 1999
- ---------------------------- Trustee
Thomas L. West, Jr.

/s/ GREGORY R. SEWARD Treasurer November 4, 1999
- ----------------------------
Gregory R. Seward

* Trustee November 4, 1999
- ----------------------------
Kent E. Barrett

* Trustee November 4, 1999
- ----------------------------
Judith Craven

* Trustee November 4, 1999
- ----------------------------
Timothy J. Ebner

* Trustee November 4, 1999
- ----------------------------
Gustavo E. Gonzales, Jr.

* Trustee November 4, 1999
- ----------------------------
Norman Hackerman

* Trustee November 4, 1999
- ----------------------------
Alice T. Kane

* Trustee November 4, 1999
- ----------------------------
John Wm. Lancaster

* Trustee November 4, 1999
- ----------------------------
Ben H. Love

* Trustee November 4, 1999
- ----------------------------
John E. Maupin, Jr.

* Trustee November 4, 1999
- ----------------------------
F. Robert Paulsen
</TABLE>

<PAGE> 154

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Trustee November 4, 1999
- ----------------------------
R. Miller Upton

By: /s/ DAVID M. LEAHY November 4, 1999
------------------------
David M. Leahy
Attorney-in-Fact
</TABLE>