NORTH AMERICAN FUNDS VARIABLE PRODUCT SERIES II, 485BPOS, 2000-12-01

NORTH AMERICAN FUNDS VARIABLE PRODUCT SERIES II
485BPOS, 2000-12-01

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON: December 1, 2000

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. 3 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 5 [X]

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

NORTH AMERICAN FUNDS VARIABLE PRODUCT SERIES II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
PAULETTA P. COHN
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(713) 831-1230
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

THE CORPORATION TRUST COMPANY
1209 ORANGE STREET
WILMINGTON, DELAWARE 19801
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

Copy to:
DAVID M. LEAHY, 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)
-----
X on December 11, 2000 pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(1)
-----
on (date) 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

NORTH AMERICAN FUNDS VARIABLE PRODUCT SERIES II

2929 Allen Parkway
Houston, Texas 77019

December 11, 2000

North American Funds Variable Product Series II (the "Series Company") (known as
American General Series Portfolio Company 3 prior to October 1, 2000) is a
mutual fund made up of 15 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. As of October 1, 2000, the name of each
Fund has changed. Here is a list of the old and new names for the Funds:

<TABLE>
<CAPTION>
OLD NAME NEW NAME
-------- --------
<S> <C>
American General Aggressive Growth Lifestyle Fund North American-AG Aggressive Growth Lifestyle Fund
American General Conservative Growth Lifestyle Fund North American-AG Conservative Growth Lifestyle
Fund
American General Core Bond Fund North American-AG Core Bond Fund
American General High Yield Bond Fund North American-AG High Yield Bond Fund
American General Moderate Growth Lifestyle Fund North American-AG Moderate Growth Lifestyle Fund
American General Money Market Fund North American-AG 2 Money Market Fund
American General Socially Responsible Fund North American-AG Socially Responsible Fund
American General Strategic Bond Fund North American-AG Strategic Bond Fund
American General Large Cap Growth Fund North American-Goldman Sachs Large Cap Growth Fund
American General International Growth Fund North American International Growth Fund
American General Mid Cap Growth Fund North American-INVESCO MidCap Growth Fund
American General Small Cap Growth Fund North American-J.P. Morgan Small Cap Growth Fund
American General Mid Cap Value Fund North American-Neuberger Berman MidCap Value Fund
American General Small Cap Value Fund North American Small Cap Value Fund
American General Large Cap Value Fund North American-State Street Large Cap Value Fund
</TABLE>

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.

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

<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
TOPIC PAGE
----- ----
<S> <C>
WELCOME TO AMERICAN GENERAL
FUND FACT SHEETS 3
North American-AG Aggressive Growth Lifestyle Fund 5
North American-AG Conservative Growth Lifestyle Fund 7
North American-AG Core Bond Fund 9
North American-AG High Yield Bond Fund 11
North American-AG Moderate Growth Lifestyle Fund 13
North American-AG 2 Money Market Fund 15
North American-AG Socially Responsible Fund 16
North American-AG Strategic Bond Fund 18
North American-Goldman Sachs Large Cap Growth Fund 20
North American International Growth Fund 22
North American-INVESCO MidCap Growth Fund 24
North American-J.P. Morgan Small Cap Growth Fund 26
North American-Neuberger Berman MidCap Value Fund 28
North American Small Cap Value Fund 30
North American-State Street Large Cap Value Fund 32
MORE ABOUT PORTFOLIO INVESTMENTS 34
MORE ABOUT RISK 38
ABOUT THE SERIES COMPANY'S MANAGEMENT 40
ACCOUNT INFORMATION 44
FINANCIAL HIGHLIGHTS 46
</TABLE>

2
<PAGE> 4

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

American General Corporation, with assets of approximately $123 billion and
shareholders' equity of $8.1 billion as of September 30, 2000, is the parent
company of one of the nation's largest diversified financial services
organizations. American General's operating divisions deliver a wide range of
retirement services, life insurance, and consumer finance products and services
to diverse markets through focused distribution channels. American General,
headquartered in Houston, was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.

The address of American General Corporation and its subsidiaries, including The
Variable Annuity Life Insurance Company ("VALIC") and American General
Investment Management, L.P. ("AGIM"), is 2929 Allen Parkway, Houston, Texas
77019. American General Advisers, the investment adviser, is a division of
VALIC.

Unless otherwise specified in this prospectus, the words "we" and "our" mean
American General Advisers. The words "you" and "your" mean the participant.

Individuals can't invest in these Funds directly. Instead, they participate
through an annuity contract, variable life policy, or employer plan
(collectively, the "Contracts" and each a Contract) with VALIC or one of its
affiliates, or employee thrift plans maintained by VALIC or American General
Corporation. Most often employers set up annuity contracts so they can offer
their employees a way to save for retirement or assist them in estate planning.
Retirement plans through employers may be entitled to tax benefits that
individual retirement plans may not be entitled to. These tax benefits are more
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 and annuity contracts issued by VALIC
should be directed, in writing, to VALIC Client Service, A3-01, 2929 Allen
Parkway, Houston, Texas 77019, or by calling 1-800-633-8960.

All inquiries regarding annuity contracts or variable life policies 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.

The Contracts may be sold by banks. An investment in a Fund through a Contract
is not a deposit of a bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.

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

GROWTH, INCOME, STABILITY AND LIFESTYLE CATEGORIES

The Funds offered in this prospectus fall into four general investment
categories: growth, 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 or decrease 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, but if the Company does not do well, the
stock value may decrease. Ideally, the value of your investment may increase,
but there is no guarantee that the price of stocks will always go up. The price
will fluctuate so that the Company's value changes daily.

3
<PAGE> 5

Series Company Growth Category includes:

North American-AG Socially Responsible Fund
("Socially Responsible")
North American-Goldman Sachs Large Cap
Growth Fund ("Large Cap Growth")
North American International Growth Fund
("International Growth")
North American-INVESCO MidCap Growth
Fund ("MidCap Growth")
North American-J.P. Morgan Small Cap
Growth Fund ("Small Cap Growth")
North American-Neuberger Berman MidCap
Value Fund ("MidCap Value")
North American-Small Cap Value Fund
("Small Cap Value")
North American-State Street Large Cap Value
Fund ("Large Cap Value")

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 the Fund's investments. To
meet this objective, Funds in the income category buy investments that are
expected to pay dividends to the Fund on a regular basis.

Series Company Income Category includes:

North American-AG Core Bond Fund ("Core Bond")
North American-AG High Yield Bond Fund ("High Yield Bond")
North American-AG Strategic Bond Fund ("Strategic Bond")

Stability Category

Funds in the stability category provide liquidity, protection of capital and
current income through investments in high quality securities.

Series Company Stability Category includes:

North American-AG 2 Money Market Fund
("Money Market")

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 North American Funds Variable Product Series I and
II ("NAFVPS I" and "NAFVPS II") Series Company Funds in order to meet its
investment objective. NAFVPS I and NAFVPS II are related investment companies
for purposes of investment and investors services, and American General Advisers
serves as investment adviser to both, although each offers a unique selection of
mutual funds. 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:

North American-AG Aggressive Growth

Lifestyle Fund ("Aggressive Growth Lifestyle")
North American-AG Conservative Growth
Lifestyle Fund ("Conservative Growth
Lifestyle")
North American-AG Moderate Growth Lifestyle
Fund ("Moderate Growth Lifestyle")

INVESTMENT OBJECTIVES

The investment objective for each of the Funds in this prospectus is
non-fundamental and may be changed by the Series Company's Board of Trustees
without investor approval.

4
<PAGE> 6

NORTH AMERICAN -- AG
AGGRESSIVE GROWTH LIFESTYLE FUND

Fact Sheet

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

INVESTMENT CATEGORY

Lifestyle

INVESTMENT ADVISER

American General Advisers

INVESTMENT OBJECTIVE

Seeks growth through investments in a combination of the Series Company Funds of
NAFVPS I and NAFVPS II ("Underlying Funds"). This Fund is suitable for investors
seeking the potential for capital growth that a fund investing predominately in
equity securities may offer.

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 15%-35%
Domestic equity securities 60%-80%
Bonds 5%-15%
</TABLE>

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

INVESTMENT RISKS

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

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

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

Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds. The Fund is also
subject to the risk that a Fund that is non-diversified under the 1940 Act will
invest more of its assets in fewer issuers and, therefore, is more likely to be
adversely affected by a downturn in any one issuer or security. The securities
that Underlying Funds invest in also involve various risks.

5
<PAGE> 7

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

PERFORMANCE INFORMATION

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

This chart illustrates the Fund's annual returns for each full calendar year
since inception of the Fund (September 21, 1998). Charges imposed by the
Contracts that invest in the Fund are not included in the calculations of return
in this bar chart, and if those charges were included, the returns would have
been lower than those shown below.

[BAR CHART]
------------

For the year-to-date through September 30, 2000, the Fund's return was 2.98%.

Best quarter: 21.90%, quarter ending December 31, 1999

Worst quarter: -2.09%, quarter ending September 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's benchmark and the S&P 500 Index. The S&P 500 Index consists of 500 stocks
chosen for market size, liquidity, and industry group representation. It is a
market-value weighted index (stock price times number of shares outstanding),
with each stock's weight in the Index proportionate to its market value. No
sales charges have been applied to the S&P 500 Index, and an investor cannot
invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
Aggressive Growth
Lifestyle 29.99% 39.56%
Benchmark 18.43% 29.89%(1)
S&P 500 Index 21.05% 34.42%
</TABLE>

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

(1)Reflects returns from 10/1/98 to 12/31/99; benchmark value is only published
at the end of the month.

BENCHMARK INFORMATION

Each Lifestyle Fund currently compares its performance to a blended benchmark,
calculated by including the pro rata portion of the respective indices for each
of the Underlying Funds, and the S&P 500(R) Index. In order to simplify
calculation and reflect a collective benchmark which is more representative of
the investment ranges and focus on equities, the benchmark for each Lifestyle
Fund has been changed to a combination of the Wilshire 5000, Morgan Stanley
Capital International(R) Europe, Australasia, Far East ("MSCI EAFE") Index, and
Lehman Brothers Aggregate Index.

6
<PAGE> 8

NORTH AMERICAN -- AG

CONSERVATIVE GROWTH
LIFESTYLE FUND

Fact Sheet

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

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
American General Advisers

INVESTMENT OBJECTIVE

Seeks current income and low to moderate growth of capital through investments
in a combination of the Series Company Funds of NAFVPS I and NAFVPS II
("Underlying Funds"). This Fund is suitable for investors who wish to invest in
equity securities, but who are not willing to assume the market risks of either
the Aggressive Growth Lifestyle Fund or the Moderate Growth Lifestyle Fund.

<TABLE>
<S> <C>
International equity securities 5%-15%
Domestic equity securities 20%-50%
Bonds 45%-65%
</TABLE>

INVESTMENT RISKS

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

Investment in the Underlying Funds involves manager risk. Manager Risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds. The Fund is also
subject to the risk that a Fund that is non-diversified under the 1940 Act will
invest more of its assets in fewer issuers and, therefore, is more likely to be
adversely affected by a downturn in any one issuer or security. The securities
that Underlying Funds invest in also involve various risks.

7
<PAGE> 9

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

PERFORMANCE INFORMATION

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

[BAR CHART]
------------

For the year-to-date through September 30, 2000, the Fund's return was 5.98%.

Best quarter: 11.58%, quarter ending December 31, 1999

Worst quarter: -2.81%, quarter ending September 30, 1999

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
Conservative Growth
Lifestyle 13.32% 21.83%
Benchmark 10.63% 18.08%(1)
S&P 500 Index 21.05% 34.42%
</TABLE>

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

(1)Reflects returns from 10/1/98 to 12/31/99; benchmark value is only published
at the end of the month.

BENCHMARK INFORMATION

8
<PAGE> 10

NORTH AMERICAN -- AG
CORE BOND FUND

Fact Sheet

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

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
American General Advisers

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

INVESTMENT OBJECTIVE

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

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

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

The Fund's transactions are reflected in its portfolio turnover rate, 476%, for
the fiscal year ended August 31, 2000. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains.

INVESTMENT RISKS

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

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

Foreign Securities Risks:

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

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

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

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

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

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

Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of

9
<PAGE> 11

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

fixed-income securities will usually fall, and vice versa. Longer term
securities are subject to greater interest rate risk.

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

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

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

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

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

PERFORMANCE INFORMATION

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

[BAR CHART]
------------

For the year-to-date through September 30, 2000, the Fund's return was 5.35%.

Best quarter: 0.49%, quarter ending September 30, 1999

Worst quarter: -1.42%, quarter ending June 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Lehman Brothers Aggregate Index, a broad-based securities
market index. No sales charges have been applied to the index, and an investor
cannot invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ----------------
<S> <C> <C>
Core Bond -1.15% 0.58%
Lehman Brothers
Aggregate Index -0.83% 0.48%
</TABLE>

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

10
<PAGE> 12

NORTH AMERICAN -- AG
HIGH YIELD BOND
FUND

Fact Sheet

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

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER

American General Advisers

INVESTMENT SUB-ADVISER
AGIM

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

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

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

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

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

Foreign Securities Risks:

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

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

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 U.S.
markets and offer less protection to investors.

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

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

Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During

11
<PAGE> 13
HIGH YIELD BOND
--------------------------------------------------------------------------------

periods of falling interest rates, the Fund may invest in new securities with
lower interest rates, thus reducing the stream of cash payments that flow
through the Fund.

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 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.

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

[BAR CHART]

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

For the year-to-date through September 30, 2000, the Fund's return was 1.73%.

Best quarter: 3.61%, quarter ending December 31, 1999

Worst quarter: -1.69%, quarter ending September 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Salomon Brothers High Yield Market Index, a broad-based
securities market index. No sales charges have been applied to the index, and an
investor cannot invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
High Yield Bond 2.94% 6.69%
Salomon Brothers High
Yield Market Index 1.74% 4.21%(1)
</TABLE>

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

(1)Reflects returns from 10/1/98 to 12/31/99; benchmark value is only published
at the end of the month.

12
<PAGE> 14

NORTH AMERICAN -- AG

MODERATE GROWTH
LIFESTYLE FUND

Fact Sheet

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

INVESTMENT CATEGORY
Lifestyle

INVESTMENT ADVISER
American General Advisers

INVESTMENT OBJECTIVE

Seeks growth and current income through investments in a combination of the
Series Company Funds of NAFVPS I and NAFVPS II ("Underlying Funds"). This Fund
is suitable for investors who wish to invest in equity securities, but who are
not willing to assume the market risks of the Aggressive 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 10%-20%
Domestic equity securities 35%-65%
Bonds 25%-45%
</TABLE>

INVESTMENT RISKS
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.

13
<PAGE> 15

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

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

The performance information presented here is intended to help you evaluate the
potential risks and rewards of an investment in the Fund by showing changes in
the Fund's performance and comparing the Fund's performance with that of its
benchmark. How the Fund performed in the past is not necessarily an indication
of how the Fund will perform in the future. The Fund's annual report contains a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year.
This chart illustrates the Fund's annual returns for each full calendar year
since inception of the Fund (September 21, 1998). Charges imposed by the
Contracts that invest in the Fund are not included in the calculations of return
in this bar chart, and if those charges were included, the returns would have
been lower than those shown below.

[BAR CHART]
------------
For the year-to-date through September 30, 2000, the Fund's return was 5.14%.

Best quarter: 15.23%, quarter ending December 31, 1999

Worst quarter: -3.16%, quarter ending September 30, 1999

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
Moderate Growth
Lifestyle 18.81% 28.39%
Benchmark 13.77% 23.11%(1)
S&P 500 Index 21.05% 34.42%
</TABLE>

-------------------------------------------------
(1) Reflects returns from 10/1/98 to 12/31/99; benchmark value is only published
at the end of the month.

BENCHMARK INFORMATION
Each Lifestyle Fund currently compares its performance to a blended benchmark,
calculated by including the pro rata portion of the respective indices for each
of the Underlying Funds, and the S&P 500(R) Index. In order to simplify
calculation and reflect a collective benchmark which is more representative of
the investment ranges and focus on equities, the benchmark for each Lifestyle
Fund has been changed to a combination of the Wilshire 5000, Morgan Stanley
Capital International(R) Europe, Australasia, Far East ("MSCI EAFE") Index, and
Lehman Brothers Aggregate Index.

14
<PAGE> 16

NORTH AMERICAN -- AG 2

MONEY MARKET
FUND

Fact Sheet

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

INVESTMENT CATEGORY
Stability

INVESTMENT ADVISER

American General Advisers

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. In accordance with
Rule 2a-7 of the 1940 Act, such securities must mature in 13 months or less and
the Fund must have a dollar-weighted average portfolio maturity of 90 days or
less. These practices are designed to 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 (limited to 10% of the Fund's net assets at
all times)

- Rule 144A securities (liquid)

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

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

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

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

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

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

Please call 1-800-44-VALIC to learn the most recent Money Market Fund yield, or
log on to www.valic.com to check fund performance. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future. The Fund's annual report contains a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.

15
<PAGE> 17

NORTH AMERICAN -- AG
SOCIALLY RESPONSIBLE FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
American General Advisers

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.

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

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

- the production of nuclear energy;

- the manufacture of weapons or delivery systems;

- the manufacture of alcoholic beverages or tobacco products;

- the operation of gambling casinos; or

- business practices or the production of products that significantly pollute
the environment.

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

Up to 20% of the Fund's total assets may be invested in high quality money
market securities and warrants, or in other types of equity securities of
companies meeting social criteria, including American Depositary Receipts
("ADRs"), foreign securities, preferred stock, and convertible securities. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. ADRs are treated
in the same manner as U.S. securities for clearance, settlement, transfer and
ownership purposes; therefore, they may not be considered foreign securities.
See "More About Portfolio Investments."

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

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

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

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

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

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

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

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

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

Manager Risk: There is a risk that the Fund's management strategy may not
achieve the

16
<PAGE> 18

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

desired results and the Fund's performance may lag behind that of similar funds.

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

PERFORMANCE INFORMATION

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

[BAR CHART]

1999 18.09%
------------

For the year-to-date through September 30, 2000, the Fund's return was -2.66%.

Best quarter: 14.46%, quarter ending December 31, 1999

Worst quarter: -7.13%, quarter ending September 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the S&P 500 Index. The S&P 500 Index consists of 500 stocks chosen
for market size, liquidity, and industry group representation. It is a market-
value weighted index (stock price times number of shares outstanding), with each
stock's weight in the Index proportionate to its market value. No sales charges
have been applied to the S&P 500 Index, and an investor cannot invest directly
in it.

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

<TABLE>
<CAPTION>
AS OF SINCE INCEPTION
DECEMBER 31, 1999 ONE YEAR (9/21/1998)
----------------- -------- ---------------
<S> <C> <C>
Socially Responsible 18.09% 31.51%
S&P 500 Index 21.05% 34.42%
</TABLE>

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

17
<PAGE> 19

NORTH AMERICAN -- AG
STRATEGIC BOND
FUND

Fact Sheet

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

INVESTMENT CATEGORY
Income

INVESTMENT ADVISER
American General Advisers

INVESTMENT SUB-ADVISER
AGIM

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 at least 65% of total assets in a broad range of fixed-income
securities, including

- investment grade bonds (rated Baa or higher by Moody's and BBB or higher by
S&P)

- U.S. Government and agency obligations

- mortgage backed securities

- U.S., Canadian, and foreign high risk, high yield bonds (rated C or higher by
Moody's and CC or higher by S&P, or comparable unrated securities)

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

The Fund's transactions are reflected in its portfolio turnover rate, 100%, for
the fiscal year ended August 31, 2000. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains.

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

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

Foreign Securities Risks:

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

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

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

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

18
<PAGE> 20
STRATEGIC BOND FUND
--------------------------------------------------------------------------------

PERFORMANCE INFORMATION

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

[BAR CHART]

1999 3.85%
------------

For the year-to-date through September 30, 2000, the Fund's return was 3.69%.

Best quarter: 2.57%, quarter ending December 31, 1999

Worst quarter: -1.30%, quarter ending June 30, 1999

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

<TABLE>
<CAPTION>
AS OF SINCE INCEPTION
DECEMBER 31, 1999 ONE YEAR (9/21/1998)
----------------- -------- ---------------
<S> <C> <C>
Strategic Bond 3.85% 6.25%
Lehman Brothers
Aggregate Index -0.83% 0.48%
</TABLE>

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

19
<PAGE> 21

NORTH AMERICAN --
GOLDMAN SACHS LARGE
CAP GROWTH FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
American General Advisers

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

The Fund will be managed utilizing Goldman Sachs' Quantitative Equity Strategy.
The acronym "CORE" (Computer-Optimized and Research Enhanced) reflects the three
step investment process the team uses to select securities. First, we estimate
the returns of 3000 U.S. stocks and foreign securities using a combination of
research from the Goldman Sachs Global Investment Research Department, other
industry sources and objective quantitative analysis. Next, the Fund's
investment portfolio is constructed by balancing expected returns against
portfolio risk, trading fees and investment objectives. The Fund is intended to
be constructed with minimum deviations from the sector, risk statistics and
macroeconomic sensitivity of the Fund's benchmark, the Russell 1000(R) Growth
Index. A proprietary multi-factor model is used in seeking to ensure risks taken
are both intended and are warranted due to expected return. Lastly, the Fund is
traded regularly and rebalanced in seeking to ensure all positions are in line
with current market outlooks and benchmark weights.

The Fund may invest up to 25% of total assets in the equity securities of other
U.S. and foreign issuers. The securities of the foreign issuers must be traded
in the United States. This includes convertible securities, ADRs and GDRs. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading. GDRs are very similar to ADRs.
Generally, ADRs are designed for use in the United States securities markets,
while GDRs are designed for use when the issuer is raising capital in more than
one market simultaneously, such as the issuer's local market and the U.S. GDRs
carry the same currency, political and economic risks as the underlying foreign
shares. ADRs are treated in the same manner as U.S. securities for clearance,
settlement, transfer and ownership purposes; therefore, they may not be
considered foreign securities. See "More About Portfolio Investments."

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

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

Foreign Securities Risks:

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

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

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

Developing Country Risk: The risks associated with investment in foreign

20
<PAGE> 22
LARGE CAP GROWTH FUND
--------------------------------------------------------------------------------

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

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

[BAR CHART]

1999 35.49%
------------

For the year-to-date through September 30, 2000, the Fund's return was -1.65%.

Best quarter: 23.01%, quarter ending December 31, 1999

Worst quarter: -1.93%, quarter ending September 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Russell 1000 Growth Index, a broad-based securities market
index. No sales charges have been applied to the index, and an investor cannot
invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
Large Cap Growth 35.44% 49.00%
Russell 1000 Growth
Index 33.16% 50.09%
</TABLE>

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

21
<PAGE> 23

NORTH AMERICAN INTERNATIONAL
GROWTH FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
American General Advisers

INVESTMENT SUB-ADVISER
Thompson, Siegel & Walmsley, Inc. ("TS&W")

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 the foreign equity
securities of at least three countries outside the United States. Since the Fund
normally intends to be fully invested, foreign equity securities will usually
represent closer to 80-85% of the Fund's total assets. Foreign equity securities
include common and preferred stock, convertible preferred stock, rights, and
warrants, European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs"). Generally, EDRs are designed for use in European securities markets.
GDRs are designed for use when the issuer is raising capital in more than one
market simultaneously, such as the issuer's local market and the U.S. EDRs and
GDRs each carry the same currency, political and economic risks as the
underlying foreign shares.

The Fund may also invest in American Depositary Receipts ("ADRs"). ADRs are
certificates issued by a U.S. depositary bank and represent foreign shares held
by the bank to facilitate trading. ADRs are treated in the same manner as U.S.
securities for clearance, settlement, transfer and ownership purposes;
therefore, they may not be considered foreign securities.

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

TS&W will use a flexible, value-oriented approach to selecting this Fund's
investments, focusing on companies rather than on countries or markets. The goal
is to identify stocks selling at the greatest discount to their intrinsic future
value. Value is ascertained through an analysis of price/cash flow, enterprise
value/cash flow, and price/future earnings. This Fund invests in a wide range of
equity securities, including those of smaller capitalization companies ("Small
Caps"). Up to 50% of the Fund's total assets may be invested in Small Caps,
which are companies that have total assets (capitalization) of approximately
$150 million to $2.0 billion. See "More About Portfolio Investments."

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

Foreign Securities Risks:

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

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

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

22
<PAGE> 24
INTERNATIONAL GROWTH FUND
--------------------------------------------------------------------------------

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

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.

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

[BAR CHART]

1999 56.69%
------------

For the year-to-date through September 30, 2000, the Fund's return was -12.35%.

Best quarter: 47.20%, quarter ending December 31, 1999

Worst quarter: -1.04%, quarter ending March 31, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Salomon Brothers Primary Market Index, a broad-based
securities market index. No sales charges have been applied to the index, and an
investor cannot invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
--------------------- -------- ---------------
<S> <C> <C>
International Growth 56.69% 55.17%
Salomon Brothers
Primary Market
Index 24.51% 37.78%
</TABLE>

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

Please note that from the Fund's inception, September 21, 1998, until July 24,
2000, Jacobs Asset Management, Inc. was the Fund's sub-adviser. TS&W became the
new sub-adviser effective July 24, 2000, due to the retirement of Daniel Jacobs,
the lead portfolio manager. The performance shown above is for the period in
which Jacobs Asset Management, Inc. was the sub-adviser.

23
<PAGE> 25

NORTH AMERICAN --

INVESCO MIDCAP

GROWTH FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER

American General Advisers

INVESTMENT SUB-ADVISER

INVESCO Funds Group, 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.

INVESTMENT STRATEGY

This Fund will invest at least 65% of total assets in the equity securities of
medium capitalization companies. Medium capitalization companies generally
include companies with a market capitalization between $2 and $15 billion at the
time of purchase. We will seek to achieve capital appreciation through an
opportunistic investment strategy with a growth bias. This Fund will purchase
equity securities of those companies that appear to be undervalued relative to
their growth potential in the securities markets, because the companies are
presently out of favor, not well known or possess value that is not currently
recognized by the investment community. The Sub-Adviser uses a "bottom up"
approach to select specific investments, employing analysis that contains
elements of traditional dividend discount and earnings yield models, establishes
predicted relative valuation for equity and fixed-income markets, and determines
the attractiveness of individual securities through evaluation of growth and
risk characteristics of the underlying company relative to the overall equity
market. Although the Fund's portfolio securities generally will be acquired for
the long term, they may be sold under some of the following circumstances when
the Sub-Adviser believes that: a) the anticipated price appreciation has been
achieved or is no longer probable; b) alternative investments offer superior
total return prospects; or c) fundamentals change adversely.

Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, convertible securities, bonds
and Canadian securities. The Fund may purchase American Depositary Receipts
("ADRs") but does not consider ADRs to be foreign securities. The Fund may
invest up to 25% on foreign securities. See "More About Portfolio Investments."

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

Foreign Securities Risks:

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

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

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

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

Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the

24
<PAGE> 26

MIDCAP GROWTH FUND

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

prices of investments. For example, market risk occurs when expectations of
lower corporate profits in general cause the broad market of stocks or bonds to
fall in price. When this happens, even though a company is experiencing growth
in profits, the price of its stock or bonds could fall.

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

PERFORMANCE INFORMATION

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

[BAR CHART]

1999 6.42%
------------

For the year-to-date through September 30, 2000, the Fund's return was 28.34%.

Best quarter: 18.23%, quarter ending December 31, 1999

Worst quarter: -11.30%, quarter ending September 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Russell MidCap Growth Index, a broad-based securities market
index. No sales charges have been applied to the index, and an investor cannot
invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
MidCap Growth 6.42% 26.03%
Russell MidCap Growth
Index 51.29% 64.67%
</TABLE>

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

Please note that from the Fund's inception, September 21, 1998, until September
29, 2000, Brown Capital Management, Inc. was the Fund's sub-adviser. INVESCO
became the new sub-adviser effective September 29, 2000. The performance shown
above is for the period in which Brown Capital Management, Inc. was the
sub-adviser.

25
<PAGE> 27

NORTH AMERICAN --

J.P. MORGAN SMALL

CAP GROWTH FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER

American General Advisers

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

At least 65% of the Fund's total assets are invested in the equity securities of
small capitalization companies, which are companies whose approximate market
capitalizations are greater than $150 million and less than $2 billion. These
equities include U.S. and foreign common and preferred stocks, warrants and
rights, and convertible securities. On an industry-by-industry basis, the Fund's
weightings are similar to those of the Russell 2000(R) Growth Index. Within each
industry, the Fund invests in equity securities that the Sub-Adviser's research
and valuation process indicate are undervalued, or fairly valued and are poised
for long-term growth. The greater a company's estimated worth compared to the
current market price of its equity securities, the more undervalued the company.

The Fund may invest up to 35% of total assets in other equity securities of U.S.
large and medium capitalization issuers, including those equities listed above,
and the securities of investment companies. Large and medium capitalization
issuers are those companies with total assets of approximately $2 billion or
more. The Fund may invest up to 5% of total assets in equity securities of
foreign issuers that are U.S. dollar-denominated and listed on a U.S. exchange.
See "More About Portfolio Investments."

The Fund's transactions are reflected in its portfolio turnover rate, 133%, for
the fiscal year ended August 31, 2000. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains.

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

Foreign Securities Risks:

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

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

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

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

26
<PAGE> 28
SMALL CAP GROWTH FUND
--------------------------------------------------------------------------------

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

PERFORMANCE INFORMATION

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

[BAR CHART]

1999 69.79%
------------

For the year-to-date through September 30, 2000, the Fund's return was 4.05%.

Best quarter: 48.83%, quarter ending December 31, 1999

Worst quarter: -0.67%, quarter ending March 31, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Russell 2000 Growth Index, a broad-based securities market
index. No sales charges have been applied to the index, and an investor cannot
invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
Small Cap Growth 69.79% 80.93%
Russell 2000 Growth
Index 43.09% 56.73%
</TABLE>

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

27
<PAGE> 29

NORTH AMERICAN --

NEUBERGER BERMAN

MIDCAP VALUE FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER
American General Advisers

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 at least 65% of total assets in equity securities of medium
capitalization established companies, using a value-oriented investment approach
intended to increase capital with reasonable risk. Medium capitalization
companies include companies with the characteristics of companies included in
the Russell Midcap(R) Index. As of June 30, 2000, the largest company included
in the Russell Midcap(R) Index had an approximate market capitalization of $13
billion, while the average market capitalization was approximately $4.2 billion.

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

The Fund's transactions are reflected in its portfolio turnover rate, 166%, for
the fiscal year ended August 31, 2000. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains.

INVESTMENT RISKS

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

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

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

28
<PAGE> 30

MIDCAP VALUE FUND

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

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

[BAR CHART]

1999 22.22%
------------
For the year-to-date through September 30, 2000, the Fund's return was 22.05%.

Best quarter: 16.13%, quarter ending June 30, 1999

Worst quarter: -11.91%, quarter ending September 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Russell MidCap Value Index, a broad-based securities market
index. No sales charges have been applied to the index, and an investor cannot
invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
MidCap Value 22.22% 34.78%
Russell MidCap Value
Index -0.11% 10.02%
</TABLE>

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

29
<PAGE> 31

NORTH AMERICAN

SMALL CAP
VALUE FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER

American General Advisers

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

INVESTMENT OBJECTIVE

Seeks maximum long-term return, consistent with reasonable risk to principal, by
investing primarily in equity securities of small capitalization companies in
terms of revenues and/or market capitalization.

INVESTMENT STRATEGIES

This Fund invests at least 65% of its total assets in equity securities of small
capitalization companies, which are companies whose total market capitalizations
range from approximately $150 million to $2 billion and companies included in
the Russell 2000(R) Value Index ("Index"). One portion of the Fund's investment
portfolio will be actively managed and the other portion will be passively
managed.

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

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

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

The Fund's transactions are reflected in its portfolio turnover rate, 97%, for
the fiscal year ended August 31, 2000. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains.

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

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

Small Capitalization Company Risk: The risk that smaller companies may be
subject to more

30
<PAGE> 32
SMALL CAP VALUE FUND
--------------------------------------------------------------------------------

abrupt or erratic market movements than securities of larger, more established
companies or markets, generally.

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

PERFORMANCE INFORMATION

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

[BAR CHART]

1999 -06.57%
------------

For the year-to-date through September 30, 2000, the Fund's return was 16.11%.

Best quarter: 11.32%, quarter ending June 30, 1999

Worst quarter: -13.51%, quarter ending March 31, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Russell 2000 Value Index, a broad-based securities market
index. No sales charges have been applied to the index, and an investor cannot
invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
Small Cap Value -6.57% 4.20%
Russell 2000 Value
Index -1.49% 6.05%
</TABLE>

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

31
<PAGE> 33

NORTH AMERICAN --
STATE STREET LARGE
CAP VALUE FUND

Fact Sheet

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

INVESTMENT CATEGORY
Growth

INVESTMENT ADVISER

American General Advisers

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

INVESTMENT OBJECTIVE

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

The Index is a sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index
follows the 3,000 largest U.S. companies, based on total market capitalization.
The Index measures the performance of the 1,000 largest companies in the Russell
3000(R) Index, focusing on those with lower price-to-book ratios and lower
forecasted growth values.

INVESTMENT STRATEGY
The Fund will invest at least 65% of total assets in the equity securities of
the largest 1200 companies by market capitalization traded in the United States.
The Sub-Adviser combines financial accounting data with earnings forecasts
provided by many security analysts. This quantitative method allows the
Sub-Adviser to quickly and systematically evaluate large amounts of data.

The constructed portfolio is well-diversified, maintaining industry and sector
exposures and macroeconomic and risk characteristics that are similar to the
Index.

The Fund's transactions are reflected in its portfolio turnover rate, 142%, for
the fiscal year ended August 31, 2000. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains.

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

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

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

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

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

32
<PAGE> 34
LARGE CAP VALUE FUND
--------------------------------------------------------------------------------

PERFORMANCE INFORMATION

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

[BAR CHART]

1999 5.31%
------------

For the year-to-date through September 30, 2000, the Fund's return was 5.41%.

Best quarter: 12.46%, quarter ending June 30, 1999

Worst quarter: -9.94%, quarter ending September 30, 1999

This table compares the Fund's average annual returns to the returns of the
Fund's index, the Russell 1000 Value Index, a broad-based securities market
index. No sales charges have been applied to the index, and an investor cannot
invest directly in it.

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, SINCE INCEPTION
1999 ONE YEAR (9/21/1998)
------------------ -------- ---------------
<S> <C> <C>
Large Cap Value 5.31% 17.53%
Russell 1000 Value
Index 7.35% 18.73%
</TABLE>

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

33
<PAGE> 35

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

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

ASSET-BACKED SECURITIES

Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders. Examples of assets supporting asset-backed
securities include credit card receivables, retail installment loans, home
equity loans, auto loans, and manufactured housing loans. All of the Funds
except International Growth, Large Cap Growth, and MidCap Growth may invest in
asset-backed securities.

DEPOSITARY RECEIPTS

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

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

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

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

Generally, there are three types of stocks:
1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also gives
each owner a share in a company's profits through dividend payments or the
capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get a
fixed dividend before the common stock shareholders receive any dividends on
their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the holder
may exchange for a certain amount of common stock.

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, ADRs, convertible bonds and foreign equity securities, such as GDRs
and EDRs.

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

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

34
<PAGE> 36

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

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

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

FOREIGN CURRENCY

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

FOREIGN SECURITIES

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

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
EDRs and GDRs. See "Depositary Receipts".

There is generally less publicly available information about foreign companies,
and they are generally not subject to uniform accounting, auditing, and
financial reporting standards, practices, and requirements comparable to those
applicable to U.S. companies.

FUTURES AND OPTIONS

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

The Funds use stock and bond futures to invest cash and cash equivalents to:
- Write (sell) exchange traded covered put and call options on securities and
stock indices.
- Purchase exchange traded put and call options on securities and stock indices.
- Purchase and sell exchange traded financial futures contracts.
- Write (sell) covered call options and purchase exchange traded put and call
options on financial futures contracts.
- Write (sell) covered call options and purchase non-exchange traded call and
put options on financial futures contracts.

Futures contracts and options may not always be successful hedges; their prices
can be highly volatile. Using them can lower fund total return, and the
potential loss from the use of futures can exceed a fund's initial investment in
such contracts.

ILLIQUID SECURITIES

An illiquid security is one that may not be frequently traded or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Illiquid securities include, but are
not limited to, time deposits and repurchase agreements not maturing within
seven days and restricted securities. The non-money market funds in this
Prospectus

35
<PAGE> 37

may invest up to 15% in illiquid securities, except for Socially Responsible,
while the Money Market and Socially Responsible Funds are limited to 10%. This
restriction applies at all times to all assets.

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

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

INVESTMENT FUNDS

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

LOAN PARTICIPATIONS

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

MONEY MARKET SECURITIES

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

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

MORTGAGE-RELATED SECURITIES

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

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

Collateralized mortgage obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans or by portfolios
of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are

36
<PAGE> 38

structured into multiple classes, with each class bearing a different stated
maturity, coupon, and prepayment preference. CMOs that are issued or guaranteed
by the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Funds.

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

REAL ESTATE SECURITIES

Real estate securities are securities issued by companies that invest in real
estate or interests therein. REITs are generally publicly traded on the national
stock exchanges and in the over-the-counter market and have varying degrees of
liquidity.

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

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS

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

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

STRUCTURED SECURITIES

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

SWAP AGREEMENTS

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

U.S. GOVERNMENT SECURITIES
All the Funds may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. The U.S. Government does not guarantee the net
asset value of the Funds' shares. Some U.S. Government securities, such as
Treasury bills, notes and bonds, and securities guaranteed by the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, the Tennessee Valley Authority and the Small
Business Authority are supported only by the credit of the instrumentality. U.S.
Government

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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.

VARIABLE AMOUNT MASTER DEMAND 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. Core Bond, High Yield Bond, Large Cap Value, MidCap Growth, MidCap
Value, and Strategic Bond may invest in the variable amount master demand notes.

VARIABLE RATE DEMAND NOTES

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

WARRANTS AND RIGHTS

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

WHEN-ISSUED SECURITIES

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

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MORE ABOUT RISK
--------------------------------------------------------------------------------

There are several basic types of investment 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.
Several types of investment risks are discussed below.

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 American General
Advisers' 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. 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.

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.

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Foreign Securities Risk: Certain Funds may invest in foreign securities
including 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.

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.

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

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 new bonds pay 7%
interest.

Lower Rated Fixed-Income Securities Risk: 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
American General Advisers or a Sub-Adviser relies on in evaluating lower-rated
fixed-income securities. The analysis by American General Advisers 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. American
General Advisers 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

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<PAGE> 41

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
American General Advisers 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.

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.

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.

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

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

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

ABOUT THE SERIES COMPANY'S MANAGEMENT

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

INVESTMENT ADVISER

American General Advisers is a division of VALIC, a stock life insurance
company, which has been in the investment advisory business since 1960, and is
the investment adviser for all the Funds. American General Advisers is a
registered investment adviser with the SEC and had over $48.8 billion in assets
under management as of June 30, 2000. Several of the principal officers,
directors and portfolio managers of American General Advisers hold similar
positions with AGIM.

As Investment Adviser, American General Advisers oversees the Fund's day to day
operations, supervises the purchase and sale of Fund investments, and performs
the cash management function. American General Advisers employs Investment
Sub-Advisers who make investment decisions for the Funds, including Core Bond,
High Yield Bond, International Growth, Large Cap Growth, Large Cap Value, MidCap
Growth, MidCap Value, Small Cap Growth, Small Cap Value, and Strategic Bond.

American General Advisers makes investment decisions for and is directly
responsible for the day-to-day team management of the Lifestyle Funds, the
Socially Responsible Fund, and the Money Market Fund. The investment advisory
agreement between American General Advisers and the Series Company provides for
the Series Company to pay all expenses not specifically assumed by American
General Advisers. Examples of the expenses paid by the Series Company include
transfer agency fees, custodial fees, the fees of outside legal and auditing
firms, the costs of reports to shareholders and expenses of servicing
shareholder accounts. These expenses are allocated to each Fund in a manner
approved by the Board of Trustees.

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

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

HOW AMERICAN GENERAL ADVISERS IS PAID FOR ITS SERVICES

Each Fund pays American General Advisers 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

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<PAGE> 42

Fund's investments. From time to time American General Advisers, the
Sub-Advisers and/or the Distributor may voluntarily undertake to reduce a Fund's
expenses by reducing the fees payable to them or bearing certain expenses.

<TABLE>
<CAPTION>
ADVISORY FEE PAID TO AMERICAN GENERAL ADVISERS
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
--------- ----------------------------------------------
<S> <C>
Aggressive Growth Lifestyle 0.10%
Conservative Growth Lifestyle Fund 0.10%
Core Bond 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
High Yield Bond 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
Moderate Growth Lifestyle 0.10%
Money Market 0.25%
Socially Responsible 0.25%
Strategic Bond 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
Large Cap Growth 0.55%
International Growth 0.90% on the first $100 million
0.80% on assets over $100 million
MidCap Growth 0.80% on the first $50 million
0.75% on the next $50 million
0.70% on the next $150 million
0.65% on the next $250 million
0.60% on assets over $500 million
Small Cap Growth 0.85%
MidCap Value 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 0.75% on the first $50 million
0.65% on the assets over $50 million
Large Cap Value 0.50%
</TABLE>

INVESTMENT SUB-ADVISERS

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

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

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

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<PAGE> 43

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.

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

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

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

The Sub-Advisers are:

AGIM
2929 Allen Parkway, Houston, Texas 77015

AGIM is the Sub-Adviser for Core Bond, High Yield Bond and Strategic Bond. AGIM
was formed in 1998 as a successor to the investment management division of
American General Corporation, and is an indirect wholly-owned subsidiary of
American General Corporation. AGIM also provides investment management and
advisory services to pension and profit sharing plans, financial institutions
and other investors. AGIM had approximately $73.6 billion in assets under
management as of August 31, 2000. Investment decisions for several Funds are
made by teams as noted below. Each team meets regularly to review portfolio
holdings and discuss purchase and sale activity.

Robert N. Kase, CF, has been Core Bond's Portfolio Manager since November 1998.
He has been Investment Officer of American General Advisers 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 Strategic Bond are made by a team, headed by Steven
Guterman. Mr. Guterman, Executive Vice President, joined the Sub-Adviser in June
1998. Previously, Mr. Guterman was with Salomon Brothers, Inc. from 1983 to May
1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.

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

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

FMA is the Sub-Adviser for the actively managed portion of the assets of Small
Cap Value. FMA is a wholly-owned subsidiary of United Asset Management
Corporation, and provides investment management services to corporations,
foundations, endowments, pension and profit-sharing plans, trusts, estates and
other institutions as well as individuals. As of June 30, 2000, FMA had over
$1.2 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.

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<PAGE> 44

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

GSAM is the Sub-Adviser for Large Cap Growth. GSAM is a separate business unit
of the Investment Management Division ("IMD") of Goldman, Sachs & Co. ("Goldman
Sachs"). Goldman Sachs registered as an investment adviser in 1981. 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 September 30, 2000, GSAM, along with
other units of IMD, had assets under management of over $281.3 billion.

Large Cap Growth is managed by the following individuals: Robert C. Jones;
Victor H. Pinter; and Melissa Brown. Mr. Jones, Managing Director, joined the
Sub-Adviser as a portfolio manager in 1989. Mr. Pinter, Vice President, joined
the Sub-Adviser as a research analyst in 1989, and became a portfolio manager in
1992. Ms. Brown, Managing Director, joined the Sub-Adviser as a portfolio
manager 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.

INVESCO FUNDS GROUP, INC. ("INVESCO")

7800 East Union Avenue, Denver, Colorado 80237

As of approximately September 29, 2000, INVESCO became the investment
sub-adviser for MidCap Growth. Timothy J. Miller and Thomas Wald are primarily
responsible for the day-to-day management of the Fund's portfolio holdings. Both
Mr. Miller and Mr. Wald are Chartered Financial Analysts. Mr. Miller is the
leader of INVESCO's growth team and the lead portfolio manager. He is a director
and senior vice president of INVESCO, which he joined in 1992. Mr. Miller holds
an M.B.A. from the University of Missouri -- St. Louis and a B.S.B.A. from St.
Louis University.

Thomas Wald, co-portfolio manager, joined INVESCO in 1997 and is now a vice
president. Prior to joining INVESCO, Mr. Wald was employed by Munder Capital
Management. Mr. Wald holds an M.B.A. from the Wharton School at the University
of Pennsylvania and a B.A. from Tulane University.

INVESCO, the investment advisor for the INVESCO family of mutual funds, was
founded in 1932 and manages over $56 billion in 45 INVESCO mutual funds as of
August 31, 2000. INVESCO is an indirect wholly owned subsidiary of AMVESCAP PLC,
an international investment management company based in London, with money
managers located in Europe, North and South America, and the Far East.

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

J.P. Morgan is the Sub-Adviser for Small Cap Growth. 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, 2000, J.P. Morgan and its affiliates
employed over 380 analysts and portfolio managers around the world and had more
than $369 billion in assets under management.

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

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

NB Management is the Sub-Adviser for MidCap Value. NB Management and its
predecessor firms have specialized in the management of no-load mutual funds
since 1950. As of September 30, 2000, NB Management and its affiliates managed
approximately $56.5 billion in aggregate net assets.

Robert I. Gendelman serves as manager of the MidCap Value Fund. Mr. Gendelman is
Vice President of the Sub-Adviser and is a managing director of Neuberger
Berman, LLC. Mr. Gendelman has been associated with the Sub-Adviser since 1994.

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

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 $740
billion under management as of June 30, 2000.

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<PAGE> 45

Large Cap Value 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.

THOMPSON, SIEGEL & WALMSLEY, INC. ("TS&W")

5000 Monument Avenue, Richmond, Virginia 23230

TS&W became the investment sub-adviser for International Growth on July 24,
2000. Jacobs Asset Management, L.P. ("JAM") was the sub-adviser for the Fund
from September 1, 1998 through July 24, 2000. The president of JAM, Daniel
Jacobs, decided to retire. Therefore, effective July 24, 2000, JAM's parent
company, United Asset Management Corporation ("UAM"), merged the assets and
business of JAM into another of its subsidiaries, TS&W, located at 5000 Monument
Avenue, Richmond, Virginia 23230.

TS&W specializes in the management of large-cap value equities, international
equities, and fixed-income assets. As of August 31, 2000, TS&W had approximately
$4.6 billion in assets under management. TS&W is the investment advisor for
several UAM Funds. UAM was acquired by Old Mutual plc, a UK-based financial
services group, in a recent transaction.

The five-person research team responsible for the Fund has an average of twelve
years' international equity management experience and is led by Rob Jurgens. Mr
Jurgens has managed funds for sixteen years. He joined TS&W in July, 2000. Prior
to that, he was with Jacobs Assets Management, the Fund's previous Sub-Adviser,
from August 1995 through July, 2000.

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ACCOUNT INFORMATION
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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.

BUYING AND SELLING SHARES
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.

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.

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

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

44
<PAGE> 46

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

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

DIVIDENDS AND CAPITAL GAINS

Each Fund pays dividends from its net investment income. Net investment income
consists of interest income, net short-term capital gains, if any, and dividends
declared and paid on investments, less expenses. Dividends are declared
quarterly for all Funds, except for Money Market, which declares dividends
daily. Distributions of net short-term capital gains (treated as dividends for
tax purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividends and
any distributions are automatically reinvested in the same Fund.

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 your contract
prospectus for further tax information. You may also wish to consult your tax
advisor before investing.

45
<PAGE> 47

--------------------------------------------------------------------------------
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 a Fund (assuming reinvestment of
all dividends and distributions). This information has been audited by Ernst &
Young LLP, whose reports, along with the Fund's financial statements, are
included in the Annual Report, which is available upon request and which is
incorporated into this document by this reference. Per share data 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 are not annualized.

<TABLE>
<CAPTION>
AGGRESSIVE CONSERVATIVE
GROWTH GROWTH CORE HIGH YIELD
LIFESTYLE FUND LIFESTYLE FUND BOND FUND BOND FUND
------------------ ------------------ ------------------ -------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED AUGUST 31, ENDED AUGUST 31, ENDED AUGUST 31, ENDED AUGUST 31,
------------------ ------------------ ------------------ -------------------
2000 1999 2000 1999 2000 1999 2000 1999
------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period...... $ 12.77 $ 10.00 $ 11.73 $ 10.00 $ 9.58 $ 10.00 $ 9.69 $ 10.00
-------------------------------------------------------------------------------------
Investment Operations
Net investment income................... 0.37 0.08 0.46 0.25 0.61 0.50 0.96 0.87
Net realized & unrealized gain.......... 3.31 2.74 1.59 1.65 (0.12) (0.39) (0.41) (0.31)
-------------------------------------------------------------------------------------
Total from investment operations........ 3.68 2.82 2.05 1.90 0.49 0.11 0.55 0.56
-------------------------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income................... (1.09) (0.05) (0.92) (0.17) (0.61) (0.50) (0.96) (0.87)
Net realized gains...................... (0.47) -- (1.53) -- -- (0.03) -- --
-------------------------------------------------------------------------------------
Total distributions to shareholders..... (1.56) (0.05) (2.45) (0.17) (0.61) (0.53) (0.96) (0.87)
-------------------------------------------------------------------------------------
Net Asset Value, end of period............ $ 14.89 $ 12.77 $ 11.33 $ 11.73 $ 9.46 $ 9.58 $ 9.28 $ 9.69
-------------------------------------------------------------------------------------
TOTAL RETURN.............................. 29.91% 28.28% 19.33% 19.00% 5.31% 1.12% 6.01% 5.50%
-------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets.......... 0.10% 0.10% 0.10% 0.10% 0.80% 0.80% 0.99% 0.98%
Net investment income to average net
assets................................ 1.07% 0.76% 2.99% 2.29% 6.39% 5.06% 10.21% 8.51%
Portfolio turnover rate................. 79% 9% 63% 94% 476% 489% 90% 74%
Net assets at end of year (000's)....... $13,963 $ 8,480 $12,268 7,429 $ 5,420 $ 5,119 $ 5,830 $ 5,397
</TABLE>

<TABLE>
<CAPTION>
MODERATE GROWTH MONEY SOCIALLY STRATEGIC
LIFESTYLE FUND MARKET FUND RESPONSIBLE FUND BOND FUND
------------------ ---------------- ------------------ ----------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
------------------ ---------------- ------------------ ----------------
2000 1999 2000 1999 2000 1999 2000 1999
------- ------- ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period........... $ 12.24 $ 10.00 $ 1.00 $ 1.00 $ 12.88 $ 10.00 $ 9.86 $10.00
------
Investment Operations
Net investment income........................ 0.43 0.17 0.06 0.05 0.13 0.14 0.81 0.69
Net realized & unrealized gain............... 2.28 2.18 -- -- 1.74 3.45 (0.01) (0.16)
------
Total from investment operations............. 2.71 2.35 0.06 0.05 1.87 3.59 0.80 0.53
------
Distributions to Shareholders From:
Net investment income........................ (1.10) (0.11) (0.06) (0.05) (0.13) (0.14) (0.84) (0.65)
Net realized gains........................... (0.43) -- -- -- (0.46) (0.57) -- (0.02)
------
Total distributions to shareholders.......... (1.53) (0.11) (0.06) (0.05) (0.59) (0.71) (0.84) (0.67)
------
Net Asset Value, end of period................. $ 13.42 $ 12.24 $ 1.00 $ 1.00 $ 14.16 $ 12.88 $ 9.82 $ 9.86
------
TOTAL RETURN................................... 23.29% 23.52% 5.67% 4.66% 14.77% 36.27% 8.43% 5.33%
------
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets............... 0.10% 0.10% 0.56% 0.54% 0.56% 0.55% 0.89% 0.88%
Net investment income to average net
assets..................................... 2.00% 1.60% 5.65% 4.43% 0.99% 1.10% 8.27% 6.76%
Portfolio turnover rate...................... 72% 13% N/A N/A 40% 29% 100% 143%
Net assets at end of year (000's)............ $16,222 $10,349 $5,427 $9,784 $14,276 $10,304 $5,870 $5,296
</TABLE>

46
<PAGE> 48
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
LARGE CAP INTERNATIONAL MIDCAP SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND
------------------ ----------------- ----------------- ------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
------------------ ----------------- ----------------- ------------------
2000 1999 2000 1999 2000 1999 2000 1999
------- ------- ------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period......... $ 13.96 $ 10.00 $ 11.22 $10.00 $ 12.45 $10.00 $ 14.86 $ 10.00
----------------------------------------------------------------------------------
Investment Operations
Net investment income...................... (0.02) 0.01 0.05 0.13 (0.02) (0.03) (0.10) (0.05)
Net realized & unrealized gain............. 4.24 3.96 4.16 1.09 5.32 2.48 10.05 4.96
----------------------------------------------------------------------------------
Total from investment operations........... 4.22 3.97 4.21 1.22 5.30 2.45 9.95 4.91
----------------------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income...................... -- (0.01) (0.20) -- -- -- -- --
Net realized gains......................... (0.50) -- (0.44) -- (1.45) -- (1.57) (0.05)
----------------------------------------------------------------------------------
Total distributions to shareholders........ (0.50) (0.01) (0.64) -- (1.45) -- (1.57) (0.05)
----------------------------------------------------------------------------------
Net Asset Value, end of period............... $ 17.68 $ 13.96 $ 14.79 $11.22 $ 16.30 $12.45 $ 23.24 $ 14.86
----------------------------------------------------------------------------------
TOTAL RETURN................................. 30.68% 39.77% 37.31% 12.20% 46.25% 24.50% 68.91% 48.82%
----------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets............. 0.86% 0.81% 1.15% 1.13% 0.79% 0.77% 1.16% 1.11%
Net investment income to average net
assets................................... (0.12)% 0.13% 0.31% 1.40% (0.20)% (0.24)% (0.64)% (0.45)%
Portfolio turnover rate.................... 68% 76% 81% 87% 51% 38% 133% 126%
Net assets at end of year (000's).......... $35,983 $19,309 $11,715 $6,815 $12,770 $7,394 $34,000 $10,843
</TABLE>

<TABLE>
<CAPTION>
MIDCAP SMALL CAP LARGE CAP
VALUE FUND VALUE FUND VALUE FUND
----------------- ---------------- -----------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
----------------- ---------------- -----------------
2000 1999 2000 1999 2000 1999
------- ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period........................ $ 13.82 $10.00 $10.48 $10.00 $ 12.85 $10.00
----------------------------------------------------------
Investment Operations
Net investment income..................................... 0.05 0.08 0.15 0.13 0.13 0.13
Net realized & unrealized gain............................ 3.13 4.11 1.60 0.61 0.65 2.85
----------------------------------------------------------
Total from investment operations.......................... 3.18 4.19 1.75 0.74 0.78 2.98
----------------------------------------------------------
Distributions to Shareholders From:
Net investment income..................................... (0.05) (0.08) (0.15) (0.13) (0.13) (0.13)
Net realized gains........................................ (3.41) (0.29) (0.35) (0.13) (1.90) --
----------------------------------------------------------
Total distributions to shareholders....................... (3.46) (0.37) (0.50) (0.26) (2.03) (0.13)
----------------------------------------------------------
Net Asset Value, end of period.............................. $ 13.54 $13.82 $11.73 $10.48 $ 11.60 $12.85
----------------------------------------------------------
TOTAL RETURN................................................ 29.31% 42.38% 17.53% 7.34% 7.35% 29.87%
----------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets............................ 1.05% 1.03% 0.98% 0.96% 0.81% 0.80%
Net investment income to average net assets............... 0.41% 0.73% 1.36% 1.28% 1.17% 1.10%
Portfolio turnover rate................................... 166% 197% 97% 102% 142% 93%
Net assets at end of year (000's)......................... $17,411 $9,039 $5,421 $6,414 $11,084 $7,856
</TABLE>

47
<PAGE> 49
--------------------------------------------------------------------------------
INTERESTED IN LEARNING MORE?
--------------------------------------------------------------------------------

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

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

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

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

Telephone: 1-800-44-VALIC

Web-Site Address: http://www.valic.com

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

You can get text only copies:

- For a fee, by writing to or calling the Public Reference Room of the
Commission, Washington, D.C. 20549-6009, Telephone: 1-800-SEC-0330.

- Free from the Commission's Internet website at http://www.sec.gov.

Investment Company Act File No. 811-08789 (NAFVPS II)

Printed Matter
Printed in U.S.A.

VA10832 VER. 12/2000 Recycled Paper LOGO

<PAGE> 50

NORTH AMERICAN FUNDS VARIABLE PRODUCT SERIES II

NORTH AMERICAN-AG AGGRESSIVE GROWTH LIFESTYLE FUND

NORTH AMERICAN-AG CONSERVATIVE GROWTH LIFESTYLE FUND

NORTH AMERICAN-AG CORE BOND FUND

NORTH AMERICAN-AG HIGH YIELD BOND FUND

NORTH AMERICAN-AG MODERATE GROWTH LIFESTYLE FUND

NORTH AMERICAN-AG 2 MONEY MARKET FUND

NORTH AMERICAN-AG SOCIALLY RESPONSIBLE FUND

NORTH AMERICAN-AG STRATEGIC BOND FUND

NORTH AMERICAN-GOLDMAN SACHS LARGE CAP GROWTH FUND

NORTH AMERICAN INTERNATIONAL GROWTH FUND

NORTH AMERICAN-INVESCO MIDCAP GROWTH FUND

NORTH AMERICAN-J.P. MORGAN SMALL CAP GROWTH FUND

NORTH AMERICAN-NEUBERGER BERMAN MIDCAP VALUE FUND

NORTH AMERICAN SMALL CAP VALUE FUND

NORTH AMERICAN-STATE STREET LARGE CAP VALUE FUND

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

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

PART B

DECEMBER 11, 2000

This Statement of Additional Information is not a prospectus and contains
information in addition to that in the Prospectus for North American Funds
Variable Product Series II (the "Series Company"). It should be read in
conjunction with the Prospectus. The Statement of Additional Information and the
related Prospectus are dated December 11, 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.

Effective October 1, 2000, American General Series Portfolio Company 3 changed
its name to North American Funds Variable Product Series II. As of October 1,
2000, the name of each Fund has changed. The table below lists each Fund's
former name and new name:

<TABLE>
<CAPTION>
AS SHOWN IN THIS STATEMENT OF
OLD FUND NAME NEW FUND NAME ADDITIONAL INFORMATION
------------- ------------- -----------------------------
<S> <C> <C>
American General Aggressive Growth North American-AG Aggressive Growth ("Aggressive Growth Lifestyle Fund")
Lifestyle Fund Lifestyle Fund
American General Conservative Growth North American-AG Conservative Growth ("Conservative Growth Lifestyle Fund")
Lifestyle Fund Lifestyle Fund
American General Core Bond North American-AG Core Bond Fund ("Core Bond Fund")
American General High Yield Bond Fund North American-AG High Yield Bond Fund ("High Yield Bond Fund")
American General Moderate Growth North American-AG Moderate Growth Lifestyle ("Moderate Growth Lifestyle Fund")
Lifestyle Fund Fund
American General Money Market Fund North American-AG 2 Money Market Fund ("Money Market Fund")
American General Socially Responsible North American-AG Socially Responsible Fund ("Socially Responsible Fund")
Fund
American General Strategic Bond Fund North American-AG Strategic Bond Fund ("Strategic Bond Fund")
American General Large Cap Growth Fund North American-Goldman Sachs Large Cap ("Large Cap Growth Fund")
Growth Fund
American General International Growth North American International Growth Fund ("International Growth Fund")
Fund
American General MidCap Growth Fund North American-INVESCO MidCap Growth Fund ("MidCap Growth Fund")
American General Small Cap Growth Fund North American-J.P. Morgan Small Cap Growth ("Small Cap Growth Fund")
Fund
American General MidCap Value Fund North American-Neuberger Berman MidCap ("MidCap Value Fund")
Value Fund
American General Small Cap Value Fund North American Small Cap Value Fund ("Small Cap Value Fund")
American General Large Cap Value Fund North American-State Street Large Cap Value ("Large Cap Value Fund")
Fund
</TABLE>

VA 10832-1 REV 12/00

<PAGE> 51

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History............................. 3
Performance and Yield Information........................... 4
Investment Restrictions..................................... 6
Aggressive Growth Lifestyle Fund.......................... 6
Moderate Growth Lifestyle Fund............................ 6
Conservative Growth Lifestyle Fund........................ 6
High Yield Bond Fund...................................... 6
Strategic Bond Fund....................................... 6
Core Bond Fund............................................ 6
International Growth Fund................................. 8
Large Cap Growth Fund..................................... 9
Large Cap Value Fund...................................... 10
MidCap Growth Fund........................................ 12
MidCap Value Fund......................................... 13
Money Market Fund......................................... 15
Small Cap Growth Fund..................................... 16
Small Cap Value Fund...................................... 17
Socially Responsible Fund................................. 18
Investment Practices........................................ 20
Repurchase Agreements..................................... 20
Lending Portfolio Securities.............................. 21
Borrowing................................................. 21
Dollar Rolls.............................................. 21
Convertible Securities.................................... 22
American Depositary Receipts ("ADRs")..................... 22
Foreign Securities........................................ 22
Sovereign Debt Obligations................................ 23
Performance Indexed Paper................................. 24
Bank Obligations.......................................... 24
International Bonds....................................... 25
Emerging Markets.......................................... 25
Brady Bonds............................................... 26
Foreign Currency Exchange Transactions.................... 26
Standard and Poor's Depositary Receipts................... 27
When-Issued Securities.................................... 27
Fixed Income Securities................................... 27
Lower Rated Fixed Income Securities....................... 27
Zero Coupon Fixed Income Securities....................... 28
Inflation Indexed Bonds................................... 28
Hybrid Instruments........................................ 29
Catastrophe Bonds......................................... 30
Real Estate Securities and Real Estate Investment Trusts
("REITS").............................................. 30
Warrants.................................................. 31
Swap Agreements........................................... 31
Structured Notes.......................................... 32
Eurodollar Obligations.................................... 32
Mortgage-Related Securities............................... 33
Mortgage Pass-Through Securities.......................... 33
Collateralized Mortgage Obligations (CMOs)................ 35
</TABLE>

2
<PAGE> 52

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Commercial Mortgage-Backed Securities..................... 35
Other Mortgage-Related Securities......................... 35
CMO Residuals............................................. 36
Stripped Mortgage-Backed Securities ("SMBS").............. 36
Asset-Backed Securities................................... 36
Variable Rate Demand Notes................................ 37
Loan Participations....................................... 37
Adjustable Rate Securities................................ 37
Illiquid Securities....................................... 38
Rule 144A Securities...................................... 38
Options on Securities and Securities Indices.............. 39
Writing Covered Call and Put Options and Purchasing Call
and Put Options........................................ 40
Financial Futures Contracts............................... 42
Options on Financial Futures Contracts.................... 43
Certain Additional Risks of Options and Financial Futures
Contracts.............................................. 44
Limitations............................................... 45
Short Sales and Short Sales Against the Box............... 45
Money Market Securities of Foreign Issuers................ 46
Investment Adviser.......................................... 46
Code of Ethics............................................ 47
Investment Sub-Advisers..................................... 48
Service Agreements.......................................... 49
Portfolio Transactions and Brokerage........................ 50
Distribution and Service Agreement.......................... 52
Determination of Net Asset Value............................ 52
Accounting and Tax Treatment................................ 54
Subchapter M of the Internal Revenue Code of 1986......... 54
Section 817(h) of the Code................................ 54
Other Information........................................... 55
Shareholder Reports....................................... 55
Voting and Other Rights................................... 55
Custody of Assets......................................... 56
Bond Ratings.............................................. 57
Moody's Bond Ratings................................... 57
Standard & Poor's Ratings.............................. 57
Independent Auditors...................................... 58
Management of the Series Company............................ 58
Compensation of Trustees.................................... 62
</TABLE>

GENERAL INFORMATION AND HISTORY

North American Funds Variable Product Series II (formerly known as 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, American General Advisers serves as the Series Company's investment
adviser and conducts the business and affairs of the Series Company.
Additionally, American General Advisers has engaged investment sub-advisers to
provide investment sub-advisory services for each Fund other than the Socially
Responsible Fund, the Money Market Fund, the Conservative Growth

3
<PAGE> 53

Lifestyle Fund, the Moderate Growth Lifestyle
Fund and the Aggressive Growth Lifestyle Fund, subject to American General
Advisers' control, direction and supervision. The Series Company consists of
fifteen 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.

PERFORMANCE AND YIELD INFORMATION

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

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.

SEVEN DAY YIELDS

The 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 High Yield Bond Fund, Strategic Bond Fund and 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:

<TABLE>
<S> <C>
2[(1 +
NII)(6)-1]
Yield = ---------------
S X NAV
</TABLE>

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>

4
<PAGE> 54

ANNUAL AVERAGE TOTAL RETURN

AS OF AUGUST 31, 2000

<TABLE>
<CAPTION>
AS OF AUGUST 31, 2000
----------------------
SINCE
INCEPTION
FUND NAME ONE YEAR (9/21/98)
--------- --------- ----------
<S> <C> <C>
Aggressive Growth Lifestyle Fund............................ 29.91% 29.12%
Conservative Growth Lifestyle Fund.......................... 19.33% 18.24%
Core Bond Fund.............................................. 5.31% 2.61%
High Yield Bond Fund........................................ 6.01% 5.88%
Moderate Growth Lifestyle Fund.............................. 23.29% 22.58%
Money Market Fund........................................... 5.67% 5.33%
Socially Responsible Fund................................... 14.77% 21.85%
Strategic Bond Fund......................................... 8.43% 6.43%
Large Cap Growth Fund....................................... 30.68% 35.57%
International Growth Fund................................... 37.31% 28.86%
MidCap Growth Fund.......................................... 46.25% 31.53%
Small Cap Growth Fund....................................... 68.91% 54.86%
MidCap Value Fund........................................... 29.31% 33.57%
Small Cap Value Fund........................................ 17.53% 10.68%
Large Cap Value Fund........................................ 7.35% 14.56%
</TABLE>

Because 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.

DISTRIBUTION RATE CALCULATION

The Funds may advertise a non-standardized distribution rate. The
distribution rate may be calculated as frequently as daily, based on the latest
normal dividend paid. The latest dividend is annualized by multiplying the
dividend by a factor based on the dividend frequency (12 for monthly or 4 for
quarterly). The result is then divided by the higher of the current net asset
value or the maximum offering price. For example, a bond fund may pay a monthly
dividend of 0.04536. This is multiplied by 12 since it is a monthly dividend.
The result, 0.54432, is divided by the offering price of $9.89. That equals a
distribution rate of 5.50%.

The distribution rate measures the level of the ordinary income, including
short-term capital gains, that is actually paid out to investors. This is
different from fund yield, which is a measure of the income earned by a fund's
investments, but which may not be directly paid out to investors. Total return
measures the income earned, as does the yield, but also measures the effect of
any realized or unrealized appreciation or depreciation of the fund's
investments.

5
<PAGE> 55

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.

AGGRESSIVE GROWTH LIFESTYLE FUND; MODERATE GROWTH LIFESTYLE FUND; AND
CONSERVATIVE GROWTH LIFESTYLE FUND INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Aggressive 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 Aggressive 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.

HIGH YIELD BOND FUND; STRATEGIC BOND FUND; AND 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:

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<PAGE> 56

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 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.

(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provisions of the federal
securities or commodities laws.

(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of 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, High Yield Fund, the Strategic Bond
Fund and the Core Bond 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 American General Advisers 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
American General Advisers 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
American General Advisers 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.

7
<PAGE> 57

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 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.

INTERNATIONAL GROWTH FUND INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the International Growth Fund may not:

(1) With respect to 75% of its total assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and interest
by the U.S. Government or any of its agencies or instrumentalities); except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.

(2) With respect to 75% of its total assets, purchase more than 10% of any
class of the outstanding voting securities of any issuer; except that the
Fund may purchase securities of other investment companies without regard
to such limitation to the extent permitted by (i) the 1940 Act, as amended
from time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.

(3) Invest more than 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.

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<PAGE> 58

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 American General Advisers 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
American General Advisers 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
American General Advisers 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.

(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.

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 securities by the Fund may be deemed to be an underwriting.

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<PAGE> 59

(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 American General Advisers 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
American General Advisers 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
American General Advisers 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.

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 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
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<PAGE> 60

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.

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<PAGE> 61

(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.

MIDCAP GROWTH FUND INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the MidCap Growth Fund may not:

(1) With respect to 75% of the Fund's total assets, or as allowed by federal
law, 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.

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<PAGE> 62

(9) The Fund may borrow money, pledge assets, and enter into reserve repurchase
agreements, or employ similar investment techniques, as permitted by
applicable law, provided the borrowing does not exceed 33 1/3% of the
Fund's total assets.

As a matter of non-fundamental policy, the MidCap Growth Fund may not:

(1) 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.

(2) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions).

(3) 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.)

(4) Participate on a joint or joint and several basis in any trading account in
securities.

(5) Invest more than 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
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 American General Advisers 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
American General Advisers 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
American General Advisers 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.

(6) Invest in restricted securities.

MIDCAP VALUE FUND INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the MidCap Value Fund may not:

(1) Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes and not for leveraging or investment and
(ii) enter into reverse repurchase agreements and employ similar investment
techniques, and pledge its assets in connection therewith, for any purpose;
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). If borrowings exceed 33 1/3% of the value of the
Fund's total assets, the Fund will reduce its borrowings within three days
(excluding Sundays and holidays) to the extent necessary to comply with the
33 1/3% limitation.

(2) Purchase physical commodities or contracts thereon, unless acquired as a
result of the ownership of securities or instruments, but this restriction
shall not prohibit the Fund from purchasing futures contracts or options
(including options on futures contracts, but excluding options or futures
contracts on physical commodities) or from investing in securities of any
kind. For purposes of the limitations on commodities, the Fund does not
consider foreign currencies or forward contracts to be physical
commodities.

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<PAGE> 63

(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 MidCap 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").

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has determined that the commercial paper is of equivalent quality and is liquid.

MONEY MARKET FUND INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Money Market 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) 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:

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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 American General Advisers 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) 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.

SMALL CAP GROWTH FUND INVESTMENT RESTRICTIONS

As a matter of fundamental policy, the Small Cap Growth Fund may not:

(1) Make any investment inconsistent with the Fund's classification as a
diversified investment company under the 1940 Act; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under
the 1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.

(2) Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or
instrumentalities); provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.

(3) Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder.

(4) Borrow money, enter into reverse repurchase agreements, or employ similar
investment techniques, and pledge, assets in connection therewith, except
to the extent permitted by applicable law, and provided that the Fund will
not purchase additional securities if borrowings exceed 5% of total assets.

(5) Underwrite securities of other issuers, except to the extent that the Fund,
in disposing of portfolio securities may be deemed an underwriter within
the meaning of the 1933 Act.

(6) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in (a) securities directly or
indirectly secured by real estate, or (b) securities issued by issuers that
invest in real estate.

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

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

(1) Purchase securities on margin, make short sales of securities, or maintain
a short position, except in the course of the Fund's hedging activities,
provided that this restriction shall not be deemed to be applicable to the
purchase or sale of when-issued securities or delayed delivery securities.

(2) Invest more than 15% of the Fund's net assets (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 American General Advisers 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
American General Advisers 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
American General Advisers 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) 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.

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
portfolio securities and provided that any such loans not exceed 33 1/3% of
the Fund's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately.

(4) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), in

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<PAGE> 67

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:

(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 American General Advisers 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
American General Advisers 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
American General Advisers 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.

SOCIALLY RESPONSIBLE FUND INVESTMENT RESTRICTIONS

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

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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.

(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 American General Advisers 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
American General Advisers 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
American General Advisers 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.

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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.

INVESTMENT PRACTICES

This discussion of investment practices supplements that in the Prospectus.
The Lifestyle Funds may not be specifically discussed below, since each
Lifestyle Fund actually invests in other American General Funds mentioned in the
Prospectus.

REPURCHASE AGREEMENTS

Each Fund may hold commercial paper, certificates of deposits, and
government obligations (including government guaranteed obligations) subject to
repurchase agreements with certain well established domestic banks and certain
broker-dealers, including primary government securities dealers, approved as
creditworthy by the Board of Trustees. The underlying security must be a U.S.
Government security or a security rated in the highest rating category by the
requisite Nationally Recognized Statistical Rating Organization ("NRSRO")
(except for the International Growth Fund, the 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, often less
than a week. Repurchase agreements typically obligate a seller, at the time it
sells securities to a Fund, to repurchase the securities at a specific future
time and price. The price for which the Fund resells the securities is
calculated to exceed the price the Fund initially paid for the same securities,
thereby determining the yield during the Fund's holding period. This result is a
fixed market rate of interest, agreed upon by that Fund and the seller, which is
accrued as ordinary income. Most repurchase agreements mature within seven days
although some may have a longer duration. The underlying securities constitute
collateral for these repurchase agreements, which are considered loans under the
1940 Act.

The Funds do not intend to sell the underlying securities subject to a
repurchase agreement (except to the seller upon maturity of the agreement).
During the term of the repurchase agreement, the Funds (i) retain the securities
subject to the repurchase agreement as collateral securing the seller's
obligation to repurchase the securities, (ii) monitor on a daily basis the
market value of the securities subject to the repurchase agreement, and (iii)
require the seller to deposit with the Series Company's custodian collateral
equal to any amount by which the market value of the securities subject to the
repurchase agreement falls below the resale amount provided under the repurchase
agreement. In the event that a seller defaults on its obligation to repurchase
the securities, the Funds must hold the securities until they mature or may sell
them on the open market, either of which may result in a loss to a Fund if, and
to the extent that, the values of the securities decline. Additionally, the
Funds may incur disposition expenses when selling the securities. Bankruptcy
proceedings by the seller may also limit or delay realization and liquidation of
the collateral by a Fund and may result in a loss to that Fund. The Board of
Trustees of the Series Company will evaluate the creditworthiness of all banks
and broker-dealers with which the Series Company proposes to enter into
repurchase agreements. Repurchase agreements that do not mature in seven days
are considered illiquid.

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LENDING PORTFOLIO SECURITIES

For purposes of realizing additional income, each Fund, except the
Lifestyle Funds, may make secured loans of its portfolio securities as reflected
in the fundamental investment restrictions. 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. American General Advisers 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 American
General Advisers, considers the borrowing broker-dealers or financial
institutions to be creditworthy and of good standing and the interest earned
from such loans to justify the attendant risks. On termination of the loan, the
borrower will be required to return the securities to the lending Fund. Any gain
or loss in the market price during the loan would inure to the lending Fund. The
lending Fund may pay reasonable finders', administrative, and custodial fees in
connection with a loan of its securities.

BORROWING

Each Fund may borrow money, subject to the Fund's investment restrictions.
This borrowing may be unsecured. Provisions of the 1940 Act require a Fund to
maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed, with
an exception for borrowings not in excess of 5% of the Fund's total assets made
for temporary administrative purposes. Any borrowings for temporary
administrative purposes in excess of 5% of the Fund's total assets must maintain
continuous asset coverage. If the 300% asset coverage should decline as a result
of market fluctuations or other reasons, a Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. As noted below, a Fund also may
enter into certain transactions, including reverse repurchase agreements,
mortgage dollar rolls, and sale-buybacks, that can be viewed as constituting a
form of borrowing or financing transaction by the Fund. To the extent a Fund
covers its commitment under a reverse repurchase agreement (or economically
similar transaction) by the segregation of assets determined in accordance with
procedures adopted by the Trustees, equal in value to the amount of the Fund's
commitment to repurchase, such an agreement will not be considered a "senior
security" by the Fund and therefore will not be subject to the 300% asset
coverage requirement otherwise applicable to borrowings by the Funds. Borrowing
will tend to exaggerate the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio. Money borrowed will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.

DOLLAR ROLLS

In a "dollar roll" transaction, a Fund sells a mortgage-related security,
such as a security issued by the Government National Mortgage Association

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<PAGE> 71

("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 may be covered by
segregated liquid assets equal in value to the securities subject to repurchase
by the Fund. As with reverse repurchase agreements, to the extent that positions
in dollar roll agreements are not covered by segregated liquid assets at least
equal to the amount of any forward purchase commitment, such transactions would
be subject to the Funds' limitations on borrowings. Dollar roll transactions for
terms exceeding three months may be deemed "illiquid" and subject to a Fund's
overall limitations on investments in illiquid securities.

CONVERTIBLE SECURITIES

All of the Funds except for the Money Market Fund may invest in convertible
securities of foreign or domestic issues. A convertible security is a security
(a bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
nonconvertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines.

A Fund may be required to permit the issuer of a convertible security to
redeem the security, convert it into the underlying common stock, or sell it to
a third party. Thus, a Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on a Fund's ability to achieve
its investment objectives.

To the extent that convertible securities are intended by a Fund to be
equity securities, the following equity quality criteria typically are
considered: industry prospects (growth rate, competitive pressures,
supply/demand characteristics), market valuations (including price-to-book
ratios, price-earnings ratios and return on equity), company profile (suppliers,
competitors, end-users and customers), discretionary cash flow and quality of
management. To the extent that convertible securities are intended by a Fund to
be fixed income securities, the quality criteria typically applied by the Fund
to investments in fixed income securities (i.e., Moody's and S&P ratings) are
applied.

AMERICAN DEPOSITARY RECEIPTS ("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 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.

FOREIGN SECURITIES

A foreign security includes corporate debt securities of foreign issuers
(including preferred or
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preference stock), certain foreign bank obligations (see "Bank Obligations") and
U.S. dollar or foreign currency-denominated obligations of foreign governments
or their subdivisions, agencies and instrumentalities, international agencies
and supranational entities.

Included within the definition of foreign securities are the following
depositary receipts: European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs). Depositary receipts that are denominated in U.S. dollars are
not considered foreign securities in determining compliance with the MidCap
Value Fund's investment restrictions.

EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank
similar to that for ADRs and are designed for use in the non-U.S. securities
markets. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security. In addition, the Core Bond Fund, High Yield Bond Fund,
International Growth Fund, MidCap Value Fund, Small Cap Growth Fund, Small Cap
Value Fund Socially Responsible Fund and the Strategic Bond Fund may invest in
other types of depositary securities such as international depositary receipts,
global depositary shares, European depositary shares and international
depositary shares.

A Fund may also, in accordance with its specific investment objective(s)
and investment program, policies and restrictions purchase U.S. dollar-
denominated money market securities of foreign issuers. Such money market
securities may be registered domestically and traded on domestic exchanges or in
the over-the-counter market (e.g., Yankee securities) or may be (1) registered
abroad and traded exclusively in foreign markets or (2) registered domestically
and issued in foreign markets (e.g., Eurodollar securities).

Investing in foreign securities may involve advantages and disadvantages
not present in domestic investments. There may be less publicly available
information about securities not registered domestically, or their issuers, than
is available about domestic issuers or their domestically registered securities.
Stock markets outside the U.S. may not be as developed as domestic markets, and
there may also be less government supervision of foreign exchanges and brokers.
Foreign securities may be less liquid or more volatile than U.S. securities.
Trade settlements may be slower and could possibly be subject to failure. In
addition, brokerage commissions and custodial costs with respect to foreign
securities may be higher than those for domestic investments. Accounting,
auditing, financial reporting and disclosure standards for foreign issuers may
be different than those applicable to domestic issuers. Non-U.S.
dollar-denominated foreign securities may be affected favorably or unfavorably
by changes in currency exchange rates and exchange control regulations
(including currency blockage) and a Fund may incur costs in connection with
conversions between various currencies. Foreign securities may also involve
risks due to changes in the political or economic conditions of such foreign
countries, the possibility of expropriation of assets or nationalization, and
possible difficulty in obtaining and enforcing judgments against foreign
entities.

SOVEREIGN DEBT OBLIGATIONS

Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Funds) may be requested to participate
in the rescheduling
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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.

PERFORMANCE INDEXED PAPER

Performance indexed paper ("PIPs(SM)") is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is established
at maturity as a function of spot exchange rates between the U.S. dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.

BANK OBLIGATIONS

Each Fund, other than the Lifestyle Funds, may invest in bank obligations.
Bank obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances, and fixed time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 10% or 15% (depending on a Fund's illiquid asset
limitations) of its net assets 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
American General Advisers or a Sub-adviser, are of an investment quality
comparable to obligations of United States banks in which the Funds may invest.
The Core Bond Fund may invest in the same types of bank obligations as the other
Funds, but they must be U.S. dollar-denominated. Subject to a Fund's limitation
on concentration in the securities of issuers in a particular industry, there is
no limitation on the amount of a Fund's assets which may be

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invested in obligations of foreign banks which meet the conditions set forth
herein.

Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any U.S.
Government agency or instrumentality.

INTERNATIONAL BONDS

The Core Bond Fund, High Yield Fund, Large Cap Growth Fund, MidCap Value
Fund, Small Cap Growth Fund, Small Cap Value Fund, Socially Responsible Fund and
the Strategic Bond Fund may invest in international bonds, which include U.S.
dollar-denominated bonds issued by foreign corporations for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Euro Bonds"). International bonds may involve
special risks and considerations not typically associated with investing in U.S.
companies, including differences in accounting, auditing and financial reporting
standards; generally higher commission rates on foreign portfolio transactions;
the possibility of nationalization, expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, dispositions of foreign securities and dividends and interest
payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility. A
Fund's investment in international bonds also may be affected either unfavorably
or favorably by fluctuations in the relative rates of exchange between
currencies of different nations, by exchange control regulations and by
indigenous economic and political developments.

EMERGING MARKETS

All of the Funds except for Large Cap Growth Fund, Large Cap Value Fund,
MidCap Growth Fund and the Money Market Fund may invest in companies located in
emerging market countries. The investments may be subject to additional risks.
Specifically, volatile social, political and economic conditions may expose
investments in emerging or developing markets to economic structures that are
generally less diverse and mature. Emerging market countries may have less
stable political systems than those of more developed countries. As a result, it
is possible that favorable economic developments in certain emerging market
countries may be suddenly slowed or reversed by unanticipated political or
social events in such countries. Moreover, the economies of individual emerging
market countries may differ favorably or unfavorably from the U.S. economy in
such respects as the rate of growth in gross domestic product, the rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Additionally, investments in emerging countries may also be
adversely impacted due to the implementation of certain capital control measures
which could limit the a Fund's ability to access U.S. dollars, repatriate earned
interest and/or principal, and sell selected securities.

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 internation-

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<PAGE> 75

ally traded. Certain of these currencies have experienced a steady devaluation
relative to the U.S. dollar. Many emerging markets countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies and securities markets of
certain emerging market countries.

A further risk is that the existence of national policies may restrict a
Fund's investment opportunities and may include restrictions on investment in
issuers or industries deemed sensitive to national interests. Also, some
emerging markets countries may not have developed structures governing private
or foreign investment and may not allow for judicial redress for injury to
private property.

BRADY BONDS

High Yield Bond Fund, Strategic Bond Fund and Core Bond Fund may invest in
Brady Bonds. Brady Bonds are securities created through the exchange of existing
commercial bank loans to sovereign entities for new obligations in connection
with debt restructurings under a debt restructuring plan agreed to by the debtor
nation and its creditors. Brady Plan debt restructurings have been implemented
in a number of countries.

Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (primarily the U.S. dollar) and are actively traded in the
over-the-counter secondary market. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discounts bonds, are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the Brady Bonds, but are not backed by the
U.S. Government. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").

Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Funds may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Funds to suffer
a loss of interest or principal on any of its holdings.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS

Foreign currency transactions used by certain of the Funds may be either:
(i) on the spot (i.e., cash) basis at the spot rate prevailing in the foreign
exchange market, or (ii) conducted through the use of forward foreign currency
exchange contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date. In general,
forward foreign currency exchange contracts are not guaranteed by a third party
and, accordingly, each party to a forward foreign currency exchange contract is
dependent upon the creditworthiness and good faith of the other party.

A Fund will enter into forward foreign currency exchange contracts only
under two circumstances. First, a Fund may enter into a forward foreign currency
exchange contract to purchase an amount of foreign currency to protect itself
against a possible loss that might occur between trade and settlement dates for
a particular security, resulting from a decline in the U.S. dollar against the
foreign currency in which such security is denominated. This practice may limit
the potential gains that might result from a positive change in such currency
relationships. Second, when American General Advisers 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

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and it is uncertain whether such short-term hedging strategies will be
successful.

STANDARD AND POOR'S DEPOSITARY RECEIPTS

The Large Cap Growth Fund may, consistent with its objectives, purchase
Standard & Poor's Depositary Receipts ("SPDR's"). SPDRs are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500. This trust is sponsored by a subsidiary of the American Stock Exchange.
SPDRs may be used for several reasons, including but not limited to:
facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk to the Large Cap Growth
Fund as the price movement of the instrument does not perfectly correlate with
the price action of the underlying index.

WHEN-ISSUED SECURITIES

Securities may be purchased on a when-issued, delayed delivery or forward
commitment basis. When such transactions are negotiated, the price of such
securities is fixed at the time of commitment, but delivery and payment for the
securities may take place a month or more after the date of the commitment to
purchase. The securities so purchased are subject to market fluctuation, and no
interest accrues to the purchaser during this period. Forward commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date. American General Advisers does not believe that a
Fund's net asset value or income will be adversely affected by the purchase of
securities on a when-issued basis.

FIXED INCOME SECURITIES

Fixed income securities are considered high quality if they are rated at
least A by Moody's or its equivalent by any other NRSRO or, if unrated, are
determined to be of equivalent investment quality. High quality fixed income
securities are considered to have a very strong capacity to pay principal and
interest. Fixed income securities are considered investment grade if they are
rated, for example, at least Baa3 by Moody's or BBB- by S&P or their equivalents
by any other NRSRO or, if not rated, are determined to be of equivalent
investment quality. Investment grade fixed income securities are regarded as
having an adequate capacity to pay principal and interest. Lower rated
securities, for example, Ba by Moody's or its equivalent by any other NRSRO are
regarded on balance as high risk and predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments.

The maturity of fixed income securities may be considered long (ten plus
years), intermediate (one to ten years), or short-term (thirteen months or
less). In general, the principal values of longer-term securities fluctuate more
widely in response to changes in interest rates than those of shorter-term
securities, providing greater opportunity for capital gain or risk of capital
loss. A decline in interest rates usually produces an increase in the value of
fixed income securities, while an increase in interest rates generally reduces
their value.

LOWER RATED FIXED INCOME SECURITIES

Issuers of lower rated or non-rated securities ("high yield" securities,
commonly known as "junk bonds") may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of lower rated securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.

Lower rated securities frequently have call or redemption features which
would permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding

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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, American General Advisers or 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. American General Advisers and the Sub-Advisers
will not necessarily dispose of a portfolio security when its ratings have been
changed.

ZERO COUPON FIXED INCOME SECURITIES

Large Cap Value Fund, MidCap Value Fund, High Yield Bond Fund, Strategic
Bond Fund and Core Bond Fund may invest in zero coupon fixed income securities,
which are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or that specify a future date when the
securities begin to pay current interest.

Zero coupon fixed income securities are issued and traded at a discount
from their face amount or par value. This discount varies depending on
prevailing interest rates, the time remaining until cash payments begin, the
liquidity of the security, and the perceived credit quality of the issuer.

The discount on zero coupon fixed income securities ("original issue
discount") must be taken into income ratably by a Fund prior to the receipt of
any actual payments. Because the Fund must distribute substantially all of its
net income to its shareholders each year for income and excise tax purposes, the
Fund may have to dispose of portfolio securities under disadvantageous
circumstances to generate cash, or may be required to borrow, to satisfy its
corresponding Fund's distribution requirements.

The market prices of zero coupon fixed income securities generally are more
volatile than the prices of securities that pay interest periodically. Zero
coupon fixed income securities are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having a similar
maturity and credit quality.

Custodial receipts issued in connection with zero coupon fixed income
securities, such as CATs and TIGRs, are not issued by the U.S. Treasury,
although the underlying bond represented by such receipt is a debt obligation of
the U.S. Treasury. Other zero coupon Treasury securities (STRIPs and CUBEs) are
direct obligations of the U.S. Government.

INFLATION-INDEXED BONDS

Core Bond Fund, High Yield Bond Fund and Strategic Bond Fund may invest in
inflation-indexed bonds. Inflation-indexed bonds are fixed income securities
whose principal value is periodically adjusted according to the rate of
inflation. Interest payments are made to bondholders semi-annually and are made
up of two components: a fixed "real coupon" or spread, and a variable coupon
linked to an inflation index. Accordingly, payments will increase or decrease
each period as a result of changes in the inflation index. In the period of
deflation payments may decrease to zero, but in any event will not be less than
zero. Inflation-indexed bonds generally are issued at an interest rate lower
than

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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, ten or thirty years, although it is anticipated that
securities with other maturities will be issued in the future. The securities
will pay interest on a semi-annual basis, equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if a Fund purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months
were 1%, the mid-year par value of the bond would be $1,010 and the first
semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation
during the second half of the year reached 3%, the end-of-year par value of the
bond would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).

If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.

The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.

While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.

The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Fund may be forced to liquidate positions when
it would not be advantageous to do so. There also can be no assurance that the
U.S. Treasury will issue any particular amount of inflation-indexed bonds.
Certain foreign governments, such as the United Kingdom, Canada and Australia,
have a longer history of issuing inflation-indexed bonds, and there may be a
more liquid market in certain of these countries for these securities.

The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.

Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Taxation" for information about the possible tax
consequences of investing in inflation-indexed bonds.

HYBRID INSTRUMENTS

A hybrid instrument can combine the characteristics of equity and fixed
income securities, futures, and options. For example, a hybrid instrument

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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

High Yield Bond Fund, Strategic Bond Fund, and Core Bond Fund may invest in
"catastrophe bonds." Catastrophe bonds are fixed income securities, for which
the return of principal and payment of interest is contingent on the
non-occurrence of a specific "trigger" catastrophic event, such as a hurricane
or an earthquake. They may be issued by government agencies, insurance
companies, reinsurers, special purpose corporations or other on-shore or
off-shore entities. If a trigger event causes losses exceeding a specific amount
in the geographic region and time period specified in a bond, a Fund investing
in the bond may lose a portion or all of its principal invested in the bond. If
no trigger event occurs, the Fund will recover its principal plus interest. For
some catastrophe bonds, the trigger event or losses may be based on companywide
losses, index-portfolio losses, industry indices, or readings of scientific
instruments rather than specified actual losses. Often the catastrophe bonds
provide for extensions of maturity that are mandatory, or optional at the
discretion of the issuer, in order to process and audit loss claims in those
cases where a trigger event has, or possibly has, occurred. In addition to the
specified trigger events, catastrophe bonds may also expose the Fund to certain
unanticipated risks including but not limited to issuer (credit) default,
adverse regulatory or jurisdictional interpretations, and adverse tax
consequences.

Catastrophe bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Illiquid Securities" below. Lack of a liquid market may impose the risk of
higher transaction costs and the possibility that a Fund may be forced to
liquidate positions when it would not be advantageous to do so. Catastrophe
bonds are typically rated, and a Fund will only invest in catastrophe bonds that
meet the credit quality requirements for the Fund.

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

Real estate securities are equity securities consisting of (i) common
stocks, (ii) rights or warrants to purchase common stocks, (iii) securities
convertible into common stocks and (iv) preferred stocks issued by real estate
companies. A real estate company is one that derives at least 50% of its
revenues from the ownership, construction, financing, management or sale of
commercial, industrial, or residential real estate or that has at least 50% of
its assets invested in real estate.

REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interest. REITs are
generally classified as equity REITs, mortgage

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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.

WARRANTS

Bonds with warrants attached to purchase equity securities have many
characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Bonds also may be issued with
warrants attached to purchase additional fixed income securities at the same
coupon rate. A decline in interest rates would permit a Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value. Warrants do not
entitle a holder to dividends or voting rights with respect to the underlying
securities and do not represent any rights in the assets of the issuing company.
In addition, the value of warrants does not, necessarily, in all cases change to
the same extent as the value of the underlying securities to which they relate.
Warrants cease to have value if they are not exercised prior to the expiration
date. These factors can make warrants more speculative than other types of
investments.

SWAP AGREEMENTS

These transactions are entered into in an attempt to obtain a particular
return when it is considered desirable to do so, possibly at a lower cost to the
Fund than if the Fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments, which may be adjusted for an interest
factor. The gross returns to be exchanged or "swapped" between the parties are
generally calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Forms of swap agreements include interest rate
caps, under which, in return for a premium, one party agrees to make payments to
the other to the extent that interest rates exceed a specified rate, or "cap";
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified rate, or "floor"; and interest rate collars, under which a party sells
a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding minimum or maximum levels.

Most swap agreements entered into by the Funds would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). A Fund's current obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
segregation of assets determined to be liquid by American General Advisers 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

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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 American General
Advisers or a Sub-adviser's ability to predict correctly whether certain types
of investments are likely to produce greater returns than other investments.
Because they are two party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
Fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Funds will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness (generally, such counterparties
would have to be eligible counterparties under the terms of the Fund's
repurchase agreement guidelines). Certain restrictions imposed on the Funds by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.

Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which include the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.

This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public. When a Fund is
invested in this manner, it may not be able to achieve its investment objective.

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, American General Advisers or a Sub-Adviser will analyze
these securities in its overall assessment of the effective duration of the
Fund's portfolio in an effort to monitor the Fund's interest rate risk.

EURODOLLAR OBLIGATIONS

All of the Funds except for International Growth Fund, Large Cap Growth
Fund, Large Cap Value Fund and MidCap Growth Fund may invest in Eurodollar
obligations, including Eurodollar

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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.

The Core Bond Fund, High Yield Bond Fund, Small Cap Growth Fund, Small Cap
Value Fund, Socially Responsible Fund and Strategic Bond Fund may purchase and
sell Eurodollar futures contracts, which enable purchasers to obtain a fixed
rate for the lending of funds and sellers to obtain a fixed rate for borrowings.
A Fund might use Eurodollar futures contracts and options thereon to hedge
against changes in a foreign prime lending interest rate to which many interest
swaps and fixed income securities are linked.

MORTGAGE-RELATED SECURITIES

Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." Certain of the Funds may also invest in fixed income securities
which are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities. These securities may be structured in classes with rights to receive
varying proportions of principal and interest.

MORTGAGE PASS-THROUGH SECURITIES

Interests in pools of mortgage-related securities differ from other forms
of fixed income securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.

The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the
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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. The Funds may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, American General Advisers or a Sub-adviser determines that the
securities meet the Series Company's quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. No Fund will purchase
mortgage-related securities or any other assets which in American General
Adviser'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 International Value 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

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represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
Veterans' Administration. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government securities nor
U.S. Government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal is
paid, in most cases, monthly. CMOs may be collateralized by whole mortgage
loans, but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.

CMOs are structured in multiple classes, each bearing a different stated
maturity, coupon, and prepayment preference. Actual maturity and average life
will depend upon the prepayment experience of the collateral. CMOs provide for a
modified form of call protection through a de facto breakdown of the underlying
pool of mortgages according to how quickly the loans are repaid. Monthly payment
of principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.

As an example of a CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.

COMMERCIAL MORTGAGE-BACKED SECURITIES

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

OTHER MORTGAGE-RELATED SECURITIES

Other mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, including mortgage
dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS").
Other mortgage-related securities may be equity or fixed income securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.

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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")

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

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

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.

ASSET-BACKED SECURITIES

Asset-backed securities (unrelated to first mortgage loans) represent
fractional interests in pools of retail installment loans, both secured (such as
certificates for automobile receivables) and unsecured, and leases, or revolving
credit receivables both secured and unsecured (such as credit card receivable
securities). These assets are generally held by a trust and payments of
principal and

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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.

VARIABLE RATE DEMAND NOTES

Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and which are subject to an unconditional right of demand to receive
payment of the principal balance plus accrued interest either at any time or at
specified intervals not exceeding one year and in either case upon no more than
seven days notice. The interest rates are adjustable at intervals ranging from
daily ("floating rate") to up to one year to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments are typically based upon the prime rate of a
bank or some other appropriate interest rate adjustment index.

Money Market Fund may also invest in VRDNs in the form of participation
interests ("Participating VRDNs") in variable rate tax-exempt obligations held
by a financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days. A
Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.

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. American General
Advisers 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. American General
Advisers and the Sub-advisers will not purchase such securities for the Funds
unless they believe that the collateral underlying the corporate loans is
adequate and the corporation will be able, in a timely fashion, to pay scheduled
interest and principal amounts.

ADJUSTABLE RATE SECURITIES

Adjustable rate securities (i.e., variable rate and floating rate
instruments) are securities that have interest rates that are adjusted
periodically, according to a set formula. The maturity of some adjustable rate
securities may be shortened under certain special conditions described more
fully below.

Variable rate instruments are obligations (usually certificates of deposit)
that provide for the adjustment of their interest rates on predetermined dates
or whenever a specific interest rate changes. A variable rate instrument whose
principal amount is scheduled to be paid in 13 months or less is considered to
have a maturity equal to the period remaining until the next readjustment of the
interest rate. Many variable rate instruments are subject to demand features
which entitle the purchaser to resell such securities to the issuer or another
designated

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party, either (1) at any time upon notice of usually 30 days or less, or (2) at
specified intervals, not exceeding 13 months, and upon 30 days notice. A
variable rate instrument subject to a demand feature is considered to have a
maturity equal to the longer of the period remaining until the next readjustment
of the interest rate or the period remaining until the principal amount can be
recovered through demand.

Floating rate instruments (generally corporate notes, bank notes, or
Eurodollar certificates of deposit) have interest rate reset provisions similar
to those for variable rate instruments and may be subject to demand features
like those for variable rate instruments. The maturity of a floating rate
instrument is considered to be the period remaining until the principal amount
can be recovered through demand.

All of the Funds except for International Growth Fund, Large Cap Growth
Fund, Large Cap Value Fund and Money Market Fund may invest in inverse floaters,
which are derivative fixed income securities. Inverse floaters may be issued by
agencies or instrumentalities of the U.S. government or by private issuers
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Inverse
floaters generally have greater volatility than other types of mortgage
securities in which a Fund may invest. Although inverse floaters are purchased
and sold by institutional investors through several investment banking firms
acting as brokers or dealers, the market for such securities has not yet been
fully developed. Accordingly, inverse floaters are generally illiquid.

Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate securities.

ILLIQUID SECURITIES

Pursuant to their investment restrictions, the Funds will not invest their
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 the percentage of the value of a Fund's
net assets as shown in the non-fundamental investment restrictions.

RULE 144A SECURITIES

Privately placed securities are eligible for purchase and sale pursuant to
Rule 144A under the 1933 Act. This Rule permits certain qualified institutional
buyers, such as the Funds, to trade in privately placed securities even though
such securities are not registered under the 1933 Act. The Series Company, under
the supervision of the Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Funds'
restriction concerning illiquid securities. 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 allowed in illiquid
securities. Investing in Rule 144A securities could have the effect of
increasing the amount of the Funds' investments in

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<PAGE> 88

illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. Each Fund other than the Lifestyle Funds
and MidCap Growth, may invest in Rule 144A securities that have been determined
to be liquid by Board approved guidelines as shown below:

<TABLE>
<CAPTION>
FUND NAME: LIMITATION:
---------- -----------
<S> <C>
Core Bond Fund................... up to 30%
High Yield Bond Fund............. up to 30%
Money Market Fund................ up to 20%
Socially Responsible Fund........ up to 20%
Strategic Bond Fund.............. up to 50%
Large Cap Growth Fund............ up to 25%
International Growth Fund........ up to 25%
Small Cap Growth Fund............ up to 30%
MidCap Value Fund................ up to 25%
Small Cap Value Fund............. up to 10%
Large Cap Value Fund............. up to 15%
</TABLE>

OPTIONS ON SECURITIES AND SECURITIES INDICES

Each Fund, other than Large Cap Growth Fund, MidCap Growth Fund,
International Growth Fund, Lifestyle Funds and Money Market Fund, may write
covered call and put options on securities and securities indices. A call option
is a contract that gives to the holder the right to buy a specified amount of
the underlying security or currency at a fixed or determinable price (called the
exercise or "strike" price) upon exercise of the option. A put option is a
contract that gives the holder the right to sell a specified amount of the
underlying security or currency at a fixed or determinable price upon exercise
of the option.

To "cover" a call option written, a Fund may, for example, identify and
have available for sale the specific portfolio security, group of securities, or
foreign currency to which the option relates. To cover a put option written, a
Fund may, for example, establish a segregated asset account with its custodian
containing cash or liquid assets that, when added to amounts deposited with its
broker or futures commission merchant ("FCM") as margin, equals the market value
of the instruments underlying the put option written.

All the Funds except for International Growth Fund, MidCap Growth Fund and
Money Market Fund may write options on securities and securities indices. If a
Fund writes an option which expires unexercised or is closed out by the Fund at
a profit, it will retain the premium received for the option, which will
increase its gross income. If the price of the underlying security or currency
moves adversely to the Fund's position, the option may be exercised and the
Fund, as the writer of the option, will be required to sell or purchase the
underlying security or currency at a disadvantageous price, which may only be
partially offset by the amount of premium received.

Options on stock indices are similar to options on stock, except that all
settlements are made in cash rather than by delivery of stock, and gains or
losses depend on price movements in the stock market generally (or in a
particular industry or segment of the market represented by the index) rather
than price movements of individual stocks. When a Fund writes an option on a
securities index, and the underlying index moves adversely to the Fund's
position, the option may be exercised. Upon such exercise, the Fund, as the
writer of the option, will be required to pay in cash an amount equal to the
difference between the exercise settlement value of the underlying index and the
exercise price of the option, multiplied by a specified index "multiplier."

Call or put options on a stock index may be written at an exercise or
"strike" price which is either below or above the current value of the index. If
the exercise price at the time of writing the option is below the current value
of the index for a call option or above the current value of the index for a put
option the option is considered to be "in the money." In such a case, the Fund
will cover such options written by segregating with its custodian or pledging to
its commodity broker as collateral cash, U.S. Government or other high-grade,
short-term debt obligations equal in value to the amount by which the option
written is in the money, times the multiplier, times the number of contracts.

Stock indices for which options are currently traded include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, Computer
Technology Index, Oil Index, NYSE Options Index, Technology Index, Gold/Silver
Index, Institutional Index and NYSE Beta Index. The Funds may also use options
on such other indices as may now or in the future be available.

All the Funds except for International Growth Fund, MidCap Growth Fund and
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

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<PAGE> 89

purchase at a later date, (ii) hedge its investments against an anticipated
decline in value, or (iii) attempt to reduce the risk of missing a market or
industry segment advance. These Funds also may purchase put options on foreign
currencies that correlate with the Fund's portfolio securities in order to
minimize or hedge against anticipated declines in the exchange rate of the
currencies in which the Fund's securities are denominated and may purchase call
options on foreign currencies that correlate with its portfolio securities to
take advantage of anticipated increases in exchange rates. In the event that the
anticipated changes in interest rates, stock prices, or exchange rates occur,
the Fund may be able to offset the resulting adverse effect on the Fund, in
whole or in part, through the options purchased.

The premium paid for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation of
the option, and, unless the price of the underlying security, securities index,
or currency changes sufficiently, the option may expire without value to the
Fund. To close option positions purchased by the Funds, the Funds may sell put
or call options identical to options previously purchased, which could result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option purchased.

Options used by the Funds may be traded on the national securities
exchanges or in the over-the-counter market. Only Large Cap Value Fund, Small
Cap Growth Fund, High Yield Bond Fund, Strategic Bond Fund and 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 International Growth Fund, MidCap Growth Fund,
Large Cap Growth Fund and Money Market Fund may write exchange-traded covered
call and put options on or relating to specific securities in order to earn
additional income or, in the case of a call written, to minimize or hedge
against anticipated declines in the value of the Fund's securities. The MidCap
Value Fund may write exchange-traded covered call options, but not put options
in this connection. To "cover" an option means, for example, to identify and
make available for sale the specific portfolio security or foreign currency to
which the option relates. Through the writing of a covered call option a Fund
receives premium income but obligates itself to sell to the purchaser of such an
option the particular security or foreign currency underlying the option at a
specified price at any time prior to the expiration of the option period,
regardless of the market value of the security or the exchange rate for the
foreign currency during this period. Through the writing of a covered put option
a Fund receives premium income but obligates itself to purchase a particular
security or foreign currency underlying the option at a specified price at any
time prior to the expiration of the option period, regardless of market value or
exchange rate during the option period.

All of the Funds except International Growth Fund, MidCap Growth Fund,
Large Cap Growth Fund and Money Market Fund may also write exchange-traded
covered call and put options on stock indices and may purchase call and put
options on stock indices that correlate with the Fund's

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<PAGE> 90

portfolio securities. These Funds may engage in such transactions for the same
purposes as they may engage in such transactions with respect to individual
portfolio securities or foreign currencies, that is, to generate additional
income or as a hedging technique to minimize anticipated declines in the value
of the Fund's portfolio securities or the exchange rate of the securities in
which the Fund invested. In economic effect, a stock index call or put option is
similar to an option on a particular security, except that the value of the
option depends on the weighted value of the group of securities comprising the
index, rather than a particular security, and settlements are made in cash
rather than by delivery of a particular security.

Each Fund, other than International Growth Fund, Large Cap Growth Fund,
MidCap Growth Fund and 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 MidCap
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 Large Cap Value Fund, Small Cap Growth
Fund, High Yield Bond Fund, Strategic Bond Fund and 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

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<PAGE> 91

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 American General Advisers or the Sub-Advisers
regarding movements in securities prices, currencies or interest rates are
incorrect, a Fund's investment results may have been better without the hedge.

FINANCIAL FUTURES CONTRACTS

Each Fund, except MidCap Growth Fund, International Growth Fund, MidCap
Value Fund, 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 European Currency Unit ("ECU"). 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

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<PAGE> 92

associated with the relevant exchange assumes responsibility for closing out
transactions and guarantees that, as between the clearing members of an
exchange, the sale and purchase obligations will be performed with regard to all
positions that remain open at the termination of the contract.

Unlisted financial futures contracts, which may be purchased or sold only
by Large Cap Value Fund, High Yield Bond Fund, 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 or Subadvisor,
either as the purchaser or the seller of such contracts, the Fund is required to
deposit with the Custodian or a Subadvisor or other broker-dealer in a
segregated account in the name of the FCM an initial margin of cash or U.S.
Treasury bills equaling as much as 5% to 10% or more of the contract settlement
price. The nature of initial margin requirements in futures transactions differs
from traditional margin payments made in securities transactions in that initial
margins for financial futures contracts do not involve the borrowing of funds by
the customer to finance the transaction. Instead, a customer's initial margin on
a financial futures contract represents a good faith deposit securing the
customer's contractual obligations under the financial futures contract. The
initial margin deposit is returned, assuming these obligations have been met,
when the financial futures contract is terminated. In addition, subsequent
payments to and from the FCM, called "variation margin," are made on a daily
basis as the price of the underlying security, stock index, or currency
fluctuates, reflecting the change in value in the long (purchase) or short
(sale) positions in the financial futures contract, a process known as "marking
to market."

Financial futures contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, the Funds will normally close all futures positions by entering
into an offsetting transaction which operates to cancel the position held, and
which usually results in a profit or loss. A Fund may not adhere to its internal
operating policy in circumstances where the Fund is required to invest a large
cash infusion.

OPTIONS ON FINANCIAL FUTURES CONTRACTS

For bona fide hedging purposes, each Fund, except MidCap Growth Fund,
International Growth Fund, the MidCap Value Fund, Lifestyle Funds and 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 rela-
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<PAGE> 93

tive costs, liquidity, availability and capital requirements of such financial
futures and options contracts. Also, the Funds will consider the relative risks
involved, which may be quite different. These factors, among others, will be
considered in light of market conditions and the particular objective to be
achieved.

CERTAIN ADDITIONAL RISKS OF OPTIONS AND FINANCIAL FUTURES CONTRACTS

The use of options and financial futures contracts may entail some risks.
First, although such instruments when used by the Funds are intended to
correlate with the Funds' portfolio securities or currencies, in many cases the
options or financial futures contracts used may be based on securities,
currencies, or stock indices the components of which are not identical to the
portfolio securities owned or intended to be acquired by the Funds. Second, due
to supply and demand imbalances and other market factors, the price movements of
financial futures contracts, options thereon, currency options, and stock index
options may not necessarily correspond exactly to the price movements of the
securities, currencies, or stock indices on which such instruments are based.
Accordingly, there is a risk that a Fund's transactions in those instruments
will not in fact offset the impact on the Fund of adverse market developments in
the manner or to the extent contemplated or that such transactions will result
in losses to the Fund which are not offset by gains with respect to
corresponding portfolio securities owned or to be purchased by that Fund.

To some extent, these risks can be minimized by careful management of
hedging activities. For example, where price movements in a financial futures or
option contract are expected to be less volatile than price movements in the
related portfolio securities owned or intended to be acquired by a Fund, it may,
in order to compensate for this difference, use an amount of financial futures
or option contracts which is greater than the amount of such portfolio
securities. Similarly, where the price movement of a financial futures or option
contract is anticipated to be more volatile, a Fund may use an amount of such
contracts which is smaller than the amount of portfolio securities to which such
contracts relate.

The risk that the hedging technique used will not actually or entirely
offset an adverse change in a Fund's portfolio securities is particularly
relevant to financial futures contracts and options written on stock indices and
currencies. A Fund, in entering into a futures purchase contract, potentially
could lose any or all of the contract's settlement price. In entering into a
futures sale contract, a Fund could potentially lose a sum equal to the excess
of the contract's value (marked to market daily) over the contract's settlement
price. In writing options on stock indices or currencies a Fund could
potentially lose a sum equal to the excess of the value of the index or currency
(marked to market daily) over the exercise price. In addition, because financial
futures contracts require delivery at a future date of either a specified
security or currency, or an amount of cash equal to a multiple of the difference
between the value of a specified stock index on that date and the settlement
price, an algebraic relationship exists between any price movement in the
underlying security or 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

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Fund seeks to "close out" (i.e. terminate) a particular financial futures
contract or option position. This is particularly relevant for over-the-counter
options and financial futures contracts, as previously noted. Trading in such
instruments could be interrupted, for example, because of a lack of either
buyers or sellers. In addition, the futures and options exchanges may suspend
trading after the price of such instruments has risen or fallen more than the
maximum amount specified by the exchange. Exercise of options could also be
restricted or delayed because of regulatory restrictions or other factors. A
Fund may be able, by adjusting investment strategy in the cash or other contract
markets, to offset to some extent any adverse effects of being unable to
liquidate a hedge position. Nevertheless, in some cases, a Fund may experience
losses as a result of such inability. Therefore it may have to liquidate other
more advantageous investments to meet its cash needs.

In addition, FCMs or brokers in certain circumstances will have access to a
Fund's assets posted as margin in connection with these transactions as
permitted under the 1940 Act. The Funds will use only FCMs or brokers in whose
reliability and financial soundness they have full confidence and have adopted
certain other procedures and limitations to reduce the risk of loss with respect
to any assets which brokers hold or to which they may have access. Nevertheless,
in the event of a broker's insolvency or bankruptcy, it is possible that a Fund
could experience a delay or incur costs in recovering such assets or might
recover less than the full amount due. Also the value of such assets could
decline by the time a Fund could effect such recovery.

The success of a Fund in using hedging techniques depends, among other
things, on American General Advisers', 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 American General Advisers' 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, American General Advisers, or the Sub-adviser
will use financial futures contracts, options thereon, currency options and
stock index options only when it believes the overall effect is to reduce,
rather than increase, the risks to which a Fund is exposed. Hedging transactions
also, of course, may be more, rather than less, favorable to a Fund than
originally anticipated.

LIMITATIONS

No Fund will enter into any financial futures contract or purchase any
option thereon if, immediately thereafter, the total amount of its assets
required to be on deposit as initial margin to secure its obligations under
financial futures contracts, plus the amount of premiums paid by it for
outstanding options to purchase futures contracts, exceeds 5% of the market
value of its total assets; provided however, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. This is a fundamental policy of the Socially
Responsible Fund. Collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of the investment restrictions concerning
borrowing money, mortgaging, or hypothecating assets of any Fund.

Each Fund has an operating policy which provides that it will not enter
into financial futures contracts or write put or call options with respect to
financial futures contracts unless such transactions are either "covered" or
subject to segregation requirements considered appropriate by the SEC staff.
Further, each Fund has an operating policy which provides that it will not enter
into custodial arrangements with respect to initial or variation margin deposits
or marked-to-market amounts unless the custody of such initial and variation
margin deposits and marked-to-market amounts are in compliance with current SEC
staff interpretive positions or no-action letters or rules adopted by the SEC.

SHORT SALES AND SHORT SALES AGAINST THE BOX

The Socially Responsible Fund may enter in short sales in connection with
options and futures contracts only. MidCap Value Fund may engage in short sale
transactions in securities listed on one or more national securities exchanges
or on the National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ"). Short selling involves the sale of borrowed securities. At
the time a short sale is effected, a Fund incurs an obligation to replace the
security borrowed at whatever its price may be at the time that the Fund

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purchases it for delivery to the lender. When a short sale transaction is closed
out by delivery of the securities, any gain or loss on the transaction is
taxable as a short term capital gain or loss. Until the security is replaced,
the Fund is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. All short sales will be
fully collateralized. The Large Cap Growth Fund and MidCap Growth Fund may only
engage in short sales against the box, which involves selling a security the
Fund holds in its portfolio for delivery at a specified date in the future. A
Fund will not engage in short sales or short sales against the box if
immediately following such transaction the aggregate market value of all
securities sold short and sold short against the box would exceed 10% of the
Fund's net assets (taken at market value).

MONEY MARKET SECURITIES OF FOREIGN ISSUERS

Foreign money market instruments utilized by certain of the Funds will be
limited to: (i) obligations of, or guaranteed by, a foreign government, its
agencies or instrumentalities; (ii) certificates of deposit, bankers'
acceptances, short-term notes, negotiable time deposits and other obligations of
the ten largest banks in each foreign country, measured in terms of net assets;
and (iii) other short-term unsecured corporate obligations (usually 1 to 270 day
commercial paper) of foreign companies. For temporary purposes or in light of
adverse foreign political or economic conditions, the Funds may invest in
short-term high quality foreign money market securities without limitation.

INVESTMENT ADVISER

American General Advisers, a division of 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
American General Advisers an annual fee, payable monthly, based on its average
daily net asset value.

Pursuant to the Investment Advisory Agreement, the Series Company retains
American General Advisers 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, American General Advisers obtains and
evaluates as appropriate economic, statistical, and financial information in
order to formulate and implement investment programs in furtherance of each
Fund's investment objective(s) and investment program. Pursuant to the
Investment Advisory Agreements, American General Advisers 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 American General Advisers 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 American General Advisers'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 American General Advisers or its affiliates in connection
with the purchase and sale of portfolio investments of the Funds. In this
regard, the Investment Advisory Agreement requires American General Advisers 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.

46
<PAGE> 96

For the past two fiscal years ended August 31, the Series Company paid the
following advisory fees to American General Advisers for each Fund:

<TABLE>
<CAPTION>
FUND NAME 2000 1999
--------- -------- -------
<S> <C> <C>
Aggressive Growth
Lifestyle Fund.......... $ 10,862 $ 6,654
Conservative Growth
Lifestyle Fund.......... 9,495 6,345
Core Bond Fund............ 26,117 25,633
High Yield Bond Fund...... 38,715 37,138
Moderate Growth Lifestyle
Fund.................... 12,732 7,522
Money Market Fund......... 32,252 17,307
Socially Responsible
Fund.................... 30,422 19,258
Strategic Bond Fund....... 33,027 31,455
Large Cap Growth Fund..... 148,935 60,346
International Growth
Fund.................... 85,379 51,153
MidCap Growth Fund........ 59,188 43,155
Small Cap Growth Fund..... 190,268 66,613
MidCap Value Fund......... 88,406 54,453
Small Cap Value Fund...... 47,613 43,369
Large Cap Value Fund...... 45,559 33,827
</TABLE>

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 American General Advisers, 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
American General Advisers 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 American General Advisers.

CODE OF ETHICS

The Series Company and American General Advisers have adopted an Investment
Company Code of Ethics in compliance with the 1940 Act and the Investment
Advisers Act of 1940, as amended, (the "Advisers Act"). This Code of Ethics is
designed to detect and prevent violations of the Advisers Act and the 1940 Act
through established procedures and restrictions concerning certain employee
personal investment trading activities.

47
<PAGE> 97

INVESTMENT SUB-ADVISERS

Subject to the control, supervision and direction of American General
Advisers, sub-advisory services are provided as follows:

<TABLE>
<CAPTION>
FUND NAME: SUB-ADVISER NAME:
---------- -----------------
<S> <C>
Core Bond Fund American General

High Yield Bond Fund Investment Management,

Strategic Bond Fund L.P. ("AGIM")

Large Cap Growth Fund Goldman Sachs Asset
Management ("GSAM")

International Growth Fund Thompson, Siegel &
Walmsley, Inc. ("TS&W")

MidCap Growth Fund INVESCO Funds Group,
Inc. ("INVESCO")

Small Cap Growth Fund J.P. Morgan Investment
Management, Inc. ("J.P.
Morgan")

MidCap Value Fund Neuberger Berman
Management Inc. ("NB
Management")

Small Cap Value Fund Fiduciary Management
Associates, Inc. ("FMA")
(a portion only)

Large Cap Value Fund State Street Bank and
Trust Company/State
Street Global Advisors
("State Street Global
Advisors")
</TABLE>

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

Pursuant to the Investment Sub-advisory Agreements and subject to American
General Advisers' 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 American General Advisers.

The Investment Sub-advisory Agreements provide that the Sub-advisers will
bear the expense of discharging their responsibilities.

48
<PAGE> 98

American General Advisers shall pay the following fees to the investment
Sub-Advisers for services rendered for the past two fiscal years ending August
31:

<TABLE>
<CAPTION>
NAME OF FUND & SUB-ADVISER 2000 1999
-------------------------- --------- -------
<S> <C> <C>
Core Bond Fund........... $ 13,058 $12,817
AGIM
High Yield Bond.......... 24,888 23,874
AGIM
Strategic Bond Fund...... 19,265 18,349
AGIM
International Growth
Fund................... 61,662(1) 36,946
TS&W
MidCap Growth Fund....... 36,425(2) 26,557
INVESCO
Small Cap Growth Fund.... 134,307 47,021
J.P. Morgan
Small Cap Value Fund..... 15,237 15,109
FMA
Large Cap Growth Fund.... 81,237 32,916
GSAM
MidCap Value Fund........ 58,937 36,302
NB Management
Large Cap Value.......... 50,000 50,000
State Street Global
Advisors
</TABLE>

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

(1)The sub-adviser for International Growth Fund was Jacobs Asset Management
until July 24, 2000. The number above reflects fees paid to both Jacobs Asset
Management and TS&W.

(2)The sub-adviser for MidCap Growth Fund was Brown Capital Management for the
time period shown above and all fees were paid to Brown Capital Management.

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 American General Advisers, the relevant Sub-adviser,
the Series Company's Board of Trustees, or by vote of a majority of the
outstanding voting securities of the relevant Sub-advised Fund, on not more than
60 days' nor less than 30 days' written notice to the other entities, or upon
such shorter notice as may be mutually agreed upon. Such termination shall be
without the payment of any penalty.

The Investment Sub-advisory Agreements provide that the Sub-advisers shall
not be liable to American General Advisers, 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.

SERVICE AGREEMENTS

The Series Company has service agreements with VALIC to provide certain
accounting and administrative services to the Funds and to provide transfer
agent services. Transfer agent services also include shareholder servicing and
dividend disbursements.

Pursuant to the Accounting Services Agreement, the Series Company will pay
to VALIC an annual fee of 0.03% based on average daily net assets, except for
the Lifestyle Funds. The Transfer Agent Agreement states that all transfer agent
services will be provided to the Series Company at cost. The Series Company has
entered into an Administrative Service Agreement ("Service Agreement") with
VALIC for the provision of recordkeeping and shareholder services to retirement
and employee benefit plans. Under the terms of the Service Agreement, the Series
Company pays VALIC monthly, a fee equal to 0.25% of the aggregate net asset
value of each Fund, other than the Lifestyle Funds, on an annual basis. Under
the Service Agreement, VALIC provides recordkeeping services, including the
establishment and maintenance of plan and participant accounts and records;
participant services, including the provision of customer service
representatives to respond to participant inquiries and process telephone
transactions; and plan services, including the production of plan documentation
and summary plan descriptions.

49
<PAGE> 99

For the fiscal periods ended August 31, 2000 and 1999 respectively, the
Funds paid VALIC the following accounting fees:

<TABLE>
<CAPTION>
FUND NAME 2000 1999
--------- ------ ------
<S> <C> <C>
Core Bond Fund.............. $1,567 $1,538
High Yield Bond Fund........ 1,659 1,592
Money Market Fund........... 3,870 2,077
Socially Responsible Fund... 3,651 2,311
Strategic Bond Fund......... 1,651 1,573
Large Cap Growth Fund....... 8,124 3,292
International Growth Fund... 2,846 1,705
MidCap Growth Fund.......... 2,732 1,992
Small Cap Growth Fund....... 6,715 2,351
MidCap Value Fund........... 3,536 2,178
Small Cap Value Fund........ 1,905 1,735
Large Cap Value Fund........ 2,734 2,030
</TABLE>

For the fiscal periods ended August 31, 2000 and 1999 respectively, the
Funds paid VALIC the following administrative service fees:

<TABLE>
<CAPTION>
FUND NAME 2000 1999
--------- ------- -------
<S> <C> <C>
Core Bond Fund............ $13,058 $12,817
High Yield Bond Fund...... 13,827 13,263
Money Market Fund......... 32,252 17,307
Socially Responsible
Fund.................... 30,422 19,258
Strategic Bond Fund....... 13,760 13,107
Large Cap Growth Fund..... 67,699 27,430
International Growth
Fund.................... 23,716 14,210
MidCap Growth Fund........ 22,766 16,598
Small Cap Growth Fund..... 55,961 19,592
MidCap Value Fund......... 29,469 18,151
Small Cap Value Fund...... 15,871 14,456
Large Cap Value Fund...... 22,779 16,913
</TABLE>

PORTFOLIO TRANSACTIONS AND BROKERAGE

As investment adviser to the Series Company, American General Advisers 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, and the MidCap Growth Fund are principal transactions with issuers
and dealers at net prices which entail no brokerage commissions. The
International Value Fund, the MidCap 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
MidCap 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 American General Advisers 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 com-

50
<PAGE> 100

modities exchanges, the Advisers seek the best
overall price and execution at the most favorable commission rate (except when
higher brokerage commissions are paid to obtain brokerage and research services,
as explained below). When the Advisers believe that more than one firm meets
these criteria the Advisers may prefer brokers who provide the Advisers or the
Series Company with brokerage and research services, described below.

The Advisers may cause a Fund to pay a broker-dealer a commission (for
executing a securities transaction) that is greater than the commission another
broker-dealer would have received for executing the same transaction, if the
Advisers determine in good faith that the greater commission paid to the first
broker-dealer is reasonable in relation to the value of brokerage and research
services provided to the Advisers viewed in terms of either that particular
transaction or the overall responsibilities of the Advisers.
The Advisers receive a wide range of research services from broker-dealers,
including: information on securities markets, the economy and individual
companies; statistical information; accounting and tax law interpretations;
technical market action; pricing and appraisal services; and credit analyses.
Research services are received by the Advisers primarily in the form of written
reports, telephone contacts, personal meetings with securities analysts,
corporate and industry spokespersons, and access to various computer-generated
data.

The Advisers have no agreements or understandings with broker-dealers by
which specific amounts of transactions or commissions are directed to specific
broker-dealers.

The Advisers evaluate whether such research services provide lawful and
appropriate assistance to them in the performance of their investment
decision-making responsibilities, for the Series Company. The Advisers will not
cause the Series Company to pay higher commissions without first determining, in
good faith, that the cost is reasonable considering the brokerage and research
services provided, with respect to either the particular transaction or the
Advisers' overall responsibilities with respect to accounts for which they
exercise investment discretion. The Advisers receive research services at no
cost and cannot assign any specific monetary value to them; nevertheless, the
Advisers believe these supplemental investment research services are essential
to the Advisers' ability to provide high quality portfolio management to the
Funds. Research services furnished by broker-dealers through whom a Fund effects
securities transactions may be used by the Advisers in servicing all of the
Funds, and the Advisers may not use all such services in managing the Funds.

The amount of brokerage commissions paid, the quality of execution, the
nature and quality of research services provided, and the amount of commissions
paid to firms providing research services are reviewed quarterly by the Series
Company's Board of Trustees.

The following table lists brokerage commissions paid by each Fund on
portfolio transactions for the fiscal periods ended August 31, 2000 and August
31, 1999. Unless otherwise noted, the Funds paid no brokerage commissions to
brokers for research services provided to the Advisers or to VALIC.

<TABLE>
<CAPTION>
NAME OF FUND 2000 1999
------------ ------- -------
<S> <C> <C>
Socially Responsible
Fund.................... $ 5,478 $ 6,662
Large Cap Growth Fund..... 17,709 16,780
International Growth
Fund.................... 51,574 42,589
MidCap Growth Fund(1)..... 7,768 10,081
Small Cap Growth Fund..... 16,414 12,012
MidCap Value Fund......... 55,989 45,395
Small Cap Value Fund(2)... 19,067 23,628
Large Cap Value Fund...... 29,845 11,843
</TABLE>

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

(1)For the fiscal year ended August 31, 2000, the MidCap Growth Fund paid $795
in brokerage commissions on transactions totaling $357,803 to brokers
selected on the basis of the quality of execution, together with research
services provided to the Advisers.

(2)For the fiscal year ended August 31, 2000, the Small Cap Value Fund paid
$6,614 in brokerage commissions on transactions totaling $2,810,156 to
brokers selected on the basis of the quality of execution, together with
research services provided to the Advisers.

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
51
<PAGE> 101

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, 2000, the Series Company did not pay
brokerage commissions to any of the Funds' affiliated brokers.

DISTRIBUTION AND SERVICE AGREEMENT

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.

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

52
<PAGE> 102

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 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 quota-

53
<PAGE> 103

tions 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.

ACCOUNTING AND TAX TREATMENT

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 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

54
<PAGE> 104

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.

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 15 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.

55
<PAGE> 105

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, 2000, VALIC Separate Account A (a registered separate
account of VALIC) owned, directly or indirectly, 100% of the outstanding shares
of all Funds.

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
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.

56
<PAGE> 106

BOND RATINGS

MOODY'S BOND RATINGS

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

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

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

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

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

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

Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

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

C: Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by: (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

STANDARD & POOR'S RATINGS

AAA: An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.

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

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

BBB: An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree

57
<PAGE> 107

of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.

BB: An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

B: An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

CCC: An obligation rated 'CCC' is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

CC: An obligation rated 'CC' is currently highly vulnerable to nonpayment.

C: A subordinated debt or preferred stock obligation rated 'C' is currently
highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A 'C' also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.

D: An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized. Plus (+) or minus(-): The ratings
from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.

INDEPENDENT AUDITORS

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

MANAGEMENT OF THE SERIES COMPANY

The Board of Trustees manages the business activities of the Series Company
in accordance with 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 addresses, present positions and principal occupations
during the past five years are set forth below. Each person is a Director or
Trustee of North American Funds Variable Product Series I ("NAFVPS I") and North
American Funds Variable Product Series II ("NAFVPS II"), each an open-end
investment company for which VALIC serves as the investment adviser.

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
---------------- --------------- -------------------
<S> <C> <C>
Alice T. Kane..................... President and Trustee since Executive Vice President, American
390 Park Avenue 1999 General Investment Management, L.P.
New York, New York (1998-Present). Formerly Executive Vice
Date of Birth: 01/16/48 President, New York Life Insurance
Company (1994-1998). President of other
investment companies advised by VALIC.
</TABLE>

58
<PAGE> 108

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
---------------- --------------- -------------------
<S> <C> <C>
Kent E. Barrett................... Executive Vice President and Executive Vice President and Chief
2929 Allen Parkway Trustee since 1999 Financial Officer, VALIC and AGAIC
Houston, Texas 77019 (1999-Present), Executive Vice President
Date of Birth: 09/20/56 and Chief Financial Officer, American
General Life & Accident Insurance
Company ("AGLA") (1998-1999), Senior
Vice President -- Finance and Trea-
surer, AGLA (1997-1998), Senior Vice
President-Controller and Treasurer, AGLA
(1994-1997).
Dr. Judith L. Craven.............. Trustee since 1998 Retired Administrator. Formerly,
3212 Ewing Street President, United Way of Texas Gulf
Houston, Texas 77004 Coast (1992-1998). Director, Houston
Date of Birth: 10/06/45 Branch, Federal Reserve 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).(3)
Dr. Timothy J. Ebner.............. Trustee since 1998 Professor and Head, Department of Neuro-
17994 NW Union Blvd. science and Visscher Chair of Physiology
Elk River, Minnesota 55330 (1998-Present), Professor, Departments
Date of Birth: 07/15/49 of Neurosurgery and Physiology,
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).(3)
Judge Gustavo E. Gonzales, Jr..... Trustee since 1998 Municipal Court Judge, Dallas, Texas
3731 Gilbert Ave. A (1995- Present); Director, Downtown
Dallas, Texas 75219 Dallas YMCA Board (1996-Present);
Date of Birth: 07/27/40 Director, Dallas Easter Seals Society
(1997-Present). Formerly, private
attorney (litigation) (1980-1995).(3)
Dr. Norman Hackerman.............. Trustee since 1998 Chairman -- Scientific Advisory Board
2001 Pecos Street for 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)(2)(3)
Dr. John Wm. Lancaster............ Trustee since 1998 Pastor Emeritus and Director of Planned
4624 Braeburn Giving, First Presbyterian Church,
Bellaire, Texas 77401 Houston, Texas (1996-Present). Formerly,
Date of Birth: 12/15/23 Pastor, First Presbyterian Church,
Houston, Texas (1961-1990).(3)
Ben H. Love....................... Trustee since 1998 Retired. Formerly, Director,
4407 Eaton Circle Mid-American (waste products)
Colleyville, Texas 76034 (1993-1997) and Chief Executive, Boy
Date of Birth: 09/26/30 Scouts of America. (1985-1993).(3)
</TABLE>

59
<PAGE> 109

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
---------------- --------------- -------------------
<S> <C> <C>
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).(3)
Dr. F. Robert Paulsen............. Trustee since 1998 Dean and Professor Emeritus, University
2801 N. Indian Ruins of Arizona, Tucson, Arizona. Formerly,
Tucson, Arizona 85715 Dean and Professor, University of
Date of Birth: 07/05/22 Connecticut, Storrs, Connecticut and
Carnegie Fellow, University of Michigan,
Ann Arbor, Michigan.(1)(2)(3)
</TABLE>

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

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

(1)Retired Managing General Partner of Van Kampen American Capital Exchange
Fund.

(2)Retired Trustee of Van Kampen American Capital Bond Fund, Inc., Van Kampen
American Capital Income Trust, Van Kampen American Capital Convertible
Securities Fund, Inc. and the Common Sense Trust.

(3)Prior to January 1, 2000, Trustees who are not interested persons of the
Series Company received an annual retainer of $5,000. In addition, such
Trustees are paid per board meeting, committee meeting, telephone meeting and
committee chair, a fee of $500, $250, $250 and $500, respectively, plus
expenses incurred, if any. As of January 1, 2000, the annual retainer
increased to $6,200 and the fee paid per board meeting increased to $1,000.

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 unless otherwise noted. Each officer serves until his or
her successor is elected and shall qualify.

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- --------------- -------------------
<S> <C> <C>
Alice T. Kane..................... President and Trustee since Executive Vice President, American
390 Park Avenue 1999 General Investment Management, L.P.
New York, New York (1998- Present). Formerly Executive
Date of Birth: 01/16/48 Vice President, New York Life
Insurance Company (1994-1998).
President of other investment
companies advised by VALIC.
Kent E. Barrett................... Executive Vice President and Executive Vice President and Chief
Date of Birth: 09/20/56 Trustee since 1999 Financial Officer, VALIC and AGAIC
(1999-Present), Executive Vice
President and Chief Financial
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).
Chris Bauman...................... Assistant Controller since 2000 Associate Director -- Variable
Date of Birth: 02/06/64 Product Accounting AGA/AGIM
(2000-Present). Manager, Variable
Accounting and Reporting, AGAIC
(1998-2000). Accountant, AGAIC
1996-2000).
Charles H. Clines................. Vice President and Tax Officer Vice President and Tax Officer,
Date of Birth: 11/24/61 since 2000 Corporate Tax Department, American
General Corporation (2000-Present).
Formerly, Partner -- Financial
Services Tax Practice, KPMG, LLP
(1985-1999).
</TABLE>

60
<PAGE> 110

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- --------------- -------------------
<S> <C> <C>
Nori L. Gabert.................... Vice President since 1998 and Associate General Counsel, VALIC
Date of Birth: 08/15/53 Secretary since 2000 (1997 to Present). Assistant
Secretary (1997-2000). Formerly, Of
Counsel, Winstead Sechrest & Minick
P.C. (1997); Vice President and
Associate General Counsel of Van
Kampen American Capital, Inc. (1981-
1996).
Donald H. Guire................... Assistant Treasurer since 2000 Director -- Fund Accounting, AGIM
Date of Birth: 06/05/64 (2000-Present). Formerly Assistant
Vice President-Manager Fund
Accounting, American Capital
(1987-2000).
Gregory R. Kingston............... Treasurer since 2000 Vice President, Fund Accounting, AGIM
Date of Birth: 01/18/66 (1999-Present). Formerly, Assistant
Treasurer.
Teresa S. Moro.................... Vice President and Investment Trader -- VALIC. Formerly, Money Mar-
Date of Birth: 08/14/60 Officer since 1991 ket Trader, VALIC (1986-1990).
Kathryn A. Pearce................. Assistant Controller since 2000 Director, Fund Accounting, VALIC
Date of Birth: 02/05/47 (1999 to present). Associate Director
of Fund Accounting, VALIC (1996 to
1999). Controller (1996-1999).
Formerly, Supervisor -- Mutual Fund
Accounting, Van Kampen American
Capital, Inc. (1977-1996).
Pauletta P. Cohn.................. Vice President since 1999 Deputy General Counsel Product
Date of Birth: 06/06/48 Development, American General
Enterprise Services, Inc. (2000 to
Present), Associate General Counsel,
American General Life Companies
(1998-Present), Senior Attorney,
American General (1993-1998).
Todd L. Spillane.................. Chief Compliance Officer since Chief Compliance Officer, AGIM (1999-
Date of Birth: 12/20/58 2000 Present). Formerly, Director of
Compliance, Nicholas Applegate
Capital Management (1994-1999).
William Trimbur, Jr............... Vice President and Investment Portfolio Manager, VALIC. Formerly,
Date of Birth: 06/15/51 Officer since 1998 Second Vice President, VALIC
(1985-1990); Controller, VALIC
(1985-1986); Assistant Controller,
VALIC (1982-1985) and Assistant
Treasurer, VALIC (1982-1986).
</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 has a
Nominating Committee. The Series Company's Nominating Committee consists of
Messrs. Love, Gonzales and Hackerman, and Ms. Craven. The Nominating Committee
recommends to the Board nominees for independent trustee membership, reviews
governance procedures and Board composition, and periodically reviews trustee
compensation. The Series Company does not have a standing compensation
committee.

The trustees of the Series Company who are not affiliated with VALIC are
each paid annual trustees' fees and are reimbursed for certain out-of-pocket
expenses by the Series Company.

61
<PAGE> 111

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.

COMPENSATION OF TRUSTEES

The following table sets forth information regarding compensation and
benefits earned by Trustees who are not affiliated with VALIC for the fiscal
year ending August 31, 2000.

COMPENSATION TABLE

FISCAL YEAR ENDING AUGUST 31, 2000

<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM FUND
FROM COMPLEX(2)
TRUSTEE SERIES COMPANY PAID TO TRUSTEES
------- -------------- -----------------
<S> <C> <C>
Dr. Judith Craven........................................... $10,465 $50,750
Dr. Timothy Ebner........................................... $10,433 $50,500
Judge Gustavo Gonzales...................................... $ 9,465 $47,000
Dr. Norman Hackerman........................................ $10,498 $51,500
Dr. John Wm. Lancaster...................................... $10,466 $51,500
Ben H. Love................................................. $10,531 $51,750
Dr. John Maupin............................................. $ 9,465 $48,000
Dr. F. Robert Paulsen....................................... $10,465 $51,000
Dr. R. Miller Upton(1)...................................... $ 917 $ 6,745
</TABLE>

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

(1) Mr. Upton resigned as a Trustee of the Fund on December 31, 1999.

(2) Includes all investment companies managed by VALIC.

62
<PAGE> 112

NORTH AMERICAN FUNDS VARIABLE PRODUCT SERIES II

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)
3. Amended and Restated Certificate of Trust dated
9/25/2000.

(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)
(22) North American International Growth Fund
North American-Goldman Sachs Large Cap Growth Fund
North American-State Street Large Cap Value Fund
North American-INVESCO MidCap Growth Fund
North American-Neuberger Berman MidCap Value Fund
North American-J.P. Morgan Small Cap Growth Fund
North American Small Cap Value Fund
North American-AG Socially Responsible Fund
North American-AG Core Bond Fund
North American-AG High Yield Bond Fund
North American-AG Strategic Bond Fund
North American-AG Conservative Growth Lifestyle Fund
North American-AG Aggressive Growth Lifestyle Fund
North American-AG Moderate Growth Lifestyle Fund
North American-AG 2 Money Market Fund

(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> 113

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

6. Distribution and Service Agreement between the Registrant and A.G. Distributors, Inc.(5)

7. Not Applicable

8. (a) Custodian Contract between Registrant and State Street Bank and
Trust Company(5)
(b) Form of Securities Lending Authorization Agreement between Registrant
and State Street Bank and Trust Company(2)

9. (a) Transfer Agency and Service Agreement between Registrant and VALIC(5)
(b) Form of Data Access Services Agreement between Registrant and State
Street Bank and Trust Company(2)
(c) Accounting Services Agreement between Registrant and VALIC(5)
(d) Administrative Service Agreement among Registrant and VALIC(5)

10. Opinion of Counsel

11. Consent of Independent Auditors

12. Not Applicable

13. Subscription Agreements(2)

14. Not Applicable

15. Not Applicable

16. Not Applicable

17. Not Applicable

18. Not Applicable
</TABLE>

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<PAGE> 114

<TABLE>
<C> <S>
19. (a) Powers of Attorney for Messrs. Hackerman, Lancaster, Paulsen,
and Love(1)

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

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

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 Nos. 333-53589/811-08789, Accession No. 0000950129-98-002909).

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 Nos. 333-53589/811-08789, Accession No. 0000950129-98-003747).

3. Incorporated herein by reference to the Registrant's Form N-SAR filed with
the Securities and Exchange Commission on April 29, 1999 (File Nos.
333-53589/811-08789, Accession No. 0001062374-99-000009).

4. Incorporated herein by reference to the Registrant's Form N-SAR filed with
the Securities and Exchange Commission on October 29, 1999 (File Nos.
333-53589/811-08789, Accession No. 0001062374-99-000019).

5. Incorporated herein by reference to the Registrant's Form N-1A registration
statement filed with the Securities and Exchange Commission on January 3,
2000 (File Nos. 333-53589/811-08789, Accession No. 0000950129-00-000021).

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 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).

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<PAGE> 115

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,
Accession No. 0000950129-98-003747).

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").

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<PAGE> 116

<TABLE>
<CAPTION>
NAME COMPANY TITLE
---- ------- -----
<S> <C> <C>
John A. Graf VALIC, AGAIC Chairman, Director, President and Chief Executive Officer
Bruce R. Abrams VALIC, AGAIC Director and Executive Vice President -- AGAIC Sales
Kent E. Barrett VALIC, AGAIC Director, Executive Vice President and Chief Financial Officer
Robert P. Condon VALIC, AGAIC Director and Executive Vice President -- VALIC Sales & Institutional Marketing
Alice T. Kane VALIC, AGAIC Executive Vice President -- AG Fund Group
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
Richard L. Bailey 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
Mary L. Cavanaugh VALIC, AGAIC Director and Senior Vice President -- General Counsel and Secretary
Jennifer D. Cobbs VALIC, AGAIC Senior Vice President -- Field Sales Development
Kenneth E. Coffey VALIC, AGAIC Senior Vice President -- National Marketing Director
Terry Eleftheriou VALIC, AGAIC Senior Vice President -- Finance
Sharla A. Jackson VALIC, AGAIC Senior Vice President -- Customer Service Amarillo
Stephen G. Kellison VALIC, AGAIC Senior Vice President -- Product Management
Richard J. Lindsay VALIC, AGAIC Senior Vice President -- Marketing
Rosalia Nolan VALIC, AGAIC Senior Vice President -- Institutional Services
Robert E. Steele VALIC, AGAIC Senior Vice President -- Specialty Products
Jane E. Bates VALIC, AGAIC Vice President & Chief Compliance Officer
Rosemary Beauvais VALIC, AGAIC Vice President -- Corporate Technology Services
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. den Boer VALIC, AGAIC Vice President -- Compliance
Jill A. Etta VALIC, AGAIC Vice President -- Variable Annuity Sales
Terry B. Festervand VALIC, AGAIC Vice President & Treasurer
Daniel Fritz VALIC, AGAIC Vice President -- Actuarial
Michael D. Gifford VALIC, AGAIC Vice President -- Case Development
Joseph G. Girgenti VALIC, AGAIC Vice President -- Sales Support
Albert J. Guiterrez VALIC, AGAIC Vice President & Investment Officer
Calvin King VALIC, AGAIC Vice President -- North Houston Customer Care Center
Traci P. Langford VALIC, AGAIC Vice President -- Account Management
Jerry L. Livers VALIC, AGAIC Vice President -- PPGA Sales
Cindy Moore VALIC, AGAIC Vice President -- Budget & Expense Management
Thomas G. Norwood VALIC, AGAIC Vice President -- Broker/Dealer Operations
Deanna Osmonson VALIC, AGAIC Vice President -- Insurance Sales Practices, Compliance
Rembert R. Owen, Jr. VALIC, AGAIC Vice President and Assistant Secretary
Larry Robinson VALIC, AGAIC Vice President -- Product Development
Steven D. Rubinstein VALIC, AGAIC Vice President -- Financial Planning and Reporting
Keith Schlosser VALIC, AGAIC Vice President -- Sales Executive Administration
Richard W. Scott VALIC, AGAIC Vice President and Chief Investment Officer
Gary N. See VALIC, AGAIC Vice President -- Group Actuarial
Nancy K. Shumbera VALIC, AGAIC Vice President -- Business Solution Development
Brenda Simmons VALIC, AGAIC Vice President -- Premium Processing
David Snyder VALIC, AGAIC Vice President -- Electronic Commerce
Paula F. Snyder VALIC, AGAIC Vice President -- AGRS Marketing Communications
James P. Steele VALIC, AGAIC Vice President -- Specialty Products
Kenneth R. Story VALIC, AGAIC Vice President -- Information Technology
Brian R. Toldan VALIC, AGAIC Vice President -- General Auditor
Julia S. Tucker VALIC, AGAIC Vice President -- Investment Officer
Krien Verberkmoes VALIC, AGAIC Vice President -- Sales Compliance
William A. Wilson VALIC, AGAIC Vice President -- Government Affairs
Roger E. Hahn VALIC, AGAIC Investment Officer
C. Scott Inglis VALIC, AGAIC Investment Officer
Gordon S. Massie VALIC, AGAIC Investment Officer
Craig R. Mitchell VALIC, AGAIC Investment Officer
W. Larry Mask VALIC, AGAIC Real Estate Investment Officer and Assistant Secretary
D. Lynne Walters VALIC, AGAIC Tax Officer
Kurt Bernlohr VALIC, AGAIC Assistant Secretary
Pauletta P. Cohn VALIC, AGAIC Assistant Secretary
Lauren W. Jones VALIC, AGAIC Assistant Secretary
Christine W. McGinnis VALIC, AGAIC Assistant Secretary
Connie E. Pritchett VALIC, AGAIC Assistant Secretary
Daniel R. Cricks VALIC, AGAIC Assistant Tax Officer
Eric Alexander VALIC, AGAIC Assistant Treasurer
Paul Hoepfl VALIC, AGAIC Assistant Treasurer
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
Marilyn 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
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 M. Mead VALIC, AGAIC Administrative Officer
Kathryn T. Smith VALIC, AGAIC Administrative Officer
</TABLE>

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<PAGE> 117

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, North American Funds
Variable Product Series I.

(b) The following information is furnished with respect to each officer and
director of the Distributor. Unless otherwise indicated, the principal address
for each person listed below is 2929 Allen Parkway, Houston, Texas 77019.

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DISTRIBUTOR WITH THE REGISTRANT
------------------ --------------------- ---------------------
<S> <C> <C>
Robert P. Condon.........................Chairman, Director, Chief Executive Director and Executive Vice
Officer and President President

Thomas G. Norwood........................Director, Chief Financial Officer Vice President
and Treasurer

Mary L. Cavanaugh........................Director and Secretary Senior Vice President and Secretary

D. Lynne Walters.........................Tax Officer Tax Officer

Jane E. Bates............................Vice President and Chief Compliance Vice President
Officer

V. Keith Roberts.........................Vice President - Operations --

Cheryl G. Hemley.........................Assistant Secretary --

Daniel R. Cricks.........................Assistant Tax Officer Assistant Tax Officer

James D. Bonsall.........................Assistant Treasurer Vice President

Steven D. Rubinstein.....................Assistant Treasurer -- Vice President

Marylyn S. Zlotnick......................Assistant Treasurer -- Assistant Controller
</TABLE>

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

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<PAGE> 118

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

Fiduciary Management Associates, Inc.
55 W. Monroe St., Ste. 2550
Chicago, Illinois 60603

Goldman, Sachs & Co.
32 Old Slip
New York, New York 10005

INVESCO Funds Group, Inc.
7800 East Union Avenue
Denver, Colorado 80237

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

Thompson, Siegel & Walmsley, Inc.
500 Monument Avenue
Richmond, Virginia 23230

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

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<PAGE> 119

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, North American Funds Variable
Product Series II, certifies that it meets all of the requirements for
effectiveness of this registration statement under Rule 485(b) under the
Securities Act of 1933 and 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 29th day of November, 2000.

NORTH AMERICAN
FUNDS VARIABLE
PRODUCT SERIES II

By: /s/ ALICE T. KANE
--------------------------------
Alice T. Kane
President and Trustee

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/ ALICE T. KANE President and Trustee November 29, 2000
----------------------------
Alice T. Kane

/s/ GREGORY R. KINGSTON Treasurer November 29, 2000
----------------------------
Gregory R. Kingston

* Trustee November 29, 2000
----------------------------
Kent E. Barrett

* Trustee November 29, 2000
----------------------------
Judith Craven

* Trustee November 29, 2000
----------------------------
Timothy J. Ebner

* Trustee November 29, 2000
----------------------------
Gustavo E. Gonzales, Jr.

* Trustee November 29, 2000
----------------------------
Norman Hackerman

* Trustee November 29, 2000
----------------------------
John Wm. Lancaster

* Trustee November 29, 2000
----------------------------
Ben H. Love

* Trustee November 29, 2000
----------------------------
John E. Maupin, Jr.

* Trustee November 29, 2000
----------------------------
F. Robert Paulsen
</TABLE>

<PAGE> 120

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ DAVID M. LEAHY November 29, 2000
------------------------
David M. Leahy
Attorney-in-Fact
</TABLE>

<PAGE> 121
EXHIBIT INDEX

1. (a) 3. Amendment to Agreement and Declaration of Trust dated
9/25/2000.

(b) Certificate of Designation For:
(22) North American International Growth Fund
North American-Goldman Sachs Large Cap Growth Fund
North American-State Street Large Cap Value Fund
North American-INVESCO MidCap Growth Fund
North American-Neuberger Berman MidCap Value Fund
North American-J.P. Morgan Small Cap Growth Fund
North American Small Cap Value Fund
North American-AG Socially Responsible Fund
North American-AG Core Bond Fund
North American-AG High Yield Bond Fund
North American-AG Strategic Bond Fund
North American-AG Conservative Growth Lifestyle Fund
North American-AG Aggressive Growth Lifestyle Fund
North American-AG Moderate Growth Lifestyle Fund
North American-AG 2 Money Market Fund

5. (b) Investment Sub-Advisory Agreements between VALIC and each
Sub-Adviser on behalf of the following Funds:
(10) Form of Sub-Advisory Agreement between Valic and INVESCO
Funds Group, Inc. for MidCap Growth Fund.

10. Opinion of Counsel

11. Consent of Independent Auditors